What are some of the most important aspects that will affect the way your non-bank private commercial loan is priced?

I am repeatedly asked day in, day out, what is the best rate you can get on this Development Site Purchase, or this Construction Loan, or this Residual Stock Loan, or this Agri Rural Loan?

It appears to be a hot topic at the moment especially given the ever changing landscape of ?market interest rates, cost of capital etc....As I have mentioned previously, this is a fair and valid question for any borrower to ask, however, a question like this is extremely difficult to be able to answer quickly in the Private Real Estate Debt space, mainly because everything in terms of pricing, and I mean everything, is driven by that little four letter word “RISK”.

Here are a couple of pertinent things to keep in mind when trying to ascertain whether your loan will sit on the lower or higher end of the pricing spectrum. Remember, think like a lender and you will begin to understand how risk, or the mitigation of risk will affect the way your loan is priced.

(1) Loan to Value Ratio

• This seems like a simple and obvious one, however you would be surprised?how critical this one is when a lender prices a deal.
• You have to remember that Private Real Estate Debt Lenders are typically "Asset Lenders", which means they are heavily focused on the Debt/Equity Ratio or also known as the Loan to Value Ratio (LVR).
• As discussed in other articles, a lender will always consider a worst case scenario in the event of default, whereby they would need to sell the asset to recover their funds, and the lower the LVR the more equity available in the Asset to cover this worst case scenario.

Generally Speaking;

Anything <50% LVR should attract pricing at the lower end of the spectrum

Anything between 50%-60% LVR should attract average pricing

Anything between 60%-70% LVR should attract pricing at the higher end of the spectrum

(2) Exit Strategy?

The second most?important aspect is the Exit Strategy, or in other words, how will the lender get their money back at the end of the loan term. This is critical for a lender as they would never want to go into a transaction without understanding how the borrower intends to repay the loan at the end of the term.

Some of the most common exit strategies include;

1. Sale of the Asset (typical bridging loan scenario)?
2. Future?Income/Sale Proceeds from other Projects/Sales etc...
3. Refinance to another Lender
4. Rollover existing Facility into another Facility?Term

(3) Security Location?

Rather than get all technical on this point I will keep it very simple! ?

Pending suitable LVR's, Assets located in Sydney, Melbourne or Brisbane (Metro) will always attract the most favourable pricing because these markets are the most active markets. ?

Hence should a lender need to look at a worst case scenario and need to sell the asset to recover their funds, these markets are the most liquid to do so.

(4) Developer Profile [Experience & Balance Sheet]

Experience

• How much experience do you have in completing acquisitions/projects of a similar nature?
• Is this the?first time you?have done it or have you done something of this ilk several times before? Obviously the more experienced you are at it, the less risk to the lender.

Balance Sheet

• What does your Assets & Liabilities (A&L) statement look like?
• Does your A&L statement match your level of experience?
• For example, when a Developer is asking to borrow $15M and claims to have done multiple similar projects, however the only Asset on the A&L is 1 x Residential Apartment worth approx. $800,000 with a Debt of $600,000 against it, then it is clear to anyone to see that something doesn't?add up?
• It's important to include all Assets & Liabilities on your A&L as this will only help with securing more favourable pricing.

Commercial & Construction Capital is an Expert Firm in arranging Non Bank Private Capital for Corporations, Property Developers & Brokers.

If you're in need of a non-bank funding solution, reach out to me for a chat on 0402 999 784 or [email protected]

Written By

Fabian De Marco

Managing Director

Commercial & Construction Capital