The Client’s Situation
A group of three novice property developers approached Zenith seeking assistance in obtaining financing for a duplex construction project. They had recently formed a Special Purpose Vehicle (SPV) company specifically to undertake this project. The SPV aimed to borrow $1,500,000 to fund the construction of a duplex in a growing suburban area.
The Challenge
While the SPV was set up for tax benefits within the residential development space, the main challenge was securing financing for a newly formed entity. Key issues included:
- The SPV had no financial history as it was newly formed
- Securing a substantial loan amount for a first-time borrower
- Ensuring the loan structure aligned with the SPV’s tax-efficient setup
Our Approach
At Zenith, we understood that despite the SPV structure, this loan would be treated similarly to a standard construction loan by lenders. We approached the situation by:
- Project Viability Analysis: We prepared a detailed assessment, including:
- Construction plans and costings
- Market analysis for the proposed duplex
- Projected rental income
- Lender Identification: We identified lenders experienced with construction loans, focusing on those who would view this as a standard construction loan despite the company structure.
- Documentation Preparation: We compiled a comprehensive loan application package, highlighting:
- The serviceability of each of the three directors who would go onto the loan as guarantors
- Upfront valuation report that was completed beforehand to avoid any surprises
- How they have engaged an experienced 3rd party builder
The Process
Our process involved several key steps:
- Client Education: We took the time to thoroughly educate the clients on how construction loans work, ensuring they understood the unique aspects of this type of financing. This included explaining:
- The staged drawdown process, where funds are released as construction progresses through stages such as slab, frame, lock-up, fitting, and completion.
- The interest-only repayment structure during construction helps manage cash flow by only paying interest on the amount drawn down.
- The importance of regular inspections and valuations by the lender to ensure the project is on track.
- The need for prompt communication with the lender to facilitate smooth progress payments to the builder.
- Lender Education: We also worked with lenders to ensure they understood that while the SPV was set up for tax benefits, the loan itself should be treated as a standard construction loan.
- Loan Structuring: We worked with the chosen lender to structure the loan appropriately, ensuring:
- Staged drawdowns aligned with construction milestones
- Interest-only periods during construction to manage cash flow
- Negotiation: We leveraged the size of the loan amount to negotiate favourable terms.
The Outcome
After a focused process, we successfully:
- Secured a $1,500,000 construction loan for the SPV
- Obtained approval from a mainstream lender familiar with construction loans
- Negotiated terms similar to standard construction loans, including competitive interest rates and fee structures
- Structured the loan with interest-only payments during the 12-month construction period, converting to principal and interest thereafter
The SPV was able to commence its duplex construction project with financing that aligned with both its tax-efficient structure and construction needs.
Conclusion
This case study demonstrates our ability to secure financing for newly formed entities in the property development space. At Zenith, we understand how to present SPV structures to lenders in a way that focuses on the underlying construction loan requirements.
By educating both clients and lenders on the specifics of construction loans, we ensured a smooth and successful financing process. If you’re considering property development through an SPV and need construction financing, contact us to explore your options.
