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COMMON CENTS

Dollars and Sense:
Breaking Down Construction Financing

By Jillian Murray and Bo Mocherniak

Acquiring construction financing isn’t a game of chance—rather, it takes significant skill. If you’re looking to increase your available financing opportunities, you need to give lenders what they want—and that means understanding how the financing process works.

Who Are the Lenders?
When it comes to construction financing in Canada, one size does not fit all. Fortunately there are many lenders willing to meet the needs of a wide range of construction projects, including:

To improve the likelihood of acquiring financing on attractive terms, it is important to find the lenders with the strongest appetite for the type of project at hand, not necessarily the lowest price. Rather than seeking the lowest interest rate, it’s more valuable to partner with a lender who can align its financing offer to suit the needs of your business and project.

What Can You Expect fom the Process?
Because every construction project is different, the process to obtain construction financing can be daunting. That’s why it helps to break it down into three steps:

Initial discussion and proposal
This initial stage is used to launch discussions with potential lenders, provide them with information and gauge—or pique—their interest in a particular project. In this phase, you will want to provide the lender with enough information to broadly assess the project to determine if it meets its lending criteria. Depending on the stage of the project, this may include: architectural renderings, construction cost estimates, financial projections, background information on the project team and shareholders, and potential sources of equity to fund the project. If the lender is willing to proceed, it will typically issue you a non-binding discussion paper (or term sheet) that will outline the general terms and conditions under which it is prepared to lend the funds.

Due diligence
Following the acceptance of the term sheet, the lender will want to complete its due diligence. This is the point where it will look to verify all the information provided. This will involve reviewing many aspects of the project, including:

A well-presented financing proposal will help you prepare for this process. This should include a summary of the project, as well as the borrower’s business, offering both historical and projected financial information and experience. A financial forecast is also a great tool to help you in your proposal. It should outline the cash flows of the project and demonstrate your ability to repay debt under the conditions of the lender’s term sheet.

Commitment letter and funding
Once the due diligence phase is completed, it’s time for the formal commitment letter and funding. In many construction projects, the total project financing will generally be in two separate loans: construction and take-out.
The construction loan is generally drawn in tranches, where the amounts are tied to the level of completion of the project. This facility typically will fund acceptable soft costs (e.g. engineering, architect and other professional fees), as well as hard costs for the project (e.g. land servicing and early stage construction). The draws will need to be supported by invoices, and typically will be verified by a third party. Once the construction is complete, the building occupied and all of the conditions met, the permanent take-out financing is advanced and regular principal and interest payments commence.

A Win-Win Scenario
By understanding the financing process and working with your lender, you can increase your chances of acquiring the funding you need, on the terms you want, to position your construction project for success.

 

Jillian Murray is a Director in the Grant Thornton advisory services practice in Halifax. She is the leader for the construction and real estate group for the Atlantic region. She can be reached at jillian.murray@ ca.gt.com.
 
Bo is National Leader for the Real Estate and Construction Group of Grant Thornton Canada, and a member of the Grant Thornton International Real Estate Sector Group. He can be reached at bo.mocherniak@ca.gt.com.

 

 

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