Often the main reason that Borrowing Interest is low for a Development file in Feastudy Professional, when program users expect Borrowing Interest to be much greater, is that they project their Sell-On Income occurring too soon relative to the timing of their development costs, like Land Costs and Construction Costs. They also may have Equity injected into the cashflow and may not have taken account of the mitigating effect that Equity has on Borrowing Interest. Thus it is important to check the timing of all Costs, Incomes, Equity and Debt and enter the correct dates for these data items to have the program calculate the correct monthly and total amounts of Borrowing Interest for your Development scenarios.
Borrowing Interest is an interest cost (which is usually paid to a financial institution) and is calculated for those months in which the cashflow has a cumulative debt. The opposite is Lending Interest, which is for interest income when the cashflow is in surplus (i.e. for those months where total equity plus total incomes to date is greater than all costs, including borrowing interest costs, to date).
With regard to Australian real estate developments, it is usually (if not always) the case that deposits and settlements from sales of components of the developed property cannot be realised by the developer until after those components have new certificates of title, which can only be issued after a relevant certificate of practical completion for the said components is given by a relevant professional. Also, while deposits from development sales are held in an Australian conveyancer's trust account for the purpose of applying them at settlement of those sales, they are, either always or at least usually, not repaying external debt finance and/or reducing interest costs payable to a development financier. Thus it is our policy at Devfeas Pty Ltd to suggest to Feastudy users, who study proposals for one-stage-only developments of Australian property and ask us why their Borrowing Interest is low when they have their Sell-On Income occurring before the last End Date for their Construction Cost item(s) in their studies, that they consider making each entered start date of their Sell-On Income items for all newly developed component(s) at least one month later than the said last End Date.
In a Development file in Feastudy, new net costs for the month (before interest) that are not funded by Income and/or GST input tax credits are funded, in accord with certain rules, by available Equity, Secondary Debt Funds and Primary Debt Funds for that month – in that order. If a new net cost for the month (before interest) is not fully funded by Income, input tax credits, Equity nor Secondary Debt Funds nor a combination of these four types of funds, then Primary Debt Funds are used to fund that cost or the remaining part of that cost, as the case requires.
In Australia, Primary Debt Funds are usually bank (first mortgage) finance and Secondary Debt Funds are usually Mezzanine Finance (second mortgage) finance.
For more detailed information about how debt and interest are calculated, you can read the relevant section of the Overview of Basis of Calculations section of the program’s Help file.