Sell Then Build (SST):- (a) Is the point/time when the development components are launched for sale to generate income/revenue. B) Indicates the blue line which is the income stream or the revenue generated from the sale of the development components over time. (c) Is the actual total cost involved or spent to develop the project which is partially financed through bridging finance. D) Indicates the cost incurred to develop the project over time. (e) Indicates the red line which shows the net cash flow of the project (revenue after deducting the cost) which usually will be negative and then achieves a breakable point where the development cost is covered and then continues to be positive thereafter. F) Is the point where peak borrowing is required to cover the development cost due to the reason that that is the period which the project experiences a negative cash flow (revenue obtained is fully spent to cover the cost and additional fund is required o cover the cost). (g) Is the breakable point where the revenue has covered the total cost involved in developing the project and now it is the time to start paying back the loan amount provided through bridging finance using the revenue received thereafter.
Build Then sell (BATS):- For Build Then Sell development type, explanations on the graph above are all same except for the following:- I) The Income Stream indicated by green-dashed line which shows that for this type of development revenue is only generated after the project is completed. T) Indicates the point where peak borrowing is required to fully cover the development cost since this type of build then sell development has no revenue to cover the development cost (sometimes partially depending on the availability of development cost (fully or partially). Ii) The breakable point or the payback point for this type of development is also point (g) which means the developer has to start paying the loan when they have start selling their products [development components. For the above two types of developments, end-financing is used by the potential researcher to buy units within the development/pro]etc. In other words, in the view of a developer, bridging finance is used to cover the cost of the development whilst end- financing obtained by the prospective buyers are used to generate income for the development.
As explained above and with reference to the graph above, finance is important in real estate developments for the following reasons:- a) In a BATS type development, bridging finance is very crucial to cover the development cost since there is no revenue or income generated from selling of the velveteen products in order to cover the development cost. If there is no finance being provided, most probably BATS development concept might not be applicable in the real estate development due to insufficient fund. ) In a SST type development, bridging finance is important to partially cover the development cost since it generates income from the product selling. However, the income generated from the selling will not be sufficient in the initial stage and as such, it requires financing to support the development cost. The amount of loan applied depends on the pricing of the products, units launched for selling and the estimated sales rate of the product. C) End-financing on the other hand is important and helpful for the prospective buyers to cover their purchasing cost of the development product.
In a way, it is also important for the developers because if the prospective buyers are not being provided by this type of loan or fund to assist them in buying property, then there would be less potential buyers and income generated from the sales would be very low. This would trouble the developer in paying back their bridging loan finance and hey would then need to apply for a higher loan amount due to insufficient fund to support the development cost.
The high interest rate of the bridging loan will add additional burden and cost to the developer. Large scale development usually requires financing to finance the construction or building and to purchase the final product for investment purposes. On the process involved in approving the loan amount required for large scale development project are as follows:- Bridging finance is usually paid in stages and the payment is usually given at 70% to 0% of the total cost incurred for the development.
It is also usually paid by where the borrower is required to Jointly bear the risk. A developer in order to obtain a bridging finance for his project needs to fill in the ‘standard application form for bridging finance’ available in all banks. The main purpose is to obtain relevant information and to review the ‘credit worthiness’ of the borrower. The borrower together with the form need to submit a feasibility study on the viability of the project, advanced cash flow analysis, latest audited accounts, valuation report and etc.
The developer also has to submit a paper work on the firm’s profile, including track records and profit, information on the project including feasibility study, cash flow, property market condition, and the findings on the demand and supply, etc, collateral and the sources of repayment for the bank to review before approving the loan. This generally means that the bank emphasis on the minimum level of sales before ‘drawn’ is granted. In order to determine the loan amount and granting the loan, there is a process ladled ‘Credit Analysis’ which involves SC; I. E.
Character, Capacity, Collateral, Capital and Condition briefly explained as follows:- a) Character – A study on the character on the borrower’s credibility and willingness to pay the loan amount. This is because a borrower with the credibility to pay might not willing to payback the loan. As such, the track record of the borrower’s previous loan payment needs to be studied. B) Capacity – A study on the source of repayment of the borrower. For example the cash flow of the project. As such, the rower must be able to meet with all his financial obligations on the due dates.
Although the borrower provides a cash flow showing the cash inflow/profit from the project which will be used for the loan repayment, the banker needs to check on the accuracy of the cash flow whether it is sufficient to repay the loan. C) Capital – A study on the degree of commitment and the ability to sustain this commitment during bad times. D) Condition – A study on the macroeconomic of the environment. E) Collateral – A thorough check on the collateral which is the second nine of defiance of the borrower. If the repayment is derived from the cash flow, the collateral will not be liquidated.
But however, the banker needs to check on the ownership and details of the collateral and its real worth (via a valuation report provided by the Valued) if at all the collateral needs to be liquidated at a point. In addition, the total amount of loan granted in bridging finance depends on the cash flow of the project. Interest rate on the loan amount is implied according to the financial institution and the repayment period in within an agreed period or until the demotion of the charged title/unit, whichever is earlier.
Securities is usually the land legally charged subject to the valuation by a Valued and in addition, a commitment fee is charged on per annum basis for the number of days that have elapsed from the date of agreement. In a nutshell, the developer needs to comply with all of the above requirements and the bank on the above matters. In conclusion, financing is very important in real estate development and it has several process and procedures in order to obtain the financing for the real estate developments.
