Property Development Terminology

A

The collective value applied to a property based on its current town planning status. This reflects the market value a willing purchaser would pay for the property having regard to its existing status including its potential for redevelopment

As part of their risk assessment, most banks focus on elements items when assessing the financial strength of a prospective customer, comprising their Asset & Liability statement (A&L’s), their Profit & Loss statement (P&L) and their forward looking cashflow (refer relevant individual references). For the purposes of the financier, Assets principally comprise of property, equities (shares) along with other significant valuables that someone owns either directly or via companies/trusts, which a lender considers to be capable of being readily sold or borrowed against in order to repay debt. Principal places of residence, furnishings and personal items such as jewellery are fully or partially discounted depending on the lenders view as to their accessibility.

The A&L statement comprises a simplistic one-page summary of the borrower’s assets and corresponding debts, listed (usually in table form) to demonstrate the net equity position of the person for credit purposes. Best practise is to add details of the relevant lender, loan term and repayment per month in respect of each debt to give the lender a clear understanding.

B

Refers to the written approval provided by the local council’s building approval authority which authorises the construction of a specific project in accord with a written submission including detailed working drawings, typically lodged by the developer/land owner’s consultants or builder. A precursor to the BA is the DA.

The most commonly used Inter Bank Reference Rate the banks will quote as their bench mark cost of funds and to which they add their lending margin is the Bank Bill Swap Rate (BBSW). For the purpose of defining this rate at a given point in time, the quoted BBSY bid rate is applied (BBSY). In many cases the bank will use an “Intra Bank Reference or “Base” Rate which will reflect BBSW plus an internal or “treasury” margin to reflect their internal cost of borrowing the funds.

Most major banks pass on the cost of their Treasury Division having to raise funds in the inter bank markets in order to fund the bank’s loan book. This is also referred to as their “internal cost of funds”, and is in addition to the bank’s reference rate, loan margin and any line fee charged. 

As an alternative to providing builder “retentions” (refer Retentions and Performance Guarantees), a builder can secure their performance obligations under the building contract via Bank Guarantees, Insurance Bonds or similar financial facilities (refer ‘Performance Bonds). The Bank Guarantee is an unconditional promise to pay by the builders Bank in the event that there is an event as proscribed in the Building Contract, which calls for monies to be paid by the Builder. This effectively secures the builders obligations in the same way as the retention monies and the guarantee may be called by the developer/financier in the event of the builder’s non-performance. It should be noted that lenders generally prefer a Bank Guarantee to an Insurance Bond because of its “unconditional” nature and as a consequence, may only accept bonds from a limited list of acceptable insurers.

Refers to the overall position of the borrower (individual or company), and their ability to provide/security or realise assets in order to raise debt/ capital for further investments or to meet obligations. Lenders review this document and apply standard ratio calculations based on known industry standards, in order to satisfy themselves that the borrower has the ability to meet its existing and proposed obligations, and therefore avoid any potential default situations.

Refers to the accounting format used to represent a company’s A&L position, usually prepared by an accounting team (internal or external) to provide management with an accurate assessment of its net shareholders position or net worth, but also prepared to assist financiers assess the business performance.

The most commonly used published Reference Rate (refer BBSW). 

C

Relates to an interest rate pricing mechanism, typically on longer term investment loans, whereby the Bank charges a risk fee to provide the borrower with a pre-agreed range within which the interest rate charged will fluctuate. For example, you might put in place a cap and collar at 6-7%, meaning that if the variable rate exceeds 7% the loan will only ever be charged at 7%. Equally if the variable rate fell below 6% you have elected to pay the minimum 6%. This is effectively an insurance policy, whereby you have traded the prospect of lower interest rates against the risk of incurring higher margins at the other end of the risk curve. 

Refers to the requirement by Lenders that they will only advance funding on a project after the developer has contributed their equity contribution in full. In essence, the Lender wants certainty that their undrawn funds will always be sufficient to complete the project in order to fully repay the debt. To ensure this, they require a QS to certify the “cost to complete” at each drawdown and in the event there is a shortfall against the undrawn loan amount, the borrower will be required to inject the additional equity required prior to the lander advancing against the claim.

