𝗣𝗮𝗿𝗶 𝗽𝗮𝘀𝘀𝘂 𝗰𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻 𝗹𝗼𝗮𝗻𝘀: 𝟯 𝘄𝗮𝘆𝘀 𝘁𝗼 𝗽𝗮𝘆 𝗹𝗮𝘁𝗲𝗿
A premium of only about 0.20% pa above a traditional cost-to-complete construction loan is enough now, in some cases, for developers to progressively inject equity under pari passu structures.

That is a modest price for a meaningful lift in developer EIRR.

Five lenders have now detailed to me how they will take the risk a developer will turn up with equity tomorrow, not today.

Reflecting the weight-of-money challenge in Australian CRE, and need to deploy funds, these loans are now being offered by non-banks and a major bank.

That is a meaningful change in underwriting philosophy.
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𝗪𝗵𝗮𝘁 𝗶𝘀 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁
Standard construction loans require the developer to contribute 100% of required equity upfront before debt is drawn.

Pari passu structures change that sequence.

The lender advances debt on the assumption that part of the developer’s equity will be contributed progressively through the life of the project.

This materially improves developer EIRR because equity stays out of the deal for longer.
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𝗧𝗵𝗲 𝘁𝗵𝗿𝗲𝗲 𝗺𝗮𝗶𝗻 𝗳𝗼𝗿𝗺𝘀
1. Fixed sharing of monthly costs
The developer contributes an agreed share of each month’s total project outgoings, for example 40%, with the lender funding the balance.

2. Capitalised costs
The lender funds the actual project costs, while the developer covers the monthly interest and line fee.

3. Equity pays final costs
The developer contributes most of the equity upfront, the lender funds 100% of costs for most of the project, and the final equity contribution, often the last $10m or so, is injected by the developer to complete the build.
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𝗣𝗲𝗮𝗸 𝗱𝗲𝗯𝘁 𝗰𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻
In all three structures, the peak debt is usually based on the assumption that the developer makes every future equity contribution when due.

That matters because line and establishment fees are typically calculated off that peak debt.

If the sponsor misses one or more equity injections, the leverage profile can change quickly.

That is the real risk transfer.
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𝗞𝗲𝘆 𝗶𝗻𝘀𝗶𝗴𝗵𝘁𝘀
 1. After taking more risk then less margin, some lenders are now willing to accept less certainty with pari passu loans
 2. The interest rate premium can be surprisingly low, at 0.20% pa in some cases
 3. There are three distinct variants, each shifting equity timing in a different way
 4. The lender is underwriting future behaviour, not just developer's current equity capacity
 5. While developers can improve EIRR materially, there is significant default risk if liquidity tightens and future equity cannot be contributed.

𝗗𝗲𝘃𝗲𝗹𝗼𝗽𝗲𝗿𝘀: are you seeing these pari passu structures, or are lenders still “equity first”?

Developers wanting confidential benchmarking of current terms, or introductions to lenders and equity JV partners, are welcome to reach out. No exclusivity required.

#privatecredit #developmentfunding #constructionfinance

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