Development Equity and Presales: The Real Gatekeeper

Funding: the real gatekeeper

Why a $10 million project needs $3 million before the bank says hello.

Here is the stage that quietly eliminates most aspiring developers, and it has nothing to do with skill. A development bank loan is not a home loan wearing a high-vis vest. It comes with two demands that must be met before a dollar is drawn, and both of them are the developer's problem.

Chapter 6 of the FracHaus property development guide, funding: the real gatekeeper, shown as a page beside its illustration

Demand one: the equity gap

Senior lenders typically fund somewhere around 60 to 80 per cent of total development cost, with the exact number moving with the cycle, the lender and the project. The rest, the equity, comes first and comes from the developer. On a $10 million project that can mean finding $2 to $3 million in cash or equity before the bank contributes anything. Mezzanine finance exists to shrink that gap, and charges accordingly. This is the single biggest reason talented people never develop: not knowledge, not courage, capital.

Demand two: presales

The second demand is proof the end product will sell. Lenders commonly want presale contracts covering a large share of the debt before construction funding flows. And here is the expensive irony: achieving retail presales off the plan is one of the costliest exercises in property. Display suites, campaigns, agent commissions on every contract. The developer spends heavily on marketing precisely to satisfy the bank, and every dollar of it lands inside that retail price you met in chapter 1.

Remember this chapter

Hold both demands in your head, because they are the key to everything in chapter 10. A developer who could source seed equity without a mezzanine lender, and genuine presales without a marketing campaign, would start more projects, start them sooner, and happily share the economics with whoever solved those two problems. That whoever, it turns out, can be a small group of educated investors. Which is not a spoiler so much as a promise, and it is the basis of manufacturing capital growth through co-development.

Questions people ask about this

How much equity do you need for a property development?

Senior lenders typically fund around 60 to 80 per cent of total development cost, with the exact figure moving with the cycle, the lender and the project. The developer contributes the rest, and contributes it first. On a $10 million project that can mean finding $2 to $3 million in cash or equity before the bank contributes anything.

Why do lenders require presales?

Presale contracts are the lender's proof that the finished product will actually sell, which protects their loan. Lenders commonly want presales covering a large share of the debt before construction funding flows. The irony is that achieving retail presales off the plan is one of the most expensive exercises in property, and the cost of it ends up inside the retail price buyers pay.

What is the biggest barrier to becoming a property developer?

Capital. Not knowledge and not courage. The equity a senior lender will not fund has to come from the developer first, and it typically runs to six or seven figures on even a modest project. Mezzanine finance exists to shrink that gap and charges accordingly.