Financing off the plan

Published: 17 July 2008.

Written by Damien Windle of PCS Finance

It is a common question asked by first timers and experienced operators – Will I purchase off the plan / based on income projections OR will I buy a complex that has been operating as a going concern? Whether you’re a first timer or an experienced operator you will be faced with similar challenges. The reward can be significant capital gains on the sale of the Management Rights. Remember, when buying off the plan there has to be some upside as you may have12 months of hard work ahead getting the place going. Cash reserves are important as the income isn't going to be there from day one.

Banks do prefer to lend to people who have experience in the industry if they are purchasing off the plan however it is not compulsory in order to have finance approved. Regardless of your experience it is important to discuss this proposal with an experienced financier as purchasing off the plan can be a challenging and complex process.

Some common questions a financier may ask - are there claw forward / claw back conditions, when is the adjustment date, how much is the adjustment amount per lot, how is the adjustment amount calculated, will the developer accept payment as a guarantee or will they expect monies to be deposited to there account upfront, how was the projected income calculated and what research has been completed to justify this projected net, is the multiplier within market range for that area and are there any rental guarantees. If your financier is not asking these type of questions you could be talking to the wrong person and this could cost you time, money and stress.

It is very important as a prospective purchaser that you do your own research. Compared to an established Management Rights there is no history when purchasing off the plan. Maybe there are similar complexes within the area where you can compare rental income and occupancy levels etc. Remember, you make your money when you buy not when you sell.

There have been a few proposals that I have been involved with in the last six months where the vendor insisted the sale price of the business was to be calculated on the number of lots sold to investors, regardless if these lots ended up in the letting pool at settlement. The vendor insisted the settlement proceeds were to be paid direct to the their bank account. Eg 30 lots sold to investors, even if 25 were only in the pool at settlement then 30 still had to be paid for. There was an agreed adjustment date and adjustment amount in the contract within 6 mths after settlement if a certain number of units were not in the pool then the developer would “refund” this money to the purchaser. The obvious risk here is due to paying the vendor upfront into their bank account you are hoping the vendor is still around in six months time. This is where bank guarantees can reduce this risk OR alternatively paying the monies into a solicitors trust account. Banks will be more comfortable with paying based on lots in the pool at settlement and then a claw forward / claw back can be negotiated on that date or an agreed adjustment date.

Additionally, some financiers insist that if the developer guarantees say 30 in the pool at settlement then 30 PAMDA 20’s must be signed prior to settlement or at least written evidence from the investors confirming they will offer their lot to the on site manager. Other financiers will be satisfied just with the purchaser’s written confirmation of how many units have been sold to investors compared to owner occupiers. The risk to the bank and the purchaser is the investor’s may suddenly become owner occupiers or decide to sell the lot therefore the risk is selling to an owner occupier. Once again the banks will advise the necessary steps to reduce this risk.

In majority of cases the developers will employ a sales agent who markets the lost to investors either local, interstate or overseas. When buying off the plan sometimes you have to sign an unconditional contract 2 or 3 yrs ahead of completion. No bank will give unconditional approval this far out so it is of utmost importance that you get sound advice from an experienced management rights lender and your lawyer (also has to be experienced) who has covered the legal contingencies.

Your Accountant will advise if GST is applicable on the business price when purchasing off the plan. Most financiers will provide short term funding for GST however in some cases this needs to be funded by the purchaser. Remember the GST can be claimed back when you complete your next BAS return.

It pays to shop around when purchasing off the plan as some financiers lending value ratios, interest rates and loan conditions can vary significantly compared to purchasing an established business.