5 commercial loan ‘gotchas’ small-scale property developers need to know

While commercial loans are an excellent source of financing for Australian property developers, they often come with surprise perils and pitfalls that can cause major headaches during projects.

This is especially the case given the lightly regulated nature of the commercial lending market, which caters to the needs of businesses as opposed to households.

Here, Daniel He, property director at CrowdProperty, lists five common “gotchas” that developers in the Australian property market should be aware of when it comes to commercial loans for project financing.

Loan term too short

Developers need to make sure the loan term is long enough to cover all their development objectives. It’s not unusual to find that commercial loans are too short for developers to complete projects prior to the conclusion of the loan term. This could risk suffering high penalty interest rates, which can quickly erode profit.

It’s a good idea to add at least one or two months to the project completion time when negotiating the term for commercial loans. This creates a buffer to accommodate any unforeseen contingencies that cause delays.

When negotiating the loan term, in addition to the time required for construction developers need to take sales and settlement time into consideration, given this can take several months.

It’s always a good idea to work with a lender that doesn’t charge early exit fees.

Gross vs net loans

It’s essential for developers to know exactly how much they can borrow, how long they can borrow for, and what the cost of borrowing is, in order to ensure their projects’ bottomline is solid.

For this reason, small-scale developers need to be aware of the difference between the net loan, which is the value of the loan that clients can access following deductions, and the gross loan, which is the net loan plus fees and interest.

If they confuse the two they could end up with fewer funds on hand than they first anticipated.

Small-print legals

It’s critical for developers to seek professional legal advice in order to thoroughly review their loan documents and build contracts. They should make sure the lawyers they enlist possess experience and expertise when it comes to lending documentation specifically, and that there are no unexpected surprises in the contract they have with the builder.

A key factor to consider when reviewing small-print legals is how easy it is to default, because once developers default on a loan they can run into penalty rates that rapidly ratchet up the cost of borrowing.

Developers should also keep an eye on sunk costs — what does it cost to get a term sheet and lending terms out of a lender, as this amount can vary from hundreds to tens of thousands of dollars.

Penalty rates

Developers should be well aware of the size of penalty rates and when they kick in — these fees can drastically impact the final cost of funding. It’s important to closely review lending documents in order to confirm these details.

Developers should also seek a lender that is open to providing refinancing when loan terms are about to conclude if projects are not yet completed. If they don’t offer that, then consider a lender who can look at refinancing, exit finance, or bridging finance.

Hidden fees

This is a big one for developers, as hidden fees can add considerably to the cost of financing a project in ways that are not apparent at the outset. In fact, that attractive finance deal may not look so good once you take all the hidden fees into account! These hidden charges can include line fees, broker fees, and exit fees.

Hidden fees can be highly unfair and arbitrary — there have been cases of lenders charging fees for completing their projects before schedule, as well as charging penalty fees for a full three month period once projects run late by just a single day. Ask about all fees up front and ensure it’s laid out clearly in your loan agreement.

CrowdProperty avoids all of these gotchas and aims to provide project finance to small-scale developers with speed, ease, and certainty. Our fees are simple: A set percentage rate of interest for your project loan, a 1.5 - 3% fee on successful completion of the loan application (capitalised into the loan), and third party costs at cost (things like valuation, QS, legals, etc). And that’s it. No line fees, early exit fees, or any of the other ways less transparent lenders can gouge you.

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CrowdProperty provides property project finance for property professionals with speed, ease, and certainty. Talk to our in-house specialist property team about your deal today. Learn more.