A construction agreement where the contractor or the architect and engineer are reimbursed for their direct and indirect costs and in addition, are paid a fee for services. The fee can either be a fixed sum or calculated as a percentage of cost. This is not usually a “bankable” option from a financier’s perspective.

Generally referred to as costs that arise which are not included in the agreed terms of a contract such as a GMP contract and in excess of the contingency amount. This is a reason lenders require the developers provide an A&L in order to gain comfort that the developer can quickly access the funds required to meet a reasonable cost overrun on short notice. If the borrower is unable to demonstrate this capacity the lender will (should) add a higher risk rating to the transaction because in the event the developer cannot meet the cost the lender is likely going to have to do so to ensure the project is completed and they recover their debt.

There are various forms of contract available in the market and all of them can be varied to meet the needs of the respective parties involved. The following is a basic guide and it is recommended that developers seek appropriate legal advice prior to entering into a contract

An allowance built into the project construction budget to fund unforeseen expenses encountered during the build.Typically a construction contingency of 5.0% of the total development cost can be required by lenders to safe guard against unforseen expenses. In some cases they will limit the 5% contingency to be applied to cover works completed under the building contract. However, in most cases it will also be applied across the balance of the project costs to cover unforseen expenses associated with the likes of marketing and other non-construction elements. (refer also Retentions)

An agreement between the developer and the builder that the builder will manage the construction process on a “cost plus” basis. This form of contract carries a higher risk for a lender as any cost increases or time over-runs are completely at the cost of the developer, therefore the builder is really just on a best endeavours basis to do the job, as opposed to a GMP (Gross Maximum Price) where there are cost and time penalties to motivate the builder to manage effectively. Again, this is not always a “bankable” option for financiers.

Refers to those conditions that the Lender requires to be satisfied by the borrower after the first advance but prior to a subsequent milestone as it determines appropriate. By way of example, a Lender may agree to settle the land but require additional cost analysis prior to advancing funds towards the construction of the project.

Refers to those conditions that the Lender requires to be satisfied before it will settle the first advance. These are usually detailed in the lenders Indicative Terms Sheet or Letter of Offer and are more fully documented in the Facility Agreement which encapsulates the full terms and conditions of the proposed facility. Typically, the Lender Conditions Precedent will include but are not limited to satisfaction in respect of: • Presales: in the case of residential built product projects there will be a requirement for a specific number of conforming or ‘qualifying presales’ which are usually required to equate to a percentage of the total debt to be provided. Typically the requirement is 100% coverage but this can vary dependant on other risk mitigants, refer “Presales”. • Building Contract: a signed building contract, with a reputable builder needs to be signed and the costings satisfactorily reviewed by the Lenders independent Quantity Surveyor or Engineer. Refer “Building Contracts”. • Valuation: a valuation report dealing with the current “as is” value as well as the gross realisation “on completion” value of the completed project. In the case of a “strata titled” product this will usually include an “in one line” value. Refer “Valuations”. • Survey Report: a report by a surveyor confirming that the land dimensions conform with the title searches and that there are no encroachments or other boundary/usage issues. • Geotechnical/Site History: a geotechnical report confirming that in addition to the site not being listed on an EPA register, that there are no on site conditions including contamination or sub-strata conditions which would impact the proposed project physically or financially. • Searches: All relevant property searches in respect of the security properties, which are typically undertaken by the lenders solicitors who then certify as to their acceptability.

Is interest paid on both the principal and the interest accrued on that principal calculated at set periods (typically monthly) from the commencement date of the loan.

Typically comprises a 12 month forward looking spread sheet detailing the borrowers income sources and payment obligations for the period, reconciled to their opening and closing cash position. Post the GFC, the emphasis on the borrower’s cashflow by lenders has heightened, as it provides a better understanding of the risk profile of the group and any propensity towards over trading which could create unwanted pressure on their ability to service debt.

