Residual Stock Finance: Options When a Development Completes With Unsold Stock

A development is not finished when the builder hands over the keys. The construction facility still has to be repaid, and that repayment usually depends on settling the sales. When a project completes with stock still unsold, or when some presale buyers fail to settle, the developer can be left with a debt that is due and fewer settlements than planned to repay it.

Residual stock finance is the facility designed for that position. This guide, prepared by Amar Alamar of Blended Ventures, explains what residual stock finance is, when it is used, how lenders assess it and what a developer should prepare before approaching the market.

Why unsold stock matters at completion

Construction facilities are short term by design. They are sized and priced on the basis that the project will be built, the presales will settle and the remaining stock will sell within a defined period after practical completion. The facility usually carries a fixed maturity date, and interest continues to accrue whether or not the stock is sold.

Several things can disturb that plan. Market conditions may soften during the build, so buyers become slower or more price sensitive. Some presale purchasers may be unable to obtain finance at settlement, or their valuation may come in below the contract price. Completion itself may run late, compressing the selling window before the construction loan falls due.

In each case the developer faces a choice. Stock can be sold quickly at a discount to meet the maturity date, the existing lender can be asked for an extension, or the construction facility can be refinanced with a facility built for completed stock. Residual stock finance supports the third option, and it is often less costly than a forced sale.

For an overview of how residual stock fits alongside site acquisition, construction and bridging facilities, see How Private and Development Finance Works for Gold Coast and Queensland Projects.

What a residual stock facility is

A residual stock facility is a loan secured by a first mortgage over the completed, unsold dwellings, townhouses, apartments or lots in a project. It is generally supported by guarantees from the sponsors and, in some cases, additional security.

The risk profile differs from construction lending. The building risk has gone, because the asset is complete and has a certificate of occupancy or registered titles. What remains is sales risk: how long the stock will take to sell, and at what price. Lenders price and structure the facility around that question.

Residual stock facilities are offered by banks, non-bank lenders and private credit funds. Terms are usually between six and twenty four months, and interest is commonly capitalised or prepaid from the facility, since the stock produces little or no income while it is being marketed.

How lenders assess and size the facility

The starting point is an independent valuation of the unsold stock. Lenders typically look at the gross realisation value, which is the total of the individual unit values, and many also consider an in one line value, which reflects what the stock might achieve if sold together to a single buyer. The gap between those two figures tells the lender how much the security depends on selling unit by unit over time.

Beyond the valuation, lenders consider:

The number of units and the proportion of the project that remains unsold.

The location, product type and depth of the local buyer market for that stock.

Sales evidence within the project and in comparable nearby developments.

The marketing strategy, the agent appointed and the expected selling period.

Whether any units are leased, and the quality of that income.

The sponsor's experience, other commitments and overall financial position.

From this, the lender sets a maximum loan to value ratio and the release terms. Where the stock is in a strong market with good sales evidence, the facility can usually be sized more generously. Where the stock is concentrated, specialised or in a thin market, the lender will generally be more conservative. The guide Construction Finance in Queensland explains how construction facilities are sized at the start of a project, which is a useful comparison.

Release prices and how the facility is repaid

Repayment comes mostly from individual sales. As each unit settles, the lender releases its mortgage over that title in exchange for a payment towards the debt. The facility agreement will usually set a minimum release price for each unit, or require a set percentage of the net sale proceeds, often more than the unit's proportionate share of the loan, to be paid to the lender.

This structure means the debt falls faster than the stock is sold, which protects the lender as the remaining security shrinks. For the developer, it means early sales may release little or no cash, and the release terms need to be understood before the facility is accepted.

Some developers choose to keep part of the stock as a long term investment. In that case, the residual stock facility can act as a bridge to longer term investment debt once the retained units are leased. For the differences between residual stock lending and short term bridging, see Bridging Finance on the Gold Coast.

What to prepare before approaching a lender

A well prepared application usually shortens the time to an indicative offer. The following information is commonly requested:

A schedule of unsold stock, with unit numbers, sizes, configurations, list prices and any offers received.

A sales history for the project, including settled and failed presales.

The marketing plan, the selling agent's details and campaign timing.

Details of the existing construction facility, including the current balance, maturity date and any default or extension terms.

Titles, the certificate of occupancy or plan registration, and any building defect reports.

The sponsor's asset and liability position and details of other projects.

Starting the conversation well before the construction facility matures is important. A refinance arranged three to six months ahead of maturity generally offers more choice and better terms than one arranged in the final weeks. Where additional funds are needed to cover a shortfall at refinance, a second ranking facility over other property may be considered, and the guide Commercial Second Mortgages in Australia explains how those facilities work.

The role of Blended Ventures

Blended Ventures is a finance brokering consultancy founded by Amar Alamar, working with property owners, investors, developers and business owners from the Gold Coast and Brisbane. It connects clients with private credit funds, non-bank lenders, banks and capital partners, and focuses on business, commercial and investment purpose finance.

For a residual stock refinance, each engagement starts with the stock schedule, the sales evidence, the existing facility and the developer's preferred exit, so that the facility gives the project enough time to sell well. More information is available at blendedventures.com.au.

Important information

This article is general information only. It is not financial, credit, legal or tax advice and does not take into account any person's objectives, financial situation or needs. Blended Ventures is a finance broker, not a lender. Any finance is subject to the relevant lender's assessment, credit criteria, security valuation and approval. Readers should obtain independent professional advice before acting.