*Originally published in Private Matters Today, Winter 2016
Much is written about the cutthroat real estate market in Canada, especially in major urban centers such as Vancouver and Toronto, where homeowners often find themselves in bidding wars. And mortgage brokers know all too well that the flipside of all of that is an equally competitive market for residential mortgages; where one or two decimal points could make the difference between winning or losing a deal. While construction lending isn’t for everyone, for business savvy brokers looking for a new challenge, the financial rewards can be substantial, with typical broker commissions of 1% on projects that are often several millions of dollars, translating into returns of $10’s of thousands of dollars for a single deal. The most obvious prerequisite for getting into the commercial lending game is to take one of the many commercial lending courses offered. Less obvious is the ongoing need to educate yourself about the changing landscape of commercial lending, especially when it comes to financing infill construction projects. The ‘sweet spot’ for the infill marketspace, are projects that either fly under the radar of institutional lenders or are deemed “unsuitable” by major banks. Yet many of these projects are not only viable but, with the right mix of broker, builder, and the lender can be highly profitable for all parties involved. Here’s a brief rundown of the different kinds of projects that are getting financed… all profitable, and all financed through alternative (vs. institutional) lending: THE SMELL OF OPPORTUNITY VS. GAS. Once a commercial/automotive business, the site required soil remediation due to some soil contaminated with gas. Original financing of just over $1 million was provided to purchase the site, cover its clean-up costs, and sever the property into nine residential lots. An additional round of construction financing will be provided to finance the nine homes once the severance is approved. Takeaway: the banks weren’t prepared to consider this project until the site had been entirely cleaned up. Alternative lending turned vision into reality. LEARNING HOW TO MAKE MONEY. A former high school built in 1923, the developer purchased the 4-story building on 2.1 acres for $1.7 million in 2011 in order to convert the historically designated property into a 35-unit residential condominium. Although 80% of the project was sold, the bank’s requirements and demands were too onerous. An $11.6 million first mortgage was provided to take out the existing financing plus cover the construction costs to complete the project. Takeaway: alternative financing is a viable alternative when lending requirements translate into major delays and administrative headaches. SEEING A GREAT VIEW VS. JUST TOO SMALL. The developer had the option of expanding an existing three-story, six-unit residential condominium building by adding a seventh-floor penthouse unit on top of the building. The 1,886 sq. ft. penthouse with 568 sq. ft. terrace and the private elevator would be sold on completion. Due to the complexity of the project (including several years of approvals) and the small size of the loan in the eyes of institutional lenders, a $975,000 first mortgage was provided through alternative lending. Takeaway: look for opportunities instead of obstacles. Thanks to a simple underwriting process, constructions advances were provided to help expedite the project. THE FASTER THE BETTER. The developer purchased a semi-detached home on a 25.5 x 123 ft. lot, obtaining approvals to build an addition and renovate the property into a two-unit, three-story, 3,850 sq. ft. condominium building. To maximize return on investment the developer wanted to finish the project as soon as possible. The mortgage broker opted for an alternative lender in order to avoid costly delays with initial funds and construction advances. A $1.78 million first mortgage was provided to discharge the existing mortgage, cover the hard construction costs, soft costs, and interest. Takeaway: speed in the form of a quick approval process for financing can get your builder to the finish line faster. To excel in the infill construction market, brokers need to keep apprised of its dynamics – trends, viability, hidden opportunities – and at the same time cultivate relationships with builders (or construction companies) and lenders that are disinclined to finance these projects. Paul Rayment is Executive Vice-President at Foremost Financial Corporation, a boutique mortgage lender specializing in infill construction financing for residential, commercial, or industrial projects.