By Matt Gonsalves
Vice President, Mortgage Lending, Foremost Financial
By Matt Gonsalves, Vice President & Broker – Mortgage Lending, Foremost Financial Corporation
Multiplex condominiums are emerging as an important part of Toronto’s missing-middle housing market.
While much of the recent multiplex activity has focused on purpose-built rental housing, condominiums can offer another solution: family-sized ownership housing in established, walkable neighbourhoods.
However, financing these projects requires a different approach from financing a conventional custom home, rental multiplex or larger condominium development.
During the recent webinar, “Multiplex Condo Reviews: Real Applications, Real Lessons,” I joined architect and developer Evan Saskin of Blue Lion Building, developer Chris Spoke of Toronto Standard, and real estate lawyer Benjamin Singer of Schneider Ruggiero Spencer Milburn LLP to assess two potential Toronto projects in real time.
The objective was not simply to determine how much could be built. We wanted to examine how a lender evaluates whether a multiplex condominium project is feasible, financeable and appropriate for its market.
Foremost Financial has financed residential infill and multiplex construction projects for many years. We have financed a significant number of purpose-built rental multiplexes, as well as multiplex condominium developments across Toronto.
Based on that experience, I generally focus on three core factors when reviewing a multiplex condominium construction loan:
- Is the project feasible?
- Does the development team have the necessary experience?
- Does the borrower have sufficient equity and financial capacity?
1. Is the Project Feasible?
The first step is determining whether the proposed development makes financial and market sense.
This involves more than reviewing a spreadsheet. A lender must understand the site, neighbourhood, proposed unit sizes, target purchasers and expected development timeline.
The financial review will typically include:
- Land acquisition and closing costs
- Hard and soft construction costs
- Financing and carrying costs
- Proposed unit sizes and sale prices
- HST exposure
- Development charges
- Sales commissions and marketing costs
- Projected profit
- Loan-to-cost and loan-to-value ratios
The lender must also assess whether the proposed housing product is appropriate for the location.
A project with large three-bedroom units may be very attractive near transit, schools and parks. The same project may not work as purpose-built rental housing if the rents required to support the development costs are significantly above the local market.
That was an important consideration in the first site reviewed during the webinar.
Case Study: Family-Sized Condominiums Near High Park
The first property was a 30-foot-by-127-foot site near High Park.
The existing building had substantial depth and enough rear-yard space to potentially accommodate an additional garden suite. Two possible development approaches were considered:
- A larger design requiring minor variances
- A smaller, more conservative design that more closely followed the existing zoning rules
The larger design could potentially accommodate four substantial family-sized condominium units in the main building, plus a garden suite.
From my perspective as a lender, the site had several positive characteristics.
It was located within walking distance of High Park and transit. The proposed units were large enough to appeal to families looking to remain in the neighbourhood rather than move farther outside the city.
The project also appeared to have sufficient profit and equity to support construction financing.
Based on the preliminary costs and expected selling prices presented during the webinar, I indicated that Foremost could potentially consider a construction loan of approximately $4 million.
Under the example discussed, the borrower would contribute approximately $1 million of equity, representing roughly 20% of the overall project cost. The projected loan-to-value ratio was also relatively conservative.
That does not represent a formal financing commitment. An appraisal, construction budget, plans, approvals and a full borrower review would still be required.
However, it demonstrated that a well-located multiplex condominium project can be attractive from a lending perspective when there is sufficient equity and projected profit.
A Good Location Can Support a Higher Land Cost
The High Park site had a relatively high land cost per buildable square foot.
Generally, lenders want to see that a developer has not overpaid for a property. However, I would often prefer to finance a somewhat more expensive site in an exceptional location than a cheaper site in a neighbourhood where sales may be slower or less predictable.
Location is particularly important for condominium projects because the repayment of the construction loan depends on unit sales.
A strong location can support higher values because buyers may pay a premium for:
- Walkability
- Subway access
- Nearby parks
- Established schools
- Neighbourhood retail and restaurants
- Larger units that are difficult to find in the resale market
The expected values must still be supported by an independent appraisal. However, a desirable location can help reduce the lender’s sales risk.
