Land Banking & An Imminent Case of Funding (A Property Development Case Study)
Land banking can be one of the greatest ways to increase your wealth as an experienced developer and one of the fastest ways to lose your wealth as an inexperienced developer. It is also one of the more riskier asset classes for lenders to finance, consequently it attracts higher pricing and lower LVRs. The positive though is that the potential up kick in value, significantly outweighs the cost of servicing the debt if done correctly.
Ultimately some people are blessed to own land in these new hot zones for considerable time, and others are investing to get the upside of rezoning and permit approvals.
Regardless of whether you are purchasing or owning land in these areas, there are some fundamental truths that need to be considered. Something which I advise all land bank borrowers as most of these transactions are funded through private lending (read when to use private lending here), is that the exact timing of when rezoning will occur is never guaranteed nor is the development of new projects nearby that can increase a property’s value! This in turn means borrowers can run out of funds to service a loan before the up kick in value occurs. Therefore, it is paramount that proper DD is done, to ensure the up kick in value will occur during the loan period and not after a borrower runs out of funds to service the loan.
One of our clients was fortunate to own land in the growth corridor in the outer western suburbs of Melbourne, that would in the long term hold a value of $20M to $30M. The client owned a considerable amount of farmland for cattle, which carries significant tax benefits. The client’s property was within the PSP zone, and was very close to where other residential sites had been zoned for development. The client was nearing the end of their existing land bank loan, and required a quick refinance solution before being stung with penalty rates. The client required an imminent refinance solution and working capital to improve the site as there was asbestos and other old structures that needed to be removed.
Like many of our clients that we service in private lending, they were asset rich but cash flow poor.
Engineering A Solution
Time: The client required an urgent refinance solution, as not to be hit by penalty rates with the existing lender. We were able to settle the deal within 10 days.
Calculations: There was sufficient equity in the land to provide a loan amount of circa $3.5M.
Solution: The client required interest to be capitalised, so they would not have to service the loan.
Key features of the loan: The loan agreement was for 12 months, but we offered the borrower the right to extend the loan for a further 24 months should they require it. We also offered the borrower the opportunity to sell parcels of land during the loan period to repay the funds.
In an environment where there were very few lenders that could act in the speed that we did, with a low cost of capital, with flexible loan terms, that were willing to accept an asbestos risk and the option to reduce principal by selling parcels of land. The client was able to hold onto their land and see a material increase in value of the land, that far outweighed the cost of capital.