Time is money for development finance

Tuesday, 4th Aug 2015
Categories: Finance, Newsletter

development financeWhile developers are always mindful of construction costs, it’s just as important to be aware of the costs associated with development finance, particularly when building delays occur.

Many first-time developers often forget that for every day their development is delayed, interest on their loan is still accumulating.

For example, let’s say a developer has a project which is being funded by a $2 million loan and the project hits significant delays at the halfway point.

This delay is likely to cost the developer in the vicinity of $13,000 each month in compounding capitalised interest, which means they pay interest on the interest.

While developments don’t usually experience month-long delays like this, it’s not unusual for delays of a day or two to occur at each step of construction.

The plumber, the tiler, the landscaper not starting early enough or the builder getting in their way.

It’s easy to see how a few days here and there can quickly amount to a month’s worth of downtime.

The cost of delays will vary from each project as it will depend on a number of factors, such as the interest rate, loan amount and drawn funds.

However, the interest on a fully drawn $2 million loan with a typical interest rate is about $13,000 per month capitalised and compounding.

Add to this other holding costs, such as rates, and development finance could end up costing a developer many thousands of dollars extra.

Many investors who want to develop but don’t have the time to manage the project often appoint a development manager who will manage the entire project and keep the builder to their time frames. Momentum Wealth is managing over $170 million in projects for our clients. If you’d like to speak to one of our development specialists please give us a call on 9221 6399 to see how we can help you with your project.