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Why relationships matter: A 2nd mortgage construction loan with no presales.

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Relationships are of critical importance in the finance world. Whilst decisions are based on numbers, it is relationships that determine the terms of a deal. Developing the right relationship with the right lenders or investors is paramount, and this is more so evident in the private lending space, where relationships are formed between decisions makers.

Therefore, we often advise our business clients when meeting our investors or lenders, that the cost of capital isn’t just based on the first transaction, but all deals down the line. Having the right relationships can solve many known and unknown problems. The more trust there is, the better the terms and the more capital there will be made available.

Recently one of our property developer clients required urgent funding for a luxury 4 penthouse development in the eastern suburbs of Melbourne, with a GRV of $12M and no presales. The project had experienced a 6 month delay due to Covid-19, and the first mortgage lender (sourced by the borrower) was reluctant to release more funds to our client.

The project was a high-end development, which could demand better prices and easier sales on the open market once it was completed, with it only requiring an extra $600k. The reluctance of the primary lender to lend more funds, put the project and developer at serious risk.

Where relationships matter ……

A year earlier we had introduced the developer to a family office that support us, where they funded him for another asset purchase, with monthly interest repayments.

When we advised the family of the circumstances the developer was facing, they were more than willing to lend him funds at a discounted rate, due to his repayment history and humble dealings with them. The relationship is so strong, that they will preference capital allocations for this developer over other clients.

In an environment where most were closed off to high-risk lending, the family was willing to take the risk of a second mortgage loan to support the client, because of the quality of the relationship.

This illustrates importance of how both lenders and borrowers need to be patient in their dealings with one another for a deep level of trust to be developed and the benefits of such relationships.

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