Time to stop stressing about residual stock.
Our friend Jonathan is an experienced residential developer that has just completed a project, delivering eight, high quality townhouses in Melbourne’s eastern suburbs. After a four-year journey, with millions of equity tied into the project he is ready to realise his revenues.
Jonathan sought to maximise his equity return and opted for a no-presale non-bank construction loan at a 70% LVR.
During the build, he sold three townhouses off the plan. Now that titles have been issued and sales have settled – the residual debt over the remaining five equates to 60% of the value of the unsold town homes.
Jonathan now faces a non-bank debt that has matured at an expensive, fully drawn rate of close to 12%. He needs to refinance the debt but he also wants to realise his equity as the project sells through. Jonathan is a professional developer and over the four years he has acquired two new sites, one is now mid construction and the other in planning. Being a developer, his cashflow is lumpy and equity funding certain project costs is proving stressful.
Jonathan, with the assistance of his reliable finance broker explores his residual stock finance options, the ask is undemanding – a refinance of the residual debt with 12 months of capitalised interest, taking him to a 65% LVR. But what he desires is a cost-effective solution that will allow him to realise his equity as the project takes time to sell through.
He obtains options at higher gearing, repatriating captive equity, but the leverage needed means the interest costs will be high. Maintaining conservative leverage, some lenders will cross collateralise the residual stock yet seek 100% of any sales to go to debt reduction.
Other lenders will allow him to keep some sales proceeds, but they impose a minimum interest period or early repayment penalties. While plenty of options exist for Jonathan, what he really desires is the optionality to sell through quick, not be penalised for paying back a loan early in the term and yet still realise his share of the equity along the way.
This conundrum is a common one for which a solution has often been hard to come by. Until now.
Enter the Simple Property Loans residual stock product. Instead of one loan with all properties cross collateralised as security, Simple Property Loans is able to refinance Jonathan’s residual five townhouses as five individual loans, each at a 65% LVR. As each property transacts, Jonathan gets his 35% entitlement of the sales proceeds and incurs no penalties for paying down principal early during the term. Jonathan finds that he can have his cake and eat it too.
In any one development, Simple Property Loans offers residual stock options where each loan is standalone, meaning the equity of the developer is realised at every sale and with no minimum term or early repayment penalty, the developer is not penalised for selling stock at any point during the term.