Refers to the practice where interest payments are accrued as part of the total loan facility rather than paid directly by the borrower from their cash-flow for a set period, usually coinciding with the loan expiry date or a reversion to monthly direct payments by the customer. In the case of a construction loan for a small project, say 20 townhouses, it would be normal to have 9 months of capitalised interest to accommodate the construction period where there is no available income generated by the project, after which the loan would be repaid via net sales proceeds or refinanced.

Relates to an interest rate pricing mechanism, typically on longer term investment loans, whereby the Bank charges a risk fee to provide the borrower with a pre-agreed range within which the interest rate charged will fluctuate. For example, you might put in place a cap and collar at 6-7%, meaning that if the variable rate exceeds 7% the loan will only ever be charged at 7%. Equally if the variable rate fell below 6% you have elected to pay the minimum 6%. This is effectively an insurance policy, whereby you have traded the prospect of lower interest rates against the risk of incurring higher margins at the other end of the risk curve. 

D

A qualified individual or company authorized by the developer to be responsible for coordinating completion of the Project in accordance with the Developer’s directions. This role places full responsibility for the control and management of all components of the transaction including Town Planning Approvals, Construction, Marketing, Sales and in some cases Finance with the Development Manager.  Refer also ‘Project Manager’.

Refers to the costs associated with the acquisition, design, construction and usually sale, of a given project. The lines between what is considered Hard and Soft Costs (refer below), are often blurred depending on who is interpreting them and for what purpose. (Refer also the ‘Construction’ section).

Refers to the written approval provided by the local council’s town planning authority which authorises the development of a specific project in accord with a written town planning, typically lodged by the developer/land owner’s consultants. Approvals are typically granted on the basis that they are either “Code Assessable” or “Impact Assessable”.  Code Assessable: submissions means that the proposed development meets all the existing town planning code requirements as published by the local authority and can be processed and approved without public notification. This results in relatively prompt approvals. Impact Assessable: submissions, indicates that the submission has elements that fall outside of the standard requirements of the published planning codes and will require some level of relaxation/approval. It will also require to be given public display, which provides opportunity for parties with legitimate objections to submit them to council for consideration. Prospect of approval will be largely dependant on how much diversion from the planning code is being sought.

Typically a developer will prepare this assessment based on the known costs and those that can be reasonably estimated using known market derived averages/estimates such as realisation values based on recent market sales prices and construction cost using known $psm to build similar product. Subject to the quality of the inputs, this provides the developer with a level of confidence as to the viability of a given project and the likely return on equity invested based on assumed funding levels and the projected net profit.

This involves the builder undertaking both the construction but also the full process of designing the project. This has advantages when the design parameters are not complex and reduces costs by eliminating the need for an architect and the ongoing interface between the architect and the builder. Conversely this can create cost issues where there is a need for more complex design solutions. This form of contract can also be structured to provide a ‘Fixed Price and Time’ requirement.

E

An Equity Redraw option is where an investor injects equity into an existing mature project for an agreed return, allowing the developer to redeploy some of their equity in order to progress their next project. The cost of the equity funds will vary dependant on the project risks and security provided, but essentially it is similar to a junior debt or preferred equity with less delivery risk.

A fee imposed by the lender on the borrower for repaying the loan prior to the agreed term. Particularly prevalent amongst non-bank lenders, the rationale behind it is that lenders such as mortgage trusts or contributory mortgage schemes raise their funds from investors targeting a return over say 12 months. If the borrower repays early; the lender needs to re-lend those funds with the risk of a lost opportunity cost.

F

This refers to the style of contract that generally  construction finance lenders will want to see utilised. It entails a contract that is fixed in terms of both time and price to ensure that most cost over-runs and time delay risks are effectively transferred to the builder. That said, it does not completely remove these risks. Refer: Cost Overruns, Variations and Liquidated Damages. Lump Sum Contract is another form of Fixed Price Contract.

A loan rate that is pegged to or varies in accordance with a nominated money market rate is a Variable interest rate, the most common of which is the 90-day BBSY (refer BBSY). This reference rate is the cost at which banks typically buy and sell money to each other and is published daily in the Australian Financial Review or can be viewed on-line.

