Part 5 of 5 – The Funding Contract

Often the final contract you will enter into for a development, it is an important one to get right. The first thing to consider is that this contract can often hinge on those before it — any issues with the land purchase, resource consent, pre-sales, or build contract can make securing finance difficult.

Beyond that, understanding your finance contract in itself is vital. In exchange for the finance, you normally pay significant costs but also give away certain rights in the event of a default. Understanding the terms of your agreement, the events of default, and the lender you are working with are all extremely important to a successful outcome for your project.

In terms of costs, these typically consist of an up-front fee, a line fee, and an interest cost on borrowed funds. Regarding rights, quite often as part of the security structure, you will assign control over the key contracts in a development to the lender in the event of a default.

Time
These contracts rarely exist in isolation. They are dynamic and rely on outcomes from one another. All the while, time is moving forward and the opportunity cost is growing. Think about how to bring these items closer together, what additional risks may arise, and weigh these against the time each will take.

If you want to complete multiple developments, finishing one per year — even at a lower margin, because you carried more risk — may be better than completing one every two years at a higher margin. For example, earning $800,000 over one year versus $1,200,000 over two years represents a better return relative to time ($800,000 per year vs $600,000 per year).

Ideally, securing a pre-sale contract performable only by the vendor first, followed by land acquisition — now knowing the sale value, you can buy at the right price — with a long settlement period (as close to the finance date as possible) would mean you only need to fund the design process. Ask yourself: how quickly can this be done?

The above is desirable but not always realistic. The point is that when strategising across these contracts, think carefully about their interactions and the time each one will take.