Most of us have bought a home at some point. Generally you talk to a bank or broker, present them with your financial information, and they give you an idea of how much you can borrow. This gives you your budget for what you can afford to buy, and often this is called a pre-approval up to that limit.
So far so good, right? But if you're a property developer and have moved up to a level where you're going to need commercial finance for your project, a logical question to ask is whether you can get a similar pre-approval from a commercial lender.
I'm glad you asked.
If there's one thing I've learnt over the years, it's that words have different meanings when used in different contexts. In this case, residential lending vs commercial lending.
So yes, pre-approval does exist in the commercial lending space, but no, it doesn't work the same way as it does in residential lending.
And when you think about it, that makes sense. Residential lending focusses on your capacity to service the loan. Commercial lending is more about the deal itself.
Which means that until the deal exists, the commercial lender can't give you pre-approval on it. They can certainly give you an outline of what sort of terms they would apply to your loan, such as likely LVR, interest rate, fees etc. But again, that's related to the deal, rather than a set loan amount.
The one thing both types of pre-approval have in common is this - it's not definite. That pesky little prefix "pre" is the key. No matter what a lender has said, until you actually go through the full approval process it's all just a maybe.
Now we've established that pre-approval for development finance is a way for the lender to provide an initial indication of their willingness to finance your project subject to certain conditions being met, let's dive in and see what that process involves.
Initial Assessment
The first stage of the pre-approval process involves an initial assessment after the developer presents their project to the lender.
Lenders prefer to work with developers who have a proven track record in completing projects on time and within budget. If you have completed successful developments before, your chances of receiving pre-approval are higher.
They will also assess the overall feasibility of your proposed development. This includes looking at factors such as project location, demand in the local market and construction timelines. Essentially they want to feel confident about your expected return on investment (ROI). After all, they want to ensure the project will generate enough revenue to repay the loan.
One thing to keep in mind - although commercial lending is mostly about the deal, the lender will still review your financial health, including credit history, assets, and liabilities. They want to ensure you are financially capable of handling the project.
Documents
Assuming the initial assessment is positive, you will then need to submit a series of documents to the lender. These documents provide a clearer picture of both the project and your own financial standing.
If you already have planning permissions or approvals from local authorities, then you'll need to provide these documents. Many lenders will require evidence that all necessary permits are in place before granting full approval.
Depending on the size of the project, the lender may require outside professionals to essentially "double-check" the numbers on your project. This will always include a valuation by a qualified valuer, but for bigger projects it's also likely a quantity surveyor's report will be needed to confirm the building costs and timelines.
Beyond that, lenders vary. Some other potential documentation you might need to provide would include:
Risk Assessment
After the submission of the necessary documents, the lender will conduct a comprehensive risk assessment. This is one of the most critical stages of the pre-approval process, as it determines the feasibility and riskiness of the project from the lender's perspective.
Once the level of risk has been determined, the lender will then calculate the loan-to-value ratio, which compares the loan amount to the professional valuation of the property. Generally, lenders are more comfortable with lower LVRs, as they reduce the risk for the lender.
For the initial purchase of the site, lenders will often only lend 50-60% of the property's land value. Construction finance is more likely to be based on the GRV (gross realisation value) or TDC (total development costs) and is mostly in the 60-70% LVR range.
Lenders also like to see other collateral available to support the project, such as other real estate holdings or personal guarantees from the developer. This further reduces the lender's risk. So yes, it's likely you'll have to put your home on the line unless you have other investment assets available.
Depending on the lender, you may also need to have some presales in place to reduce their risk.
Pre-Approval
At this stage the lender is usually ready to issue a Letter of Offer or an Indicative Terms Sheet. This lays out all the conditions you need to meet in order to secure the finance. Chances are you'll have provided a lot of the necessary paperwork already, but they almost always manage to think of more!
Once all those conditions are met, the lender will issue final approval, and a formal loan agreement will be signed. At this point, funds will be ready to be released according to an agreed-upon drawdown schedule. Yay!
As you can see, there's a lot of steps and a mountain of paperwork to provide in order to get a commercial loan, even for a small project. The bigger the project, the bigger the mountain! This is why using a development-savvy broker is generally a good idea once you move into this space.
So to answer the original question - can you get pre-approval for commercial finance? Yes, you can, although it's different to pre-approval in the residential lending space. Pre-approval is a valuable tool that gives you an initial commitment from the lender, helping you move forward with confidence in your project.
However, it’s important to remember that pre-approval is conditional, and you’ll need to meet a list (likely a long one!) of requirements before final approval and funding are secured. Provide thorough documentation, work closely with your broker and lender, and you can help to streamline the loan approval process once the project is ready to move forward.
