Residual Stock Finance

1. Concentration: i.e. the number of units held in the same complex / location
2. Leverage: Depending on the concentration, lenders will generally consider a Loan to Value Ratio (LVR) of between 40% – 70%. This may be on the combined value of each individual unit or on the ‘In One Line’ value, that is the combined value of the units if sold as one lot (a more conservative approach usually adopted by major banks).
3. Interest Cover Ratio (ICR): the ICR is a multiple of the loan repayment amount. From the lender’s perspective it reflects the developer’s ability to cover interest expenses on outstanding debt. Most lenders work on a minimum ICR to ensure that the debt required can be repaid with regular income. Lenders will typically require an ICR between 1.1:1 – 3:1. The more conservative the lender, the higher the ICR is likely to be. For example, for every $1 of interest payable on the loan, the lender expects net rental income of at least $1.10 – $3.00. The ICR can also have an impact on the maximum LVR the lender will allow.

It’s important to note that the ICR is just one of many financial indicators used to assess the viability of the funding requirement from the lender’s perspective. Other factors, such as cash flow, debt levels, market conditions, and project-specific risks will also be considered. In some cases, it may be more beneficial to borrow at a higher interest rate, with the option for capitalisation and with less taxing ICR requirements.

Your Green Team specialist commercial finance broker will be in the best position to provide an overview of your borrowing capacity, loan options and corresponding costs from a range of bank and non-bank lenders.