Navigating the property development minefield
Property development can be a lucrative venture, but it's also a minefield of financial pitfalls. As mortgage advisers look to diversify, property development can present some strong opportunities - but for those working with clients eyeing their first, or even second development project, understanding how to properly assess and structure these deals is crucial.
Frank Cui, managing director at EverBright Finance, has spent years helping developers navigate the complex world of non-bank funding. His approach goes far beyond simply securing finance – it’s about understanding what the client wants to do, and whether or not securing funding is the next logical step.
Assessing the proposal
Most developers walk in with a specific funding request, but Cui's approach is to dig deeper before reaching for the calculator.
"I usually scan the situation to understand where the real problem is," Cui said. "Sometimes the client wants a specific solution, but that might not be the best solution. You never want your client to dig themselves into a hole, and so over-borrowing is a big no-no.”
The reality is that some development funding requests will contain deeper issues – poor cash flow planning, unrealistic timelines, or developers taking on projects beyond their experience level. Getting to the root cause saves everyone time and money down the track.
Cui's methodology for assessing developer deals follows a systematic three-step process that advisers can adapt for their own practice.
"The first thing we look to understand is what you want to borrow the money for," Cui said. "Say you want to invest $500k into your current business – what sort of budget and cash flow are you looking at? Will it make the $500k back, and how will that impact your life?”
Cui added that an exit plan is vital, and sometimes, it becomes evident that clients should consider alternative solutions to taking on a substantial loan.
“Sometimes we have to decline the requests because it’s simply not the right decision to make,” Cui said. “Cash flow is everything, before profitability. Sometimes we have to advise clients to liquidate some of their assets to get out of stress, and then move on without adding too much debt.”
The next step is to navigate the tax maze. Development deals create complex tax implications that can catch inexperienced developers off-guard, and getting the structure wrong from the start can be expensive to fix later.
This is particularly true when clients want to blend non-tax borrowing with other, taxable activities.
“That creates a whole new set of complexities later on,” Cui said. “Involving the right tax representatives is very important here. Our advice for our non-bank customers, especially first and second-time developers, is that you have to be very familiar with how the taxation works in New Zealand.”
From here, if the project and plan is looking solid, you can proceed to securing the cheapest funding solution. Cui noted that current market dynamics are working in developers' favour, and there is plenty of opportunity out there for those prepared to move strategically. This is particularly true for building costs, which are currently relatively low.
“Builders are looking for jobs,” Cui said. “That means you can find great-quality people out there, and also negotiate good rates in a short period of time. Then we can talk about the best time to start the project – for example, we’re currently in the rainy season, so timings can feasibly be a bit longer than anticipated, particularly for first-time developers. These are the kinds of things that we discuss with clients every day.”
Finally, there’s the most challenging aspect of working with developer clients – having honest conversations about unrealistic expectations. These conversations aren't always welcome, but they're essential for long-term success.
“Sometimes we’re provided with a feasible plan, but sometimes it doesn’t quite stack up,” Cui said. “You have to be precise with clients – and where necessary, correct them in terms of the cost, budgeting and time.”