So far so good, right? But if you're a property developer and have moved up to a level where you're going to need commercial finance for your project, a logical question to ask is whether you can get a similar pre-approval from a commercial lender.
I'm glad you asked.
If there's one thing I've learnt over the years, it's that words have different meanings when used in different contexts. In this case, residential lending vs commercial lending.
So yes, pre-approval does exist in the commercial lending space, but no, it doesn't work the same way as it does in residential lending.
And when you think about it, that makes sense. Residential lending focusses on your capacity to service the loan. Commercial lending is more about the deal itself.
Which means that until the deal exists, the commercial lender can't give you pre-approval on it. They can certainly give you an outline of what sort of terms they would apply to your loan, such as likely LVR, interest rate, fees etc. But again, that's related to the deal, rather than a set loan amount.
The one thing both types of pre-approval have in common is this - it's not definite. That pesky little prefix "pre" is the key. No matter what a lender has said, until you actually go through the full approval process it's all just a maybe.
Now we've established that pre-approval for development finance is a way for the lender to provide an initial indication of their willingness to finance your project subject to certain conditions being met, let's dive in and see what that process involves.
Initial AssessmentThe first stage of the pre-approval process involves an initial assessment after the developer presents their project to the lender.
Lenders prefer to work with developers who have a proven track record in completing projects on time and within budget. If you have completed successful developments before, your chances of receiving pre-approval are higher.
They will also assess the overall feasibility of your proposed development. This includes looking at factors such as project location, demand in the local market and construction timelines. Essentially they want to feel confident about your expected return on investment (ROI). After all, they want to ensure the project will generate enough revenue to repay the loan.
One thing to keep in mind - although commercial lending is mostly about the deal, the lender will still review your financial health, including credit history, assets, and liabilities. They want to ensure you are financially capable of handling the project.
Documents
Assuming the initial assessment is positive, you will then need to submit a series of documents to the lender. These documents provide a clearer picture of both the project and your own financial standing.
If you already have planning permissions or approvals from local authorities, then you'll need to provide these documents. Many lenders will require evidence that all necessary permits are in place before granting full approval.
Depending on the size of the project, the lender may require outside professionals to essentially "double-check" the numbers on your project. This will always include a valuation by a qualified valuer, but for bigger projects it's also likely a quantity surveyor's report will be needed to confirm the building costs and timelines.
Beyond that, lenders vary. Some other potential documentation you might need to provide would include:
- business plan
- financial statements - personal & business
- cash flow projections
- information memorandum
- detailed feasibility
- comparables for end product
Risk Assessment
After the submission of the necessary documents, the lender will conduct a comprehensive risk assessment. This is one of the most critical stages of the pre-approval process, as it determines the feasibility and riskiness of the project from the lender's perspective.Once the level of risk has been determined, the lender will then calculate the loan-to-value ratio, which compares the loan amount to the professional valuation of the property. Generally, lenders are more comfortable with lower LVRs, as they reduce the risk for the lender.
For the initial purchase of the site, lenders will often only lend 50-60% of the property's land value. Construction finance is more likely to be based on the GRV (gross realisation value) or TDC (total development costs) and is mostly in the 60-70% LVR range.
Lenders also like to see other collateral available to support the project, such as other real estate holdings or personal guarantees from the developer. This further reduces the lender's risk. So yes, it's likely you'll have to put your home on the line unless you have other investment assets available.
Depending on the lender, you may also need to have some presales in place to reduce their risk.
Pre-Approval
At this stage the lender is usually ready to issue a Letter of Offer or an Indicative Terms Sheet. This lays out all the conditions you need to meet in order to secure the finance. Chances are you'll have provided a lot of the necessary paperwork already, but they almost always manage to think of more!
Once all those conditions are met, the lender will issue final approval, and a formal loan agreement will be signed. At this point, funds will be ready to be released according to an agreed-upon drawdown schedule. Yay!
As you can see, there's a lot of steps and a mountain of paperwork to provide in order to get a commercial loan, even for a small project. The bigger the project, the bigger the mountain! This is why using a development-savvy broker is generally a good idea once you move into this space.
So to answer the original question - can you get pre-approval for commercial finance? Yes, you can, although it's different to pre-approval in the residential lending space. Pre-approval is a valuable tool that gives you an initial commitment from the lender, helping you move forward with confidence in your project.
However, it’s important to remember that pre-approval is conditional, and you’ll need to meet a list (likely a long one!) of requirements before final approval and funding are secured. Provide thorough documentation, work closely with your broker and lender, and you can help to streamline the loan approval process once the project is ready to move forward.