An abbreviation for furniture, fixtures and equipment, generally associated with interior design and planning of retail stores, office facilities, holiday apartments or hotels.

Refers to the means by which a projects financial viability is measured by deducting the total cost required to deliver it from the Net Income derived from its potential sale to arrive at the net profit which will be earned as a result.

G

Refers to the tax usually calculated at 9.09% (1/11th) of all taxable product produced and sold. Applied to Residential projects, retail, commercial and industrial projects typically do not attract GST (talk to your accountant to confirm).

If your accountant confirms your project is conforming and that this is applicable, it allows you to only pay GST on the ‘margin’ difference between the revenue realised from sale of the completed asset and the site purchase price. For example, if you paid $2m for a site and had gross revenue of $20m, you would only pay GST on the differential of $18m. It is important to get this assessed by your accountant prior to completing your feasibility and engaging a valuer or approaching a lender.

Refers to the Goods and Services Tax usually applied on all residential property produced and sold

Refers to a recently introduced registered security process controlled under the new PPSA legislation which replaced the old system of registering a charge over a company in support of its borrowing/guarantor obligations. (Refer also PPSA). GSA’s are registered on a National Register securing the lender’s interest against the relevant security entity/asset. The Register also accommodates a priority system agreed between lenders secured over the same security, effectively allowing multiple lenders to ensure they receive the appropriate levels of security and priority in a similar manner to the old registered charge process.

The total revenue realisable from the sale of the completed Project.

A guaranteed maximum price contract arrangement which operates on the basis of a “not-to-exceed price”. This is effectively another form of an open-book contract where the builder is paid for the costs incurred plus a fixed fee but subject to an agreed maximum price.

Is a bar flow chart recording the actual flow as compared with the projected flow of the schedule of activities for a project. It records the start and finish dates, critical and non-critical activities, down time and assists with plotting the likely completion date as well as identifying road blocks impacting the construction progress

H

For the construction of detached dwellings the progress draws will typically follow the HIA stipulated draw-down milestones rather than being made monthly.

The typical interpretation is that Hard Costs includes all those costs associated with the physical completion of the project to the extent required to ensure practical completion and the appropriate statutory certifications are in place, thus allowing it to function in accord with its intended use under the DA. This can include all directly related consultant and statutory costs. 

I

A loan where the principal amount remains the same at the end of each month and interest is calculated and payable at agreed intervals, typically monthly.

Interest is a form of return earned by a Lender for providing financial support and can comprise of a number of components and come in many forms. It is usually calculated on a daily basis on the drawn funds and charged monthly in arrears.

Is the average interest rate estimated by leading banks in the relevant market that the average leading bank would be charged if borrowing from other banks i.e. BBSY (AUS), LIBOR (UK) and SIBOR (Singapore and SE Asia).

The value applied to a cluster of apartments or product which can be sold individually. Typically the collective value assess them on the basis of their individual value as well as their valuer to a  ‘single buyer’ who would then take the market risk at some future date of selling them individually. There is generally a discount rate applied to reflect this risk which can very dependent on the circumstances surrounding the property and the market conditions prevailing. However, a typical range for residential and retail projects of this nature would be 20-25%.

In the same way that Banks became more focused on the LCR post the GFC, they have also heightened their requirement for borrowers to demonstrate a sound capacity to meet their interest obligations on a look forward basis. This “Interest Cover Ratio” is the measure by which the net income of the customer before interest and tax is measured as a ratio against their total interest bill. Cash-flowed on a monthly basis and typically tested over a 12 to 18 month period. Enabling the bank to assess the servicing capacity of the borrower and any risks that might impact that capacity. 

J

Joint Venture equity differs from the above junior debt and preferred equity products as it generally has some correlation inline with the amount of capital injected by the parties and what they bring to the deal. Typically this will be related to both their capital investment but also their “sweat equity”, a term used to denote their contribution by way of the value added to the deal by virtue of their efforts/services and/or that of their consultants not directly billed as a cost.

Where a joint and several liability condition applies, a lender has the ability to pursue recovery of their outstanding debt against all or as many of the guarantor parties as they deem appropriate. Typically this means that they will pursue the party with the most accessible asset position until they have obtained payment, and an unsatisfied judgment against one debtor will not be a bar to an action against the others.

