Susan Thomson and Richard Wallace are Auckland-based financial consultants who have recently worked on several new social housing projects for Community Housing providers. In this article they discuss some of the issues that were top of mind as they worked with the Community of Refuge Trust (CORT) to plan and finance a series of new housing developments within Auckland.
Key matters discussed include:
- How to build and integrate a new pipeline of houses within the existing housing portfolio financial model– what are the main things to be forecasting?
- Preparing for an increased level of debt – how to think about and manage debt – how to build a debt dashboard
CORT, formed in 1987 by the Ponsonby Baptist Church has grown to become one of New Zealand’s most significant social housing providers. It has been at the forefront of growth in the Community Housing Sector including with its innovative joint venture funding partnership with the Accident Compensation Corporation which completed 104 new homes in 2026. This new pipeline of houses saw a different funding and financing arrangement with the Ministry of Housing and Urban Development (now the Ministry of Cities, Environment, Regions and Transport) and debt providers.
Community housing providers come in many forms, and the challenges each faces around access to capital can vary considerably. The unifying feature is that, unlike a traditional developer who realises their return on completion of construction, a community‑housing provider operates as a long‑term asset owner with a fundamentally different cashflow and value‑creation profile. The financial model needs to encapsulate both the short-term requirements of construction finance and the long-term economics of community housing ownership.
This article draws on lessons learnt and sets out the key financial modelling considerations that shaped how the homes were financed, and supported successful conversations with lenders.
Combining balance sheet and project finance principles
New housing projects are typically analysed on a standalone basis, however they often require direct or indirect support from the parent organisation or other stakeholders/partners. This means lenders will look through the project to assess the balance sheet capacity of the existing organisation as well as the standalone cashflows of the new project.
Debt capacity in this context is an amalgam of two things: the existing organisation’s ability to service additional debt, and the new project’s ability to generate sufficient cashflow (often underpinned by long-term government contracts). The cashflow generated is often not sufficient to fully support very high levels of external debt funding so building a capital stack and financing plan that allows the project to access each component of capital, including philanthropic capital, is critical to ensure cashflow from the completed development to service debt.
What were the important ratios
Typical project finance ratios are heavily cashflow-oriented, while traditional property development ratios focus on asset values and net debt. Balancing these frameworks to achieve a structure that works for the project while remaining prudent over the long term requires a clear understanding of the cashflow drivers.
The debt service coverage ratio (DSCR) shows the relationship between cashflow available for debt service and the actual debt service commitment. This was central to determining the appropriate level of external debt in projects. Tracking the DSCR ratio across the full project life is the most reliable guide to right-sizing the debt quantum.
Balance sheet ratios such as the Loan to market value of assets (LVR) provide comfort on the long-term principal repayment pathway rather than near-term serviceability. With these ratios understood internally, negotiations with debt providers become significantly more efficient.
Interest rate risk management
With relatively stable rental revenues and a well-modelled cost base, cashflows in community housing projects can be forecast with a reasonable degree of accuracy. Interest rates, however, can move significantly over short time horizons, and decisions about when to fix rates — and for how long — can be material to project viability.
For larger borrowing programmes, the interaction between debt tenure and interest rate reset frequency requires a robust financial model and active internal governance. Knowing what interest rate hedging tools are available, understanding how to assess whether a given rate represents good value, and having internal policies that define when and how rates are set are prerequisites for managing this risk effectively. The financial model should be built to accommodate scenario analysis on interest rates from the outset, not retrofitted to answer rate sensitivity questions after the structure is already committed.
Building the right financial model
A good financial model evaluates project returns. A great financial model functions as a strategic tool, helping decision-makers to put the right questions on the table before the wrong decisions get made.
Over the course of the project lifecycle a financial model can serve four discrete purposes, these may be partitioned into four separate models or a combination thereof.
- Opportunity selection. In the early stages of assessing a new project or pipeline of projects, flexibility in the financial model is useful. Providers are often evaluating not just a selection of sites but considering multiple funding structures (build-to-own, turnkey, leasing, build-to-rent) simultaneously. A model with a clear dashboard that allows stakeholders to compare specific opportunities across consistent financial metrics and see the impact of combining opportunities is useful. The goal at this stage is to find the optimal balance between meeting housing delivery targets and operating within capital constraints.
