Case Study: When Refinancing a Development Site at a Higher Cost Makes Sense

Refinancing a Development Site to Meet ATO Obligations

We recently assisted a property developer who had tax obligations to meet, but had their equity tied up in a site that had a bank loan on it. Assessing their entire situation, including the implications and costs of maintaining the ATO debt, we determined that refinancing to a higher-cost non-bank lender was a better solution.

Valuations are Key

Lenders and Brokers often believe that the process needs to be (1) get an offer from a lender, then (2) the lender orders the valuation, whilst (3) the borrower crosses their fingers and hopes.

At STAC, we completely disagree with this process – irrespective of what banks, private lenders or brokers will tell you, we almost never run the above process. For the benefit of our clients, to create certainty and reduce risk, we control the valuation process.

In this instance, we followed our standard process – we began by engaging one of our preferred valuers to provide an accurate site valuation.

Although we can’t tell a valuer what numbers they have to put on their report, here’s some food for thought… if there’s any argument to be had with a valuer in regards to their assessment, who do you think they’ll be more willing to negotiate with – the developer who orders one valuation a year – or the firm that engages them dozens of times a year, feeding them 6-figures worth of fees every year?

Approaching Lenders With the Valuation

Once we knew where the site value was coming in, we weren’t making guesses about what the risk to the lender was – we knew exactly what the LVR was, along with the qualitative strengths & weaknesses identified by the valuer in their report. This put us in the box seat to be able to negotiate terms with lenders and secure a favourable deal for our client.

Only at this point, did we approach lenders. We were able to negotiate the deal with the certainty of what the lender’s risks would be – which in this situation, with a relatively low LVR (from a non-bank lender’s perspective), allowed us to strike a deal on very attractive fees and rate.

The Benefits of Refinancing

Although refinancing from a bank to a private lender did, on a direct comparison basis, naturally result in a higher finance cost, that’s not the whole story.

By extracting equity to allow them to pay their outstanding ATO obligations, not only were they able to keep their nose clean, but the overall finance cost premium – including what they would have been paying the ATO under a payment arrangement (i.e. on a WACC (Weighted Average Cost of Capital) basis) – was actually very minimal.

On top of that, the refinance also gave them a bit of extra cash to cover pre-construction project costs to get the project pushed ahead faster.

Why Work with STAC

Working with professionals who have strong relationships with numerous valuers and a wide range of lenders of all types is essential when it comes to strategic debt arrangement.

As demonstrated by this property developer’s experience, the benefits of refinancing can often be more than just comparing Lender A’s costs vs Lender B’s costs. Factors such as WACC, financial and emotional stress implications of not being up to date with the tax office, and being able to push a project along faster were present here – but there can be many other reasons why a refinance at a higher direct cost might be very beneficial.

No matter what the situation, the team at STAC has extensive experience helping clients achieve their financial goals through tailored strategic financing solutions. If your situation might warrant a chat, our door is always open – reach out and say g’day.

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