L

The Loan to Value Ratio reflects the ratio between the total debt and the projected “on completion value” as assessed by the bank instructed valuer. While this is still a requirement of lenders with typically requiring borrowers to achieve a LVR of <65%, for the most part the LCR is the critical ratio to be satisfied. By way of example, a project showing a 20% profit on TDC that is funded at a LCR of 75% equates to a LVR of 62.5%. From the lenders perspective, their ability to assess the elements making up the TDC are easier to quantify at the commencement of the project providing greater comfort than relying on the valuer’s assessment of the project value on completion, particularly given the potential for the market to shift over time.

Refers to advances made to borrowers who don’t have the ability to demonstrate a strong position in terms of past credit history/experience and the like. In essence the lender is agreeing to back the “security” more so than the borrower and the documentation reflects this. The lender offsets this risk by either (1) increasing the interest rate or (2) lowering the LVR.

Reflects the ‘Margin’ earned by the bank over and above its “cost of funds” typically expressed as a Reference Rate (refer also 90 day BBSY), with the two combined forming the total loan “interest rate”. This margin is typically “capitalised” as a part of the agreed loan facility limit and can be calculated daily on the drawn funds or as at an agreed date and then charged monthly in arrears for construction facilities. For investment loans it is often charged monthly in advance, calculated on the balance drawn as at a prescribe date.

Typically in the case of construction loans, the lender will elect to split the total margin earned between the ‘Margin’ and a ‘Line Fee’. This is where the ‘Margin’ is typically calculated on the funds drawn while the ‘Line Fee’ is calculated on either the undrawn balance of the facility or in most cases on the total facility limit. This is to ensure that the Bank earns the return it has budgeted on given that it has committed funds to be available at a cost to itself. This protects the bank in a situation where a borrower elects not to draw down under a facility by virtue of having found alternative capital resources but the bank is still committed to have the funds available at its cost.

Reflects a situation whereby the lender has agreed to place a limit on the debt obligation of a party, effectively capping their liability in a recover situation. This is typically used in a joint venture scenario where the liability is limited to reflect the capacity and obligations of different parties.

Are debts or obligations usually of a financial nature or having a financial impact in this context, secured or unsecured, which are associated with a borrower or guarantor, again either directly or via trusts (refer A&L’).

Loan to Cost Ratio is a key measure for a lender to determine that there is an adequate level of equity contribution from the developer and that they are not directly funding a disproportionately high level of the project costs themselves. Pre GFC the focus was more on the LVR as the ultimate limit on the amount lent. However, post GFC and the spate of litigation which occurred relating to the accuracy of project valuations, lenders shifted their focus to the LCR with the requirement to be below their predetermined maximums. For the major banks this policy is typically 70-75% LCR, however up to 80% is achievable where you can evidence to the bank that a 80% LCR is appropriately mitigated by other risk enhancements.

Refers to finance secured to acquire and hold development sites which are still in the planning stage and unlikely to be developed in the short to medium term. In the current climate this funding is difficult to secure given the lack of income usually associated with the type of security involved.

M

Refers to the security documents which the borrower signs to provide security over the property to the incoming lender(s) but can loosely also include the accompanying facility agreement (loan agreement) and ancillary documents which detail the terms of the loan. For home loans, consumer loans and equipment finance these are usually generic in nature and prepared by the lender. For larger Construction Finance scenarios, there are often more complex and unique terms and conditions requiring them to be prepared each time by a specialist solicitor on behalf of the lender.

Is an agreed minimum period that the lender will require to receive interest An example where this is most commonly used is where funding is required for a development site acquisition where the loan period is circa 6 months. Typically the lender does not wish to incur the setup costs associated with the loan only to be repaid within a short period, so they will require a Minimum Interest Period of say 3 months to make it a worthwhile proposition.

Sometimes fees are paid upon achieving certain events, this can happen with Development Management Fees where, rather than the developer being paid a flat rate of $15,000 per month, they might receive a reduced sum with bullet payments at key milestones dates subject to the level of works completed, thereby keeping the development manager motivated to achieve each milestone.