Does the Project Need a Garden Suite?
During the first case study, I asked whether the garden suite was essential to the project.
The initial pro forma showed that eliminating the garden suite materially reduced projected profit. That suggested that some form of fifth unit was important to the development’s feasibility.
However, that did not necessarily mean that the largest possible garden suite was the best option.
A smaller garden suite might:
- Cost less to construct
- Preserve additional outdoor space
- Allow room for parking
- Improve privacy and natural light
- Sell at a higher price per square foot
This is an example of why the lender, architect and developer need to review the design together.
The objective should not always be to maximize square footage. The objective is to determine which design creates the strongest combination of marketability, construction efficiency and financial return.
2. Does the Development Team Have the Necessary Experience?
Multiplex condominium projects are not typically beginner developments.
They require the coordination of:
- Architecture
- Planning approvals
- Construction
- Financing
- Condominium registration
- Legal documentation
- Marketing
- Unit sales
- HST and tax planning
During the webinar, I noted that the experience of the development team was one of the strongest aspects of the High Park example.
Evan Saskin and Blue Lion Building have extensive experience designing and developing Toronto multiplexes, including condominium projects. That experience gives a lender greater confidence that the team understands the design, approval and construction issues that can arise.
A strong team does not eliminate project risk, but it improves the likelihood that challenges will be identified and addressed before they materially affect the development.
When Foremost reviews a construction loan, we consider the experience of the developer, architect, general contractor and other key consultants.
We also examine whether the team’s previous experience is relevant to the specific project being proposed.
Case Study: Re-Underwriting a Rental Project as Condominiums
The second project reviewed during the webinar was a larger property near Christie Station and Bickford Park.
Chris Spoke of Toronto Standard had originally been considering the property as a purpose-built rental development. During the webinar, he presented an alternative condominium pro forma.
The proposal contemplated two buildings in a semi-detached configuration, with seven units in each main building and an additional laneway suite on each side.
The project would contain 16 units in total.
The site had several attractive characteristics:
- Proximity to Christie Station
- A highly walkable neighbourhood
- Access to Bickford Park and Christie Pits
- A wide lot
- Opportunities for increased density
However, the project also involved several planning and design issues, including a protected tree, minor variances, four-storey zoning permissions, development charges and building-code considerations.
This example demonstrated how differently a lender may view rental and condominium projects.
Rental Units and Condominium Units Are Different Products
The proposed design included several studios and one-bedroom units.
Those smaller units could be appropriate for purpose-built rental housing near a subway station. Renters may prioritize affordability and transit access over unit size or parking.
My concern was that the smaller condominium units could face significant competition from conventional condominium buildings.
Toronto already has a large supply of smaller condominium units developed by major high-rise builders. A small infill developer may find it difficult to compete directly with that inventory.
The larger two- and three-bedroom units appeared more differentiated.
There are fewer newly built, family-sized condominium units available in established low-rise neighbourhoods. Buyers who want to remain in areas such as Christie Pits may value a larger unit with a separate entrance, outdoor space and a residential-street setting.
I suggested that the project might achieve stronger results by placing greater emphasis on the larger units and being more conservative on the value of the smaller units.
Evan Saskin went further and suggested that the one-bedroom units could potentially be eliminated altogether.
Reducing the unit count could also lower construction costs by reducing the number of:
- Kitchens
- Bathrooms
- Mechanical systems
- Interior corridors
- Separate servicing requirements
The project could potentially create fewer but larger units, improve the building’s efficiency and achieve stronger selling prices per square foot.
This is why maximizing unit count does not necessarily maximize project value.
Parking Remains Important for Family-Sized Condominiums
The Christie Station project was not required to provide resident parking because of its transit-oriented location.
From a planning perspective, that may be acceptable. From a sales perspective, parking may still be important.
For a purpose-built rental development near transit, limited or no parking may work well.