- Bankable project finance model. As the project evolves and a preferred scenario is established; the financial model’s purpose shifts to providing the evidence required to obtain project and financing approvals for the preferred option. Stakeholders will be focused on assessing the robustness of the opportunity, particularly the operational detail of the construction phase. The model needs to demonstrate cashflow certainty and confirm that the project meets all key debt covenants, ratios and lender requirements across each period, typically on a monthly or quarterly basis. A sensitivity analysis of key variables including construction cost overruns, delays and interest rate movements also provides confidence to lenders.
- Impact on the existing organisation. Unless the new project is ring-fenced (through an SPV or similar) the cashflows and balance sheet capacity of the new project need to be consolidated with the existing organisation. This analysis may fit into the organisations existing long-term planning model but needs to highlight any bottlenecks or constraints on the balance sheet capacity and ensure that consolidated cashflows are sufficient to cover any project shortfalls.
- Project forecasting and reporting. Once the project commences the internal accounting team typically produces project accounts for management. It is critical that these reports track compliance with debt covenants and obligations so that any issues can be corrected before a breach occurs. One element that is frequently overlooked is a robust internal project‑reporting framework that tracks actual performance against the original budget, reforecasts cost‑to‑complete and recalculates the total expected project cost. Without this discipline, there is no reliable mechanism for assessing whether the returns that justified the investment decision are actually being delivered or for carrying those lessons into the next project.
Understanding what lenders want to see
The reality is commercial lenders finance development risk, not social mission. The financial model must demonstrate commercial viability. A strong track record in tenancy management and a meaningful community mandate matter to funders, but they still require a model that clearly demonstrates cashflow serviceability, cost certainty, a credible repayment pathway, and a capable development team.
One of the most common mistakes made in early conversations with banks is confusing construction finance and long-term debt. These are two distinct instruments, serving two distinct phases of a project, and they require two separate modelling conversations.
- Construction During the construction phase there are no operational cashflows from the new development. The interest on the construction loan is therefore typically capitalised (added to the loan balance) which means the size and timing of the drawdown facility directly affects the total cost of finance and consequently a higher level of debt at the start of operations.
Community housing developments are typically funded through a mix of philanthropic capital, donor contributions, provider equity, MHUD funding and external debt. Each of these funding sources should be modelled discretely to crystalize the sequencing of when each funding source is available. This enables the timing of drawdown facility to align with the actual timing of capital expenditure commitments and in turn minimise the duration (and cost) of external borrowing and prevent construction delays caused by funding gaps.
- Operations Once practical completion is reached, the project will switch over to utilising long-term operational debt which is materially lower risk than the construction facility it replaces. Lenders will reflect this in their terms providing longer tenures and lower margins than construction finance.
The housing provider generates returns through rental income (supported by government subsidies) and through efficient ongoing management of the properties. The cashflows from this phase should be sufficient not only to service interest but to support principal repayment son the external debt that funded construction.
Revenue is largely fixed (determined by indexation and subsidy structures) so the focus is often on the cost side. Profiling long-term lifecycle and reactive maintenance requirements carefully can improve cashflow headroom in the critical early years of the project, when debt is at its highest and the margin for error is smallest. A realistic, well-supported maintenance schedule is not just good asset management, it is a key input to a credible long-term model.
Finally, banks will require the financial model to be fully auditable. Every assumption should be documented with a source, inputs clearly distinguished from formulas, and version control maintained throughout the project. An independent model review provides the organisation confidence in the project and ensures enables a smoother conversation when presenting to a lender. The cost is minimal compared to the cost of a delayed or conditional credit approval.
For further information or to seek assistance in structuring your next development with building a great financial model, independent model reviews or advice on debt structuring or interest rate risk management please contact Frux consultants:
Susan Thomson 027 360 5987
sthomson@fruxconsultants.com
Richard Wallace 021925092
richard.wallace@xtra.co.nz
Frux Consultants 