If you’ve been involved in an Australian property transaction, you’ll be familiar with the lengthy financing documentation required, but how well do you understand all the terms used?
Most financing documents are prepared by the financier and, as you would expect, are drafted to protect their interests. As a borrower, you cannot hope that these documents will also protect your interests. If your project or investment is under stress, it is the ’non-financial terms’ in the documentation that financiers rely on to determine whether a project continues, and on what basis.
Peter Faludi, a lawyer practising in real estate financing in Australia for over 35 years, has written a book to give property developers and investors a better understanding of the terms found in finance documents. Titled ‘The Ultimate Short Guide to Property and Development Finance in Australia – There is much more to it than just numbers’, the book provides 40+ tips to improve property finance outcomes for developers and investors.
Peter has kindly shared an extract from his book with us which we republish below.
Tips to improve your property & development finance outcomes
1. Make sure the project’s ownership structure is consistent with the financier’s requirements
Be aware of a financier’s security requirements and ensure the ownership structure of the project will enable such requirements to be met. If such requirements are not acceptable or achievable, renegotiate the finance terms. Different ownership structures also have different tax and liability consequences.
2. Do your due diligence on non-bank lenders
Due to the diversity of non-bank lenders and the source of their funds, it is important to do due diligence on any non-bank lenders being considered to fund a project. For example, will they have the funds available for each drawdown?
3. Use builders and consultants with a recognized excellent Australian track record
Recent headline problems for Opal Tower and Mascot Tower highlight the importance of using builders and consultants with which financiers will be comfortable. This is particularly important for projects to be undertaken by foreign or inexperienced developers and will substantially improve the likelihood of obtaining finance.
4. Know your project
Having a full understanding of the details of a project, and being able to supply complete and accurate project information to a financier on a timely basis, demonstrates to the financier the required level of competence and professionalism of the developer. It also assists in focusing on the important issues when negotiating documents.
5. Understand the circumstances in which the financier can review the terms of the loan, including pricing
A financier may have the right to change the terms of the loan at any time prior to repayment. These rights should be qualified.
6. Negotiate changes before credit approval
Once credit approval is obtained by a financier, it is much more difficult to negotiate changes to the terms of the financing. This can put the borrower in a take it or leave it position.
7. Avoid the pre-sales trap
Ensure the financier’s requirements for pre-sale contracts are met. Resist the temptation to agree to changes required by off-the-plan purchasers which would breach the financier’s requirements as this can result in funding being denied.
Understanding the terms used in financing documents will enable you to negotiate them to achieve better commercial outcomes in the event of uncertainties or problems.
Please see Peter Faludi Consulting for more information. Peter assists inbound and local property investors and developers understand the commercial and financial consequences of the “fine print” of finance documents which are often overlooked (to the detriment of borrowers).