For a family purchasing a condominium for more than $1 million, expectations may be different.
The purchaser may use the subway to commute but still require a vehicle for:
- Children’s activities
- School transportation
- Grocery shopping
- Family trips
- Appointments outside the neighbourhood
During the discussion, I noted that a purchaser spending a significant amount on a family-sized condominium may be willing to pay an additional amount for a parking space.
The developer must therefore compare the value of parking with the value of the building area that would be sacrificed to provide it.
Possible strategies could include:
- Providing parking with selected premium units
- Creating separately saleable parking units
- Retaining the parking spaces and leasing them to residents
- Reducing the size of a laneway suite
- Eliminating an expensive laneway suite and providing surface parking
- Increasing the depth of the main building instead
The right approach will depend on the location, unit mix and target purchaser.
3. Does the Borrower Have Sufficient Financial Capacity?
The third major consideration is the borrower’s financial capacity.
Even a strong project can experience:
- Construction cost overruns
- Approval delays
- Unexpected site conditions
- Changes in HST treatment
- Slower unit sales
- Interest-rate changes
- Additional consultant or legal expenses
The lender wants to know that the owner has sufficient equity and liquidity to manage these risks.
Foremost will assess the amount of cash equity being invested, the borrower’s net worth and the availability of funds for contingencies.
A lender should not have to depend on every assumption in the original pro forma being achieved exactly as planned.
There should be enough profit, equity and contingency to absorb reasonable changes without jeopardizing the completion of the project.
Construction Loans Are Advanced Progressively
Construction financing also differs from a conventional mortgage.
The full loan is not usually advanced at the beginning of the project. Funds are advanced progressively as construction work is completed and verified.
As a result, the financing cost may be lower than a simple calculation that assumes the full loan balance is outstanding throughout the entire construction period.
The lender will generally require inspections and cost-to-complete reviews before each construction advance.
The loan must be structured so that the remaining loan funds and borrower equity are sufficient to complete the project at every stage.
HST Must Be Underwritten Conservatively
HST can have a significant impact on multiplex condominium profitability.
Rebates may be available, but eligibility can depend on:
- The purchaser
- The selling price
- The date of sale
- Construction commencement
- Completion deadlines
- Whether the purchaser qualifies as a first-time homebuyer
The webinar demonstrated how changes in rebate assumptions can materially affect the pro forma.
From a lending perspective, temporary or purchaser-dependent rebates should not automatically be treated as guaranteed revenue.
Where eligibility is uncertain, the project should generally be underwritten using a conservative HST assumption. Any additional rebate may then represent potential upside.
Developers should obtain project-specific legal and tax advice before relying on a rebate.
Condominium Projects Have Additional Costs
Developers should not take a rental pro forma, replace rental income with condominium sale proceeds and assume the result is complete.
Condominium projects involve additional costs, including:
- Condominium legal counsel
- Surveying
- Registration
- Disclosure documents
- Property-management consulting
- Sales and marketing
- Real estate commissions
- Tarion and warranty expenses
- Additional insurance and administration
These costs should be included in the preliminary budget and refined as the project progresses.
Why Early Lender Involvement Matters
One of the main lessons from the webinar was that multiplex condominium underwriting is an iterative process.
The developer should move repeatedly between:
- Architectural drawings
- Planning advice
- Construction estimates
- Appraisal evidence
- Realtor feedback
- Legal and tax advice
- Financing terms
- The financial pro forma
A design change may affect the value, cost and loan structure.
A financing review may reveal that a different unit mix, parking arrangement or development strategy would create a stronger project.
Involving the lender early allows the developer to understand how much equity may be required, which assumptions require independent support and whether the proposed exit strategy is realistic.
Foremost Financial’s Approach to Multiplex Lending
Foremost Financial has been in business for almost 40 years and has extensive experience financing Toronto residential infill and multiplex construction projects.
We have financed purpose-built rental multiplexes, multiplex condominiums, custom homes, garden suites and other forms of small-scale residential development.
Our approach is practical and project-specific.
