Why does the developer want to self-build?

“Builder-Developer” projects are becoming more common due the appeal of the construction margins “open book” pricing of subtrades and minimal variations, but there is still much for lenders funding these types of projects to be wary of.

The risks of a developer lacking the skill base or professional help to successfully undertake a project of this nature prompts wary lenders to prefer the engagement of an independent third-party builder.

More recently, lenders are seeing increased requests from developers proposing to self-build, utilising sub-contractors based on the developers own skill base or with professional help from project managers.

Despite an increase in the builder-developer approach projects, approvals remain difficult to obtain and lenders remain cautious however new strategies to accommodate and gain approvals are emerging, and some developers have been able to secure funding for self-build projects over the last year or so.

 

Choose the right lender

The right lender can help navigate the varying requirements for builder-developer projects. Approaches such as establishing a level of separation between the development company (borrower) and the entity undertaking the construction are proving reasonable.

In this case the developer can form an in-house “construction company” that contracts back to the developer, providing an effectively arm’s length transaction. And with no requirement to contract an engineer (as one would expect under NZ Standards Contract 3910, utilising 3915) for in-house construction is more than adequate to cater for this approach.

As with third-party contractors the lender will still insist on the engagement of a quantity surveyor to act on behalf of the lender and verify all costs and contingencies associated with the project. In addition to this the lender will also want to verify that a high percentage of the subtrades have determined a fixed price prior to draw down of any funding.

Normal margins, preliminary and general costs as well as a performance bond, in certain cases, will also be required as with a third-party contractor in larger transactions.

To answer the question; the “builder-developer” should be able to increase profitability through keen pricing of subtrades together with construction margins but will be well rewarded by choosing a lender with the expertise and reputation to deliver funding solutions for these typed of projects.

Development Finance NZ can help you navigate and fulfil the requirements to get your project funded. Our specialists will analyse your project and provide you with the clearest pathway to secure funding. A free overview of your funding options is typically available within 24 hours.

Call Kingsley Turner on +64 9 215 0939 or email kingsley@pfnz.co.nz to discuss your project.

 

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