Commercial Loan Workouts and Renegotiation
By Michelle Gamble
How we can ensure property development projects remain profitable
When unexpected changes in the market arise, it is important for developers to turn to experts early on to ensure that projects not only stay afloat, but also turn a profit.
According to the Bureau of Statistics’ most recent figures, Australia’s economy shrank by 0.3% in the March quarter, suggesting that recession is inevitable. ABS chief economist Bruce Hockman said that the economy is seeing the “slowest through-the-year growth since September 2009”.
The property development sector is struggling under the weight of the high interest and unemployment rates typical of recession. According to Peter Switzer of Switzer Financial Group, “The big surprise here is that, after the coronavirus, more Australians feel comfortable investing in stocks over property.”
These problems are compounded by the global nature of COVID-19, contributing to a dramatic slash in foreign investment. A report by the Foreign Investment Review board reveals that residential and commercial property investments from China have recently fallen by more than 50%.
The reduction in potential investors puts pressure on developers who have financially committed to a project under construction. With market conditions such as these, open communication with stakeholders and creative solutions are vital to prevent a project from becoming financially disastrous. This is where workouts come in.
What is a commercial loan workout?
Put simply, a loan workout is an agreement between a lender and borrower to renegotiate the terms of a loan to benefit both parties and prevent foreclosure.
In a loan workout agreement, the terms of the original loan are liquidated, with new terms agreed upon, such as extending the timeline of the loan or changing the payment schedule. This can also include new sales and building processes designed with the current market in mind.
Experts can help developers negotiate and implement a workout agreement that will end in the successful completion of a project, even during the most volatile of times.
This is best organised as early as possible, as experts have access to specialist alliance consultants such as valuers, quantity surveyors, property lawyers, and more, who can provide guidance at each step, from early site analysis through to workout placement.
Development Finance Partners have extensive experience in guiding developers towards profitable outcomes.
One example of this is a loan workout we organised for a recently completed 42-apartment development on the Central Coast. 8 of the units had been sold, 4 contracts had exchanged but not yet settled, and 8 properties were still subject to lease agreements.
Due to flooding issues, the apartments did not sell as well as expected, leading to the project’s default under the mortgage facility. DFP formulated a sales process, drip-feeding the properties to the market to maximise value. As well as this, the 8 leased apartments were assigned a vacation schedule to further maximise rental returns, while also allowing units to become available for sale as they were completed. These steps resulted in a substantial increase in the project’s overall return, raising it from $8.9 million to $12.3 million.
Similarly, DFP also advised the National Australia Bank on a development that was no longer viable in the market because of its price point, cost to complete, and design. Its original plan—three lots separated into luxury apartments, affordable housing units, and a heritage property renovation—was set to yield a net loss of around $12 million.
DFP’s alternate development strategy led to a shift away from luxury apartments and towards a more affordable price point, greatly improving the presale rate. DFP also recommended a staged finance management solution, allowing for a profit yield of $7.2 million.
If you are a developer whose project is negatively affected by current market conditions, it is important to act now.
Contact DFP for early advice on completing your project or managing unmeetable funding obligations. We can use our expertise to help you mitigate losses and find creative financial and development solutions.
For expert advice:
Level 3, 31 Alfred St
Sydney NSW 2000
P / 02 8916 6246
Level 30/35 Collins Street,
Melbourne VIC 3000
P/ 03 8692 0082
Level 18, 175 Eagle Street
Brisbane QLD 4001
P / 07 3041 4136
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