At Lateral Partners we see developments of all shapes and sizes. Of late we have been involved in a few larger development projects and the discussion around staging has been center stage. In this blog we explore what staging a development is and further how that can be of benefit to the developer.
What is staging a development
Staging of a development typically occurs on larger projects. It is where a developer will set their project up to get completed in stages as opposed to all at once. This could go so far as to having distinct stages that are completed before others are started or involve having your project set up so, whilst construction on all units might occur contemporaneously, you may allow for some to be completed and sold before others.
Normally this is determined by the consenting process where there is an allowance for titles to be issued on some units before others. This may involve securing more than one building consent or even resource consent.
What is the benefits to staging a development
By staging a development you can manage your peak debt requirements. Peak Debt refers to your maximum loan balance. On larger projects (30 units+) where there may be large blocks of units that can be completed months before others staging a project will allow you to sell and settle these units early in your development programme.
If you are able to settle those units out early and that capital is applied to your funders loan then naturally your loan balance will remain lower which can save a significant amount of interest costs.
For example, if you are developing 50 units each worth $600,000.00 ($30,000,000.00 total) which are being built in 5 blocks of 10 and you can stage your consent to allow titling and CCC on each block independently you can realise $6M of revenue on completion of each block.
If your programme allowed that the first block would be complete in month 9 whilst the final block wasn’t due for completion until month 15 you could in theory reduce your ‘peak debt’ by $6,000,000.00 for a period of 6 months. At a 10% interest rate that would equate to savings of $300,000.00. You may also find another block can be completed and sold in say month 12 providing a further $150,000.00 of saving on the project.
You may also look at breaking up a project into distinct stages where one property or block of units is constructed, completed and sold before the next is begun. This is a good way of managing your overall leverage utilising profits from the first stage to unlock the equity required for the following stages. We typically see this approach on projects that are carrying a lot of leverage and raising sufficient debt for the full project might not be possible.
This might involve a small subdivision and build of standalone or duplex properties on a property where the developer may complete the subdivision and develop one of the new units or sell off the existing home before beginning the development of the other units.
For example, if a developer acquires a site and is looking to split it into 4 titles building 3 new homes and retaining the existing and has borrowed heavily to acquire the site and secure the consents they may not have sufficient headroom to borrow for the construction of the new units. They may elect to complete the subdivision work and then sell down the existing property utilising the funds raised on the sale to pay down debt and consolidate some equity in the remaining sections to enable borrowing for the construction of those units.
How to stage a development
As mentioned above, staging a development normally involves getting your consent prepared to allow for it. Traditionally a building consent will require all units to be complete before you are able to receive CCC and therefore you may need to break these up into multiple building consents allowing these to be closed off independently.
We recommend working closely with your planner about what staging your project could allow. You should also speak with your financial adviser to understand what staging a project might allow for from a finance perspective.
If you have a project and need to chat through finance options reach out today!
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