Why is the "LVR on Completion" So Important to Understand?

I am going to keep this one short and sweet, “LVR on Completion”, you will hear this term mentioned incessantly by Funders of Construction Finance Deals, by why?

What is the LVR on Completion and why is this such an important piece of data to understand if you are a Developer, Broker, Funder, Investor?

Let me give you simple answer straight up!

Example) 

$10,356,000

Let's assume this is the total outstanding loan balance (including interest & fees) at the end of the project

$17,000,000

Lets assume this is the total end value of completed project (less GST & selling costs)

Here’s a real simple way to calculate it!

LVR on Completion = Outstanding loan balance / End Value of Project (less GST & selling costs)

LVR on Completion = 60.91%

So why is this figure so important to understand?

• This explains how exposed a Funder would be at the end of a project in the event that a Sponsor cannot repay the loan for any reason
• This explains how likely an exit into a residual stock loan is going to be?
• This explains how much room there is for fluctuations in the expected GRV?

Fro example, let’s say the market drops by 10% from Funding to Project completion, hence the expected GRV also drops by 10%, then in the above example the LVR on Completion would have increased to 67.68%

All of a sudden the potential for an exit via residual stock loan becomes unlikely, now whilst this is only hypothetical, it is prudent to consider all possibilities, especially in a declining market.

Please remember when you are calculating the "LVR on Completion" always remember to deduct the (GST and Selling Costs from the Gross Realisation Value) before using the GRV number in your calculations.

Lastly to wrap things up, if the LVR on completion is low, as in 50% or less, this will assist the Sponsor when trying to mitigate other potential weaknesses in the deal such a low profit margin, lack of sponsor experience etc… Conversely if the LVR on completion is already up at 65% - 70%, everything else in the deal will need to be rock solid to entice the funder to take on the additional risk.

My name is Fabian (Fab) and I am the Director of Debt Placement for Commercial & Construction Capital, If you're working on new Construction Deals, Site Acquisitions, Land Sub-Divisions or Residual Stock Loan Facilities, think of me as your go to person, reach out to me with your scenario on 0402 999 784 or [email protected]

Commercial & Construction Capital works with Brokers & Developers in getting deals placed and settled within the Private Funding space.

Fabian De Marco

Director of Debt Placement