Securing finance for your commercial build is a step that requires careful consideration before progressing with your project. For business owners and new developers, navigating the specifics of commercial property financing in New Zealand can be a confusing process.
In this article, we outline the things to consider before approaching a financer, helping you navigate the process with confidence.
Understanding Equity Requirements
One of the first questions you'll need to address is how much equity you need. In New Zealand, banks typically need a substantial amount of equity before they will finance a commercial build project. This is generally around 40-55% of the total project cost, but it can vary depending on the nature and location of the project, your credit history, and your relationship with the bank.
Rule of Thumb:
- For smaller projects (up to NZD 5 million), expect to provide at least 40% equity.
- For larger projects (over NZD 5 million) or riskier projects, the equity requirement can increase up to 50% or more.
Equity can come from various sources, including existing property, cash savings, investments, mezzanine financing, private investors, and equity partnerships. It's important to prepare a detailed financial statement outlining your equity sources to present to the bank.
The Bank's Lending Process
Banks have a structured process they follow to assess and approve commercial building finance. This typically includes several stages:
- Preliminary Assessment: Initial evaluation of your project, credit history, and financial strength.
- Approval in Principle (AIP): A conditional approval based on preliminary information.
- Detailed Due Diligence: In-depth analysis of your project plans, including feasibility studies, designs, and consents.
- Final Approval: Once all conditions are met, the bank issues final approval and prepares the loan documents.
At each stage, the bank will scrutinize various aspects of your project, including:
Design and Consents: Banks typically prefer that you have detailed designs and necessary consents in place before they commit to financing. This demonstrates the project's viability and reduces the risk.
Construction Contract: Banks look for contracts with reputable contractors to mitigate risks associated with cost overruns and delays.
Bank's Criteria for Contract Structure
The structure of your construction contract is something the banks will consider. Banks favour contracts that minimise their risk and provide clarity on the project's scope, timeline, and costs. Here are some key elements banks look for in a contract:
- Fixed-Price Contract: A fixed-price contract specifies a set price for the construction work, which reduces the risk of cost overruns.
- Reputable Contractors: Banks prefer contracts with established and reputable contractors who have a proven track record.
- Clear Milestones: Defined milestones and payment schedules help banks monitor project progress and ensure funds are released in stages.
- Contingency Plans: Including contingency plans for unexpected issues (e.g., cost increases, delays) is a sign of thorough planning and reduces risk.
If you plan to undertake parts of the project yourself, such as earthworks or fit-out, make sure to discuss this with the bank early on. They will want assurance that you have the ability and resources to manage these aspects without jeopardising the project's success.
Involvement of Quantity Surveyors (QS) and Valuers
These professionals provide independent assessments of project costs and value, which banks rely on for their due diligence. At XL Structural, we have in-house QSs who handle the pricing of your project, ensuring accuracy and ease throughout the process.
When to Involve QS and Valuers:
- Feasibility Stage: Engage a QS early to help estimate costs and prepare a detailed budget. This can strengthen your financing application.
- Pre-Construction: A QS can prepare a comprehensive cost plan, while a valuer can provide an initial project valuation.
- During Construction: Regular QS reports on cost control and progress help reassure the bank that the project is on track.
- Completion: A final valuation by a valuer confirms the project's value, which is important for finalising the loan.
Checklist for Approaching the Bank
To streamline the process and ensure you have everything in order when approaching the bank for financing, here is a full checklist of what to prepare:
- Detailed Financial Statements: Include balance sheets, income statements, and cash flow statements for the past three years.
- Credit History: Provide your credit report and any explanations for past credit issues.
- Project Plan: Detailed project plans, including scope, timelines, and objectives.
- Equity Documentation: Proof of equity sources (property, cash savings, investments, etc.).
- Designs and Consents: Complete architectural designs and necessary consents.
- Construction Contract: A contract with a reputable contractor, including clear milestones and contingency plans.
- Feasibility Studies: Comprehensive feasibility studies conducted by a Quantity Surveyor.
- Market Analysis: Providing a thorough market analysis showing demand for your commercial property can help convince the bank of the project's viability.
- Cash Flow Projections: Detailed cash flow projections showing how you plan to manage finances during and after construction. This includes rent income, operating costs, and loan repayments.
- Risk Management Plans: Demonstrating robust risk management strategies, such as insurance and contingency plans, can significantly enhance your application's credibility.
- Environmental Compliance: Documentation of eco-friendly practices and environmental compliance if applicable.
- Futureproofing Plans: Showcasing how your project is adaptable to future changes in market conditions or regulations can provide additional confidence to the bank.
- Professional Assessments: Independent assessments by QS and valuers.
Securing finance for a commercial build project involves careful planning and thorough preparation. By understanding equity requirements, the bank's lending process, contract structure criteria, and the role of a QS and valuers, you can navigate this complex process more effectively. Additionally, considering often-overlooked factors can give you an edge in securing the necessary funding.
At XL Structural, we’re committed to helping you grow to achieve your commercial property goals. By keeping these five key considerations in mind, you’ll be better equipped to secure the finance needed to bring your vision to life.
For more detailed guidance and personalised advice, please contact us. You can book a call with one of our team here.
