EXPERT OPINION
Which Speaks Louder, Your Head Or Heart?
Getting your proposal financed often means putting emotion aside
By Paul Rayment
When you're looking to get a small to medium-sized building project off the ground, it pays to follow your head. The last thing anyone wants to see is a fully serviced subdivision sitting vacant for years or a poured concrete foundation lying covered in weeds behind a chain-link fence. Yet it happens.
It's a matter of understanding your market, identifying the type of product that will work there, and steering clear of those that won't. In other words, listening to sound advice even when your heart may be telling you otherwise.
Perhaps you've always dreamed of a 50-unit condominium complex on a sprawling golf course. If the absorption rate is low, it's a bad investment. And you should know that before approaching lenders to investigate financing options.
To bolster your odds of hitting the mark with a project lenders will back, consider the following:
Know your market. Early on in the planning stages, you'll want to get feet on the ground and do your due diligence. Is the economy growing? Is public transit easily accessible? What's the employment rate? What are town planners saying about growth plans? All of this information is readily accessible and should be included with your building proposal.
Do the supply/demand analysis. There's no value in moving forward with a single-family residential infill project when the competition has standing inventory already reduced to sell. If you need to obtain $450 per square foot to meet your profit margin and they've artificially depressed their prices to $300 to get things moving, you'll have a difficult case to make. On the other hand, if you've discovered a great location on a bus route in a town that's vibrant and growing, and is within close proximity to a thriving urban centre, a mixed-use condominium makes sense.
Be early, not first. There are always those who try to be pioneers. But the first in rarely gets the premium price out. To maximize your investment, aim to be just behind the leaders. Condominium developers, in particular, are hedging their bets in urban fringe areas. If you decide to move into new territory with a new product, you can expect most lenders to set a higher pre-sales threshold.
An idle project is a losing investment. Long before you enter the building phase, you'll need to prepare your exit. The goal is to get in and out as quickly and efficiently as possible, which might mean selling off end units or seeking tenants. Lenders will want to know how and when they can expect to be paid. A well thought out exit strategy is expected.
Put emotions aside. At the end of the day, regardless of how proud you are of your design, workmanship and overall concept, your building project is a business proposal. And it needs to be treated as such. If a lender does the math on your project and finds it doesn't add up, best to heed the warning. One client came to us with plans to build a penthouse unit on an existing small condominium building. It took three years and multiple appraisals, but we finally convinced the developer that given his cost to build there would be little to no profit in the project based upon a realistic value once completed. Time for a reality check.
There will always be an element of speculation associated with new construction. In general, look for areas where the cost of entry is low (land is inexpensive), demand for your end product exists and supply is limited.
One area seeing great success is in repurposing outdated structures. When you take an old school house, church or commercial building and convert it to modern residential units while preserving much of the original façade, you not only achieve a premium price, but you win the favour of neighbours, politicians and end-users too.
A lender's decision on whether or not to finance a building proposal is based on the merits of the project as well as the builder's track record. In the end, they are both looking for the same thing: to build a long-term, profitable partnership that has more hits than misses. And that means allowing your head to outweigh your heart.
Paul Rayment is vice-president of Toronto-based Foremost Financial Corporation (www.foremost-financial.ca) a boutique first-mortgage lender specializing in infill-construction financing for residential, commercial or industrial projects.
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