Commercial Real Estate Finance For Your First Property Development
Have you ever wanted to be a commercial property developer? This is a highly lucrative area in which the opportunities are vast. If you have the ability and knowledge, people can earn millions of dollars by developing commercial property. Below are a few issues to bear in mind when looking for commercial real estate finance.
The numbers behind successful property development
If you have a piece of land or rundown property you want to develop, it is imperative that you do research on the property’s profit potential. Is it near an access road? Are there apartments nearby?
Finance for property development projects
Funding for redevelopment projects is usually calculated by estimating the increased value of the development and then borrowing against that forecast. Funding can be released in various ways including as staged payments over time or on completion of various stages in the project. An individual may obtain finance for a proportion of the loan to value however this will depend on the details of the project, the developer’s experience, the location and the nature of the project. This article will provide details on the different options available to financing property development projects.
The main aspect of property development is of course, how you are going to further develop the property so that it becomes more valuable and you can sell for a profit. Renovation costs rarely stay within a planned budget, so always have “buffer” money for any additional expenses that may crop up. You will need to plan for the cost of the actual raw materials, labour costs, storage and removal of debris from the work site.
There is no guarantee that a property development scheme will be profitable. In fact, many are not and this makes property development finance a greater risk than most other investments. This is the reason that lenders approach the field of development finance with great caution and need to be very well convinced about the feasibility of the project and just as importantly, the capabilities of the developer.
Finding a good building contractor to renovate your property is another hurdle you shall have to cross. You should never arbitrarily choose a contractor and start working with them – this is a sure fire way to fail. Instead, use highly recommended building firms that have been vetted from people you know and trust.
A mezzanine finance
The mezzanine finance is also known as a second-charge loan or subordinated debt, which is placed beneath the aforementioned senior debt loan. This type of loan (the mezzanine finance) is similar to a short-term bridging loan as it enables financial funding of a construction project while the developer’s capital is invested elsewhere. Unfortunately this makes the loan a greater risk with high monthly interest rates, but the loan can represent values of up to 90% or 100%. The mezzanine loan is most suited to refurbishments and renovation projects.
This is not tax or legal advice but one idea might be, in order to avoid high taxes on your profit, you can set up a company. The taxes for small companies are usually lower than personal income tax rates. If you do not set up a company, you will be charged income taxes. But income taxes aside, there are other advantages to setting up a company for your property development project, among others, tax reduction schemes and grants. Again, seek qualified legal and accounting advice on this aspect.
In summary, developing commercial property is a very profitable activity if done correctly. Once you have the appropriate commercial real estate finance for developing property you will be well on your way to being a commercial developer. For details on commercial real estate finance in NZ, try this, Global Pacific Finance.