Assessing Project Feasibility in Construction Loans: Key Parameters from Vado Private

In construction and development, feasibility refers to the process of determining whether a proposed project is viable and worth pursuing. This involves assessing various factors to ensure that the project can be completed successfully and will meet the desired goals.

Vado Private has extensive experience in project and construction funding. Our track record includes the successful financing and delivery of residential and commercial developments across the eastern seaboard of Australia.

The key parameters of financial viability

Irrespective of project size or scale, one of the key fundamentals in assessing a construction loan application is the feasibility. This is an assessment of a project financial viability with the key parameters being:

1. Gross Realisation Value (GRV). Also known as the ‘as if complete’ value, this is the revenue derived from the sale of all properties in the development. All project revenues need to be validated by an independent Valuer appointed by the Lender.
2. GST. This is a tax payable when brand new properties are sold. The amount of GST payable depends on whether the general tax rule (1/11th of GRV) or margin scheme (7% of GRV applies).
3. Selling Costs. These are costs associated with the marketing and sale of the properties. Marketing costs include display suits, sample boards, collateral material, social media, branding and advertising costs. Sale costs are fees paid to third party real estate agents to negotiate any sale.
4. Net Realisation Value (NRV). This is GRV less GST. Some lenders also deduct selling costs to arrive at the NRV.
5. Land Value. This is the assumed project related site value based on assumptions made in the financial model. This includes revenues, costs and the adopted Internal Rate of Return (IRR).
6. Acquisition Costs. These are costs associated with conveying a property such as stamp duty and registration fees. This may also extend to due diligence fees.
7. Construction Costs. This is the cost to construct the dwelling(s) in accordance with the approved plans and conditions. This figure is provided by the builder and verified by an independent Quantity Surveyor (QS) engaged by the lender. These costs needed to be reflective of market rates.
8. Professional Fees. This includes costs required to procure planning approvals and the construction certificate. Once a project is shovel ready other professional fees include that need to be included in the feasibility are project management, site inspections, certifications etc.
9. Statutory Fees. These are fees paid by property developers and charged by local council for any new development. These costs help fund infrastructure such as roads, parks, community facilities etc.
10. Project Contingency. This a typically a percentage of construction cost. Depending on the construction complexity, level of finishes and building contract this will range between 5%-10%.
11. Land Holding Costs. These are costs of property ownership during the loan term and include land tax, council rates, water rates and any relevant levies.
12. Finance Charges. This captures the entire cost of financing a project and includes lender application fees, brokerage fees, line fees and the interest rate.
13. Time. Whilst not a separate line item, time is the largest variable in determining finance charges. Typically the loan term is construction period plus an additional three (3) months to allow for certifications, subdivision registration and settlement of sales/refinance. 

Common mistakes

In our experience, there are a few common mistakes we see:

• The Gross Realisation Value (GRV) can be overstated, this is usually because the developers’ expectations are more bullish than those of the valuer. 
• No allowance for GST when the developer intends on retaining the properties upon completion.
• Underestimating construction costs and not allowing enough for project contingency. This occurs when the owner builder forms a view they can construct the project below market price and when contingency is reduced to a negligible amount.
• Some developers adopted a program of works that fails to consider to latent conditions, inclement weather and extensions of time. Other property developers request a longer loan term (with capitalised interest) not realising this impacts the facility and cash flows.

An accurate feasibility is essential to the assessment of a construction loan application. Vado Private are experts in project finance and work with brokers to assist with the feasibility and other key assessment metrics.

For assistance

We would love the opportunity to chat to you regarding any scenarios or questions you might have for any of your clients seeking construction funding. Please contact the Business Development team at Vado Private to discuss any opportunities on the details below, or you can submit a scenario online via our website.