Development Finance Numbers

This information is about the numbers of development finance.  How to work out your borrowing capacity, the returns you need to make and the pre-sales requirements.

So that I can shorten a few important terms when I lay this out, I’ve listed below some of the common language you will here when discussing developments and financing:

GRV – Gross Realisable Value – this is the Gross amount of sales your development could achieve.  So, if you have have 10 units to sell at $400,000 each, then your GRV would be $4M.

NRV – Net Realisable Value – this amount is the Net Value of your sales, less the amount of GST you have to pay on those sales, less any commissions you have to pay to real estate agents or to marketing agents to sell them.

TDC – Total Development Cost – this is the total amount of development cost, including all construction costs, consultancy costs, real estate agents costs, broker commissions, interest and other fees.

Hard Costs and Soft Costs – the easiest way to differentiate between Hard and Soft costs (say that quickly three times!) is to think of something produced versus a service provided.  So, construction costs to build the actual units are hard costs, while real estate agent commissions are soft costs.

Feaso – the shortened version of feasibility study.  This is the analysis you perform to calculate the viability (or feasibility) of the project.  Banks and other financiers prefer to see this completed using a well known piece of software such as Feastudy or Estate Master.

 

Now that we have that out of the way, lets get down to business.
 I have put together a table for you below which you follow along using your own numbers for your project.

 

Gross Value = 10 x $400,000 (GRV)      (A) $4,000,000
Less GST $   363,636
Less Sales Comms @ 3% of $4m $  120,000
Net Realisable Value  (NRV)                   (B) $3,516,363
Total Development Costs (TDC)            (C) $2,800,000
NRV x 65%  = Loan Amount OR             (D) $2,285,636
TDC x 80% = Loan Amount                     (E) $2,240,000
The Lower of (D) or (E)                           (F) $2,240,000
Equity Required = TDC (C) less Loan Amount (F) $560,000

To establish the amount you can usually borrow, work out how much your NRV is by taking your GRV, take off the amount of GST payable and then deduct the amount of sales commission you will pay.

As a rough guide to work it out manually, take the GRV, divide by 11 and multiply by 10.  Then take 3% of the GRV and deduct it from that number.

This is your NRV.

Banks and financiers will usually provide you with either 65% of the NRV OR 80% of your TDC, whichever is the lower.  (can’t be taking any risks now can we!)

So, once you have this number, deduct it from your TDC, you will then know how much equity you have to provide in either cash or land value.  In the above example, the amount is $560,000

 

 

 

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