The strengths of private lending are speed to getting a deal in place, and the ability to leverage property equity on an unfinished piece of work.
So while lower cost forms of conventional mortgage lending may be preferred in most cases, there are times when a bank or institutional lender are just not going to be a good fit in moving your project forward.
For instance, lets start at the very beginning when the land is being acquired. Private mortgages can be ideally suited for bare land financing, especially on property that requires considerable work before a subdivision project can be completed. Many times, conventional lenders will not fund bare land depending on location, zoning, etc.
Private mortgages can also be great forms of bridge financing during the development when the project needs to get more work completed and hit certain milestones before a conventional lender is prepared to provide funds for site development or vertical construction.
Its not uncommon for a subdivision development to run out of money between the time of property purchase and plan approval. At the plan approval stage, the property can typically be re-appraised to reflect the change in value associated with the approvals in place for the subdivision to move forward. But until approvals are in place, appraisers may not be able to increase the value of property beyond the purchase price, especially if the property purchase was recent.
Private lenders who lend on construction and site development for subdivision have the ability to review the work done in the planning process to date, where draft plan approval has not yet been reached, and get a level of comfort to provide additional mortgage financing against the property that can help get it to the plan approval milestone.
This may not result in a private lender assessing a higher appraiser value from the purchase, but it can result in them providing a higher loan to value.
For example, if the land loan for purchase was at 50% loan to value, a 2nd mortgage near the end of the planning process may be able to be done up to a level of 75% loan to value. The additional capital may be crucial to keeping the overall project on track including not only the site planning approvals but the resale marketing as well.
Private money being put into place in a timely fashion not only helps pay the bills as they come due, but also provides the developer with the time necessary to complete the milestones a conventional lender may require be met before a mortgage refinancing of the overall project can take place.
Bridge loans can also be accessed at other stages of the project when cash flow cannot quite get the work completed for the next financing milestone, or to step in and replace a conventional subdivision development financing application that is in excessive delay in processing.
Whether as a primary or secondary option, private construction mortgages can be an excellent source of subdivision development financing.
It’s not uncommon for a developer to come to us looking for a condo development bridge loan for their residential property and not be able to qualify with a conventional financing program due to the level of sales or pre-sales that have been made to date.
Most bank or institutional lenders will require unit sales of anywhere from 70% to 80% of total available condo units before they are going to be prepared to finance a condo development project.
In many cases, the client falls short of this mark at the point where more capital is required to keep the project moving forward resulting in key crossroad for the developer.
If more funds cannot be secured by the condo project, everything can start to unravel with pre-sales actually going the other way if too much time with no progress taking place.
And while getting another investor could be a workable strategy, its not always easy to locate someone prepared to invest money right now that is comfortable with the project and where its at. Plus being in a position of requiring capital is a bad negotiating position which could see the developer giving away a good chunk of his profit.
So a potential solution to this challenge is to get a construction bridge loan in place to provide incremental funds for the project, keep the work moving forward, and provide time to get the pre sales to a level where the preferred condo construction and development loan can be secured.
This strategy can work if there is equity in the property that can be leveraged to secure an additional loan. Its not uncommon that a development property will appreciate after purchase once the planning has been approved and some of the site work completed. Even in situations where there is a first mortgage in place, a bridge loan can be secured in a second mortgage position. This will be at a slightly higher rate than a first position bridge loan, but compared to the costs associated with the project slowing down or stalling, the incremental cost is going to be extremely minimal in most cases.
Plus, remember that this is a bridge loan and will only be in place for the time it takes to qualify for a larger condo construction development mortgage which will occur when pre sales get to the right level.
Bridge lenders are interested in these types of situations because the project is far enough along that it already has pre-sales and there is a clear path to getting to a sales level that will allow for the project refinancing that will pay out the bridge lending source.
If you have a condo development project that is facing this challenge, or some other challenge with respect to securing incremental financing, I suggest that you give me a call so we can quickly go over your situation and requirements and provide relevant options for your consideration.
When it comes to locating and securing subdivision development financing, you can assign all the financing sources out there into one or more of the following categories.
The first category and most common source of development financing is a straight debt lender where a loan is granted against the equity in the subject property and further advances are made as the value of the property is improved from completed work.
This is straight mortgage lending where there are fees to get a deal in place and then interest payments to cover the cost of capital for the remainder of the loan term.
The second group of development loans would be debt based lending where there is a profit participation by the lender or lending group. This type of deal will apply when there is insufficient equity in the project to support a straight debt deal.
The profit participation will provide an incremental return to the lender above and beyond the interest rate being charged to compensate the lender for the added risk of the deal. Under this type of deal structure, there is not likely any change in ownership on the deal but there will be a defined agreement as to how the profit participation will work and be applied.
The third group of subdivision development financing solutions would be a debt and equity combination of some sort where the source or sources of capital are not only providing a development loan, but are also acquiring part ownership in the project to inject more equity, which can be required to secure the debt portion of the deal.
The can be fourth group which is the addition of an equity investor only, but this is less common due to the higher cost of equity over debt. Most projects will want to have as much debt as possible to minimize the cost of capital and to retain as much ownership of the project as possible.
Each subdivision project financing is going to be a customized capital solution that will fit into one of these groups.
The type of project and location will have a lot to say as to what type of deal is going to be available to you to consider as unconventional projects in remote areas will have considerably fewer options that a traditional, high demand project in a large urban center.
Lender criteria can vary considerably among lenders/investors in a given group as well, so its going to be important that you are targeting both the right group for financing, and the most relevant sources within a given group.
The best way to do this successfully is to start early in the planning stage, and to work with an experienced mortgage broker who can advise you as to the different financing options that may be available to you.
Click Here To Speak Directly To Toronto Private Mortgage Broker Joe Walsh For A Free Assessment Of Your Subdivision Development Financing Options
Construction financing on residential or commercial property can be placed in first, second, or even third mortgage position, depending on the project and the property. But anytime there is a first mortgage in place, the primary source for construction loans comes from private second mortgages.
There are two main reasons for this.
First, banks and most institutional lenders will not provide a construction loan in a second mortgage position. So if you have debt outstanding against the property where construction financing will be required and you can’t pay off the debt before funds for building are going to be required, then a bank loan is not going to be a funding option.
Second, it may advantageous from a rate and/or prepayment penalty position to leave a first mortgage in place during the time of construction and then refinance the first and second mortgage once the project is completed. Under this scenario, its all about whether or not refinancing the first is going to be cheaper than getting a new first with draws for construction.
Building still further on this last point, there are also construction financing programs that will not allow refinancing of a first mortgage due to the fact that all funds are to be used for construction purposes, so a second mortgage option becomes somewhat of a necessity where debt financing is required.
In addition to being able to maintain a lower existing rate on the first, and avoid prepayment penalties that can occur from refinancing, a private second for construction capital has some other real and tangible benefits to consider over a bank or institutional mortgage facility.
First of all, the financing can typically be arranged in a much shorter time period with few conditions to fund written into the loan agreement.
Second, the draw administration process on average is much more straight forward than what you will typically find with a bank construction loan.
This means draws occurring more often on time and within the budgeted amounts provided that basic completion milestones have been met. Keeping a construction cash flow on track can be no small feat, so having a borrower friendly draw process can definitely be a major benefit.
At the end of the construction process, most private seconds for building will allow for repayment of the funds without penalty, making it cost effective to refinance the outstanding mortgages into a longer term take out, or to repay all funds outstanding through a property sale.
In many cases, the added benefits of a private 2nd mortgage can easily out weigh the added cost of capital that comes from a sub prime mortgage registered in second position.
If you’re looking for construction financing and already have a first mortgage in place on the property, then I suggest you give me a call to discuss your private second mortgage funding options.
These are basically equity based loans where the lender is making a lending decision based on the equity in the project and the strength of the exit strategy at project’s end.
For commercial construction loans above $5,000,000, private sources are going to be hard to locate unless they are in the form of a mortgage investment corp that is large enough to deal with this type of transaction.
The key benefits to having a private lender fund a commercial construction project include the speed of getting the funding in place and the high predictability in the draw advance schedule.
And even though private money for construction can be fairly straightforward for most projects, there are some basic lending parameters that you should have knowledge of before settling in on this type of financing.
First of all, a private lender will look at financing between 65% and 70% of the market value of the completed project.
This may or may not related to 65% to 70% of the cost of complete the project as a third party property appraisal may be higher or lower than the cost to complete.
Assuming that market value and cost to complete will be the same can end up leaving you with a cash flow gap.
If this does occur, there are basically two ways to remedy the situation in still get the project funded.
The most obvious solution would be to inject more equity. If that is not possible, then the next most logical solution is provide additional real estate property as security so that the lender can provide leverage against it as well.
Its also important to understand that the lender’s loan to value requirement will likely need to be in place at all stages of the project. So if you have acquired a property for 10% of the project cost, and the lender will provide 70% of the project financing, its likely that you will have to complete the total investment of equity into the project before the first draw advance will take place.
This can vary from lender to lender and needs to be fully understood before starting a project with a defined third party debt financing source.
The key here is not to assume anything, especially when you are starting a project with your own funds and have not yet tried to secure a construction loan.
If your project does not align with these basic lending parameters, then there is a good chance commercial construction financing may be difficult to come by which could significantly jeopardize the investment you’ve already made in the project.
If you have a commercial construction project that you are planning, or one that you are in the middle of, and what to better understand your private mortgage financing options, I suggest that you give me a call so we can go over your situation together.
While it can be a surprise to someone seeking construction financing for the first time, it certainly is not a revelation for any builders, developers, or property owners that have done any type of construction in the past where third party debt financing is required.
For someone new to construction financing, it seems logical that if you can qualify for a construction loan with a bank or institutional lender, then that would be the right place to acquire your construction capital from.
But the reality is that while a conventional lender can provide funding at a lower cost than a private lender, the terms and conditions of financing can be very difficult to comply with at times, and if there are delays in meeting certain terms and conditions, there may not be any cost saving at all once you factor in the other costs incurred due to delays or the incremental third party support requirements of the lender.
To start with, most banks will not finance construction on a single family build unless they also get the long term take out mortgage as well. So while you may be able to get a construction loan at a great rate, you may not be able to secure the best market rate for the long term financing, which in the long run can cost you more money overall.
The next challenge can come in the application process. Banks and institutional lenders are low rate and low risk financing sources, so they can require a considerable amount of documentation and third party verification before they are prepared to issue a commitment. There are times when a construction loan application with a private lender will only take a fraction of the time which can be incredibly important to the project if the start time is imminent.
Perhaps the greatest challenge and risk associated with conventional construction mortgages is the draw advance schedule. Most times the lender will require a third party appraiser to assess the amount of completion at a draw stage. Even when you are completely on track with your plan, the appraiser can still insist that you will require incremental funds to complete the project and cut back on draw amounts to make sure you have enough funds from the lender to complete the rest of the project. While draw delays and reductions can still occur with a private money lender, they are much less common and provide a more predictable draw advance schedule to work from.
In the end, one can argue that the additional cost of a private mortgage for construction comes with several benefits that many builders, developers, and property owners are prepared to pay for.
In the first case mentioned, there are times when the initial financing put in place to fund the draft plan approval process cannot be extended any further to wait until the larger development financing is put into place, which will payout the initial funding arrangements.
The gap in time where a bridge loan is required can range from a few weeks to a few years.
There are also times when the primary development financing is either insufficient to complete the project, or there are draw advancing issues that require the borrower or developer to seek out another source of funding to keep the project timelines moving forward.
In most cases, the common element is urgency to get a land development bridge loan in place as quickly as possible in order to keep the project on track.
In situations where the amount required is less than two million dollars, and the time frame to complete financing under a month, a private mortgage is typically going to be the best solution.
The keys for securing land development bridge loans is the market value of the property at the time the bridge loan will be issued, and the proposed exit strategy for repaying the loan.
For the first point, the land value will need to be supported by an AACI appraisal that has been recently completed and where the appraiser completing the work is on the private lender’s list of approved appraisers.
With respect to the exit strategy, this is typically either going to come from the sale of some or all of the property, or the refinancing of the property via a longer term and larger value land development loan or mortgage.
Any meaningful exit strategy will have to be supported by binding contractual agreements in the case of an asset sale, or a solid lending commitment from a reputable lending source where the outstanding conditions to fund are viewed to be achievable by any lender looking at the deal.
If you are in need of land development bridge loan financing for a project you are in the middle of, either in the planning or land development stage, I suggest that you give me a call so we can further discuss your requirements and review potential financing options.
Up until that point, the financing is basically bare land mortgage financing on property to be developed.
In many cases, the land financing leading up to development and the funding for development of the land and installation of services is provided through private mortgage loans.
Going one step further, subdivision development mortgage financing is a very narrow slice of the overall private mortgage lender market place. The lenders that will fund these types of deals are going to either be highly knowledgeable of the subdivision development business, or developers themselves.
One of the reasons that a developer would provide this type of financing is to potential gain access to the development in the event that the existing owners fail to bring it to a state of completion. This would then provide the developer with an opportunity to acquire the property in exchange for the outstanding mortgage or another form of capital.
The lending is very specialized due to the fact that in the event of default, the lender has to be able to know how to recoup the mortgage funds advanced. Without being able to understand how to manage the risk of mortgage lost, its very unlikely that suitable land servicing financing will be located.
The key to subdivision development loans is the strength of the exit strategy to repay the debt.
For instance, if the developer expects to partially build out the serviced lots, and sell the remaining lots to other builders, then the potential absorption rate of housing inventory in that area along with the financial stability of any presold buyers of lots, whether to consumers or builders, is going to be important to the risk assessment of any potential lender.
If the developer plans to build out lots themselves, the funding for the above ground construction is typically arranged as a separate type of construction financing versus a land servicing loan.
The cost of financing is going to vary with the strength of the overall project and the exit strategy for the lender.
If the subdivision development is going to be completed over a series of years, the financing may have to be arranged in phases and take into account lot sales milestones so that lender risk can be better managed.
If you have a subdivision development loan financing requirement in Ontario and would like to better understand your options for either a land servicing loan or a construction loan, I suggest that you give me a call so we can go through your requirements together and discuss potential subdivision development financing solutions available to you.
For banks or institutional lenders to be interested in land development lending for either a new subdivision or completion of site work prior to building construction, there needs to considerable cash invested in the deal by the owner and/or developer, and there needs to be a strong exit strategy supported by binding pre sale agreements.
In many cases, there are good development projects out there that, for one or more reasons, cannot quite meet the requirements of an institutional lender.
When this occurs, private mortgage lending can be the next best option to consider.
One of the reasons that private lending can even be preferred is that this tends to be a more specialized form of lending in the first place, so the private lenders that would be interested or prepared to fund a land development financing deal are going to be comfortable with both the project and the market and regulatory dynamics that still need to be dealt with by the project owners.
With bank or institutional financing, even if funding can be arranged, the requirements for capital advance may be difficult to adhere to resulting in the project being no better off if capital can’t be deployed or advanced on a timely basis.
When there is considerable equity confirmed by market value appraisal in a project that has completed a number of regulatory and development milestones, there is a good chance that private money could be interested in funding the project.
The key is going to be in the overall business model for the project which will include the structure and strength of the exit plan.
Well thought out developments in good market areas will tend to attract different forms of money with private funding being one of the primary sources.
Ontario land development financing from a private lender is going to cost more than a conventional lender, but if you compare the incremental cost to being delayed in moving forward, or not finding funding at all, the difference can be negligible in the big picture.
If you require a land development loan for a project you are planning or are in the middle of, I suggest that you give me a call so we can go over your requirements and discuss Ontario land development financing options available to you.
And the main reason borrowers turn to private money construction financing is the flexibility and predictability that comes with it.
Compared to a bank or institutional construction loan, construction financing through a private lender, on average is faster to get approved and the the draw management process easier to manage and rely upon.
There are also situations where individuals do not quite qualify under the stringent requirements of a bank or institutional construction mortgage applicant and are resigned to take the next best option, which in most cases is a private money construction loan.
The cost of private money is going to be higher than what you will pay at a bank or institutional lender, but the added cost does come with the added benefits of greater speed and reliability mentioned above.
To further expand on reliability, the hardest part of managing the cash flow of a construction project is knowing exactly when a draw advance will be received and how much will be received. Its not uncommon with bank and institutional lenders for the construction draws to be delayed and the draw amounts reduced to provided greater comfort to the lender that there will be sufficient funds available to complete the project. This level of draw advance uncertainty is