We review:
- The quality of the location
- The feasibility of the proposed development
- The experience of the development team
- The borrower’s equity and liquidity
- The construction budget
- The expected market value
- The planning and approval risks
- The proposed repayment strategy
Multiplex condominiums can provide much-needed family-sized ownership housing in Toronto’s established neighbourhoods.
However, these developments must be carefully designed, conservatively underwritten and supported by an experienced professional team.
Developers considering a multiplex condominium project should involve their architect, planner, appraiser, lawyer, contractor and lender as early as possible.
To discuss financing for a multiplex condominium, purpose-built rental development or residential infill construction project, contact Matt Gonsalves at Foremost Financial.
About Matt Gonsalves
Matt Gonsalves is Vice President – Mortgage Lending and a licensed mortgage broker with Foremost Financial Corporation.
Matt specializes in originating and structuring construction, bridge, land and commercial real estate loans for developers and real estate investors across Ontario.
He has extensive experience financing multiplexes, custom homes, garden suites, condominium projects and other forms of residential infill development.
Matt works closely with borrowers, architects, planners, appraisers and construction professionals to evaluate project feasibility and develop practical financing structures.
About Foremost Financial
Foremost Financial Corporation is an Ontario-based private mortgage lender specializing in real estate financing.
For almost 40 years, Foremost has provided construction, bridge, land, commercial and residential development financing to experienced builders, developers and real estate investors.
Foremost offers flexible lending solutions for projects that may not fit within the conventional banking system, supported by an experienced lending team and an in-house approach to construction financing.
About Benjamin Singer
Benjamin Singer is a partner at Schneider Ruggiero Spencer Milburn LLP, commonly known as SR Law.
Ben’s practice includes advising developers, investors and lenders involved in missing-middle housing and residential infill development. He has developed particular experience with multiplex condominium projects, including condominium structuring, registration, disclosure requirements and the legal considerations involved in marketing and selling newly constructed units.
Ben has been an active supporter of Toronto’s multiplex and missing-middle development sector. He regularly works with project teams to identify the legal, tax and condominium-related issues that should be addressed during the early stages of a development.
During the webinar, Ben provided guidance on condominium registration costs, HST treatment, purchaser rebates and the legal distinctions between purpose-built rental and condominium developments.
About Evan Saskin
Evan Saskin is a licensed architect in Ontario and the founder of Blue Lion Building.
Since establishing Blue Lion Building in 2011, Evan has focused on urban infill, multiplexes and small-scale residential developments throughout Toronto. His work combines architectural design and real estate development, allowing him to assess the financial and design implications of a project simultaneously.
Evan has extensive experience developing multiplex condominium units and has helped demonstrate how well-designed, family-sized housing can be incorporated into Toronto’s established low-rise neighbourhoods.
During the webinar, Evan completed a live architectural and financial analysis of a potential multiplex condominium development near High Park. His analysis demonstrated how building depth, unit layouts, minor variances, garden suites, parking and construction costs can influence project feasibility.
About Chris Spoke
Chris Spoke is the founder of Toronto Standard, a Toronto-based residential development company focused on purpose-built rental housing and urban infill development.
Toronto Standard develops small-scale housing projects in established neighbourhoods, with a focus on thoughtful design, increased density and long-term rental housing.
Chris has been an active participant in Toronto’s missing-middle housing sector and has advocated for policies that make it easier to deliver multiplexes and other forms of neighbourhood-scale housing.
During the webinar, Chris presented a live development site near Christie Station that Toronto Standard had been evaluating as a purpose-built rental project. The panel then re-underwrote the site as a potential condominium development, examining how the unit mix, parking, laneway suites, development charges and sales assumptions would need to change under a condominium strategy.
The development examples and financial figures discussed in this article are provided for educational and illustrative purposes only. They do not represent a financing commitment. Development costs, lending terms, HST rules, rebates, planning policies, construction requirements and market values are project-specific and may change. Developers should obtain independent legal, tax, planning, appraisal and construction advice.