Is an arbitrary goal agreed between the parties, usually as a trigger for some form of action and payment when the party with the underlying obligation fails to perform. It is common in Facility Agreements where the lender requires the borrower to meet agreed undertakings such as completion of the project, presales hurdles etc. It is also a common mechanism in construction contracts where the builder undertakes to meet agreed time frames in order to receive bonus payments or incur penalties.

Also known as ‘Junior Debt’, it refers to a subordinated debt piece that is secured by a second ranking registered mortgage over the property. Junior debt is an extension of debt beyond the LVR levels that a senior lender will typically provide. In order to secure junior debt, the developer will typically be required to have de-risked the project as much as possible. Normally this style of loan/investment does not occur until the project is “shovel-ready”. If investment is required prior to this status being achieved, it is typically viewed as equity rather than an extension of project debt. For shovel-ready projects where the developer has demonstrated they have minimised the project risk, this style of debt can typically be found at a cost of 20-30% per annum.

Material Change of Use of a property, for example changing a rural residential lot which might allow only 1-2 dwellings per hectare, into an urban residential zoning to allow say 12-15 would be considered a material change of use.

The generic term for the amount calculated and charged by the lender above their base cost of funds, which equates to their return for advancing the loan funds. Typically it comprises the lenders internal cost of ‘raising’ the funds from the financial markets (the Treasury cost), together with the ‘margin’, it is usually quoted as a percentage over a published market “Reference Rate”. It can be calculated over any agreed period but is typically calculated on the daily balance of drawn funds and charged monthly in arrears.

Refers to the profit margin as a percentage of the total development cost. Generally speaking financiers will typically expect to see minimum returns ranging between 18-25% for most built product projects. This increases to 22-30% for land subdivisions, however these ranges can be significantly impacted by mitigants such as size of the transaction, presales and the economic factors such as demand and supply prevalent at the time.

N

Net present value (NPV) or net present worth (NPW) is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects. 

This a an often misconstrued term which in property lending circles is more correctly termed “limited recourse”, as it refers to the Lender’s recourse being limited to the security asset/property with no further recourse to the Borrower and their assets. Generally, Non Recourse is only provided in exceptional circumstances and usually only to customers with extremely strong financial positions.

Loans structured specifically to cater to those borrowers who can’t meet the standard income verification and credit history criteria that mainstream lenders such as banks and mortgage originators require of ordinary borrowers. Typically this would include those who are self employed, have a poor credit record or who have recently arrived in Australia. Non-conforming loans usually have higher interest rates to reflect the higher risk of these borrowers repaying. Non-conforming finance is also referred to as sub-prime lending. See also Low-Doc Loans, which have similar criteria.

The net proceeds from the sale of a completed project, being the Gross Revenue amount net of GST, the associated legal costs and sales or leasing commission’s payable at settlement of each sale

O

The term used to describe an Owner who takes on the responsibilities of the general contractor to build a specific project. Lenders typically reduce their lending ratios to owner builders as there is an increased risk associated with getting the costing’s right and the associated subcontractor negotiations.

The process of preparing, evaluating and submitting a loan application generally includes a credit check, collating of various consultants reports, along with verification of information in addition to preparation of a formal credit paper detailing the risks and mitigants in support of the application.

Reflects the value of a property having regard to any current DA and/ or BA approvals on the assumption that it is constructed to meet those terms and conditions. This value can be assessed via a number of methods including “direct comparison”, “reverse feasibility” etc

P

A qualified individual or company authorized by the developer to be responsible for coordinating tasks relating to the construction of the project. Their role typically relates to the control and management of the builder, architect, engineer, town planner and liaising with the quantity surveyor and other relevant consultants. The role includes obtaining BA/ OPW approvals, ensuring headwork’s are paid and titles can be issued efficiently and that all defects are corrected by the builder and/or subcontractors.

Refers to a valuation report prepared for the lender which will typically provide an assessment of the “on completion” value of the project (refer Gross Realisation), together with the “as is” value of the development site. This value is derived by way of a “reverse feasibility” which deducts the cost to deliver and sell the project together with a risk factor (typically 2025%), to arrive at the current site value (refer ‘Reverse Feasibility’). While the valuer is typically preparing this report on behalf of the lender, it is best practise for the developer to have completed their own research and assessment of the market to arrive at a reasonable estimate of these values prior to doing this work to ensure the project viability and its “bankability".

Construction loans are typically paid progressively as the project is being built with the lender advancing funds monthly against the loan limit (or fortnightly). While the obligation of the payment is ultimately from the developer/owner to the contractor, most of these payments are made by the lender under the loan facility to protect their security position. The bank’s independent Quantity Surveyor report is key to this as it verifies the work completed then asesses it against the total project cost and determines the cost to complete (refer “Cost to Complete”), enabling the Bank to satisfy itself that the remaining undrawn loan funds are sufficient to complete the project. The lender will typically want to see invoices for the major items and may require a statutory declaration from the borrower that the costs are genuine and that the project is on track and nothing untoward has occurred that they should know about. The lender will then either pay the contractor/invoice directly or if agreed, reimburse the developer for any invoices they have paid themselves. Lenders prefer to pay the principal contractor direct and satisfy themselves that key sub-contractors have in turn also been paid to avoid the risk of having to pay twice in the event of insolvency event impacting the principal/developer.

Representing a company’s profit or loss position after taking into account the income it earns adjusted for cost of goods sold or services provided, operating costs, expenditure, interest and tax along with all relevant deduction adjustments. Usually prepared by an accounting team (internal or external) to provide management with an accurate assessment of the business’ profitability or otherwise, when assessed over a number of recent periods (usually the past three years), it can provide the prospective lender with an understanding of the businesses capacity to meet its financial obligations. This is usually assessed by the application of various ratio’s.

A loan where both the principal and the interest form part of the installments by which they are both progressively repaid over the term of the loan.

An agreement between a wholesale investor and a property developer to expedite the procurement of presales in a project, to accelerate satisfaction of the finance conditions presale requirements. Usually the investor will receive a discount equating to 25-30% per annum on their funds invested. This is an expensive, solution given presales contracts are only secured by a 10% deposit and supporting guarantees but reflects the risk to the Investor who would in turn need to on sell the product in the event of settlements not occurring. Presales underwriting was occasionally used pre-GFC, and is generally viewed negatively by lenders as ‘financial engineering’ in the post GFC market, as it does not demonstrate market demand for the product being built.

In situations where an investment or loan exceeds the levels normally ascribed to project and mezzanine debt and does not participate as equal ranking equity, it is viewed as Preferred Equity. For this style of investment, which is higher up the risk curve than Junior Debt, a higher return is expected and this is typically achieved via a profit sharing arrangement. Typically this return is broken up into a coupon (compounding interest rate) of 12-20% calculated on the equity invested and a share of the project profits. The waterfall of repayment on completion of the project will typically comprise (1) senior debt, (2) mezzanine lender (3) investor (4) developer hence the name ‘preferred equity’

The PPSA effectively replaced the old system of registering a charge over a company in support of its borrowing/guarantor obligations. Under PPSA, “security interests” are defined as an interest in personal property provided for by a transaction that secures payment or performance of an obligation. But the new PPSA structure, which operates under a national register system, also replaces a wide range of former security forms including property, leased equipment and goods which relied on ownership for protection. Under PPSA Lenders require borrowers to enter into a General Security Agreement (refer “GSA”), which is then registered on a National Register securing their interest against the relevant security.

A developer may be required by council to provide a Bank Guarantee or similar security in support of a Performance Bond to secure works that will either be completed in the future or maintained for a period of time after they are built. An example is in a land subdivision where the kerb and channeling, and landscaping can sometimes get damaged from the builders and contractors undertaking construction on the individual allotments. This can occur long after the developer thinks his job is done and therefore council require security from the developer to ensure any damage is rectified 

Q

An independent consultant who assesses the costs associated with producing a project in accord with the architectural plans in concert with the DA and having regard to the prevailing market conditions impacting labour costs and material suppliers. Usually retained by a developer as a means of assessing the profitability prior to commencement and then controlling costs once development commences. They are also retained by lenders to ensure that the project is correctly costed, and as a means of having the “cost to complete” risk assessed (refer Cost to Complete). Civil Engineers are retained to undertake a similar role in respect to land subdivisions involving civil works.

Most major banks have similar presales requirements for residential built product projects. The criteria vary from lender to lender and can also be dependent on the level of debt and the prevailing market conditions. That said typical current requirements on qualifying presales are: - Minimum 10% deposit by way of cash or bank guarantee; - No more than 2 properties per buyer; - A limit on the number of buyers domiciled overseas. (Note: the % limitation of this requirement can vary according to the project and structure of the transaction together with the prevailing market/economic conditions.

R

Reconfiguration of Lot. I.E. separating stage 1 of a project onto its own title would be classified as an ROL.

Request for Information. This usually occurs once council have received and assessed the application and deem that they need more information on particular aspects before they can process the approval.

This is the approach used by a valuer and accepted by most banks and which differs from the Developer’s method by using the market “knowns” and an appropriate “profit and risk” factor to solve for the market value of the site “as is”. Gross Income less: selling costs = Net Income less: Profit and Risk factor = Total Capital Outlay less: Development, Finance, Interest and Acquisition costs = “as is” Value of Land. This is then crosschecked against the site value as assessed by reference to comparable site sales over the past 6 months (Direct Comparison method), to ensure that the value determined is accurate

Generally a builder agrees in the contract to have a portion of their progress payments held back or “retained” as surety that: (i) they complete the contract works, (ii) the quality of the works are satisfactory; and (iii)any faults requiring rectification are completed in a timely manner. Typically the level of retention is set at around 5% of the total contract sum but this can vary according to the risks involved as agreed by the parties, including the financier. Similarly, retentions are usually accrued at the rate of 10% of each progress payment until they equate to the agreed limit however, this can also be adjusted by agreement between the parties. Retentions are usually released to the builder on the basis of 50% on the satisfactory completion of the works and the balance at the end of the warranty period agreed under the contract (typically anywhere between 3-6 months), with the clients/financier’s QS usually responsible for assessing the quality issue and determining the level of retentions to be expended on issues requiring rectification. As an alternative to the retention process a builder can provide Bank Guarantees however, this requires the provision of appropriate security to the issuing bank and in most cases, small builders opt for the retention process and then apply a similar process to their sub-contractors, effectively reducing the impact on their own cashflow.

A contract structure that allows the developer/seller to renounce that contract at a later date. This is typically how presales underwriting agreements are documented. (refer Presales Underwriting).

S

Soft Costs are considered to include preliminary architectural and engineering, legal, permit charges, financing fees, construction Interest and operating expenses, leasing and real estate commissions, advertising and promotion, and supervision fees. 

Project ready for commencement having achieved the required town planning and building approvals and is ready to commence; subject only to the Developer having the necessary resources including financial capacity to do so.

Refers to the principal debt piece that holds the primary or first ranking registered mortgage over the property. Senior debt is typically provided by the Banks or Major Mortgage Funds and is the desired source of funding by developers as its priority position is reflected in the typically lower margins applied. Senior Debt is also typically conditioned at more conservative ratios reflective of the risk appetite of those organisations. i.e. LCR’s of <75% and ICR’s of > 1.35 times. Also known as ‘Primary Debt’.

T

Total Development Cost, this is the sum of all costs associated with completion of the project. Refer also Hard and Soft Costs under Finance Termination, ‘Development Costs’.

U

A property considered free of encumbrances or restrictions. The following outlines some the general terms used with reference to the various types of debt and equity options typically available in the market place.

V

Contract change, this provides the builder with the ability to claim an increase to the contract sum to take account of design changes instigated by the Customer or increased costs/specifications agreed under the terms of the contract at 

Z

Councils typically provide guidelines as to the permitted uses of land and buildings within designated zones shown on town planning maps which are published to assist developers assessing the development potential for their sites.