South African development finance calculator

Unlike regular home or business mortgages, development loans are paid out in stages from an agreed loan pool. Lenders will typically limit the funds they are willing to provide to no more than 65% of land purchase costs, and up to 100% of the construction costs.

Here’s an example of new-build development finance:

A plot of land has been sourced that has planning permission to build ten, three bedroom detached houses. The land can be purchased for R6,000,000 and the cost to build all ten houses will be R20,000,000. Total deal costs are R26,000,000, excluding fees and interest.

The estimated value of each house after construction (including their freehold), is R3,500,000 meaning a Gross Development Value (GDV) of (10 x R3,500,000) R35,000,000.
Development finance can be used to raise up to 65% of the land cost = R3,900,000 and 100% of the build cost = R20,000,000. This is also subject to the total borrowing requirement not exceeding 70% of the Gross Development Value (LTGDV), which in this scenario is 68% (R23,900,000 vs R35,000,000).

A loan facility is set up for R23,900,000. (The pool). Funds are released in stages, with an initial release of R3,900,000 to help buy the land. The developer will provide cash in the sum of R1,800,000 to complete the land purchase.

The remaining R20,000,000 will be released in stages as the new-build progresses. The borrower will use their cash first, with the lender then following with further drawdowns.

The borrowed sum of R23,900,000 plus interest is repaid when the houses are sold on completion. As this deal is not a joint venture, the developer retains all the profits.

With most development loans, interest is only charged on funds that have been drawn from the loan pool.

The interest rate charged on development loans is directly linked to the lenders perceived risk of the deal. Therefore, the more you borrow against the total project cost, the higher the interest rate is likely to be. Therefore, any developer needs to trade off the cash they have available to contribute towards the scheme vs the interest rate they are willing to pay to borrow the funds.