Types Of Private Lending
You can usually access up to 3 types of financing from private lenders.
First off, a straight first mortgage over the property you are buying or refinancing. The amount you can borrow will depend on the current state of the property.
Raw Land – No Development Approval – probably the most anyone will offer you here is 30% to 40% of the value. This percentage though will have to include any interest that you intend to capitalise as well.
Land with a Development Approval (DA) – 50% – 60% until the value of the DA is crystallised, very few financiers will provide you with much more than this amount inclusive of capitalised interest for the term.
Commercial Property – Standard Commercial property. ie. no specialised properties – up to 65% of the market value.
A second mortgage is an amount that is provided to a borrower in addition to the first mortgage. There are lenders in the market that have smaller amounts to lend and will take a higher risk for a higher return. You should not expect to achieve more than say 70% of the land value as a total of the funds advanced. So, if the first mortgagee has provided you with 60%, then a Second Mortgagee MAY lend you an extra 10%. You should expect to pay around 30% per annum for this money. There are some that advertise cheaper rates but you will find this relates to houses, not developments.
When the project moves into construction, the 2nd mortgage finance is often called Mezz funding. Like mezzanine floors in buildings, mezzanine financing is in the middle of the transaction. That is, it sits between the first floor of financing and the equity contributed by the developer.
Some financiers will provide money on a JV basis. This usually only occurs where they know the developer well and have a long term profitable relationship with them. They might then consider putting in some of their funds as equity to access a profit share on the project. This is not the usual process for private lenders though, so don’t expect it. Equity positions are not secured and shareholders are the last people to be paid out of a project.
These three types of financing are the most common in Development Finance. If you have any more questions or want to post a scenario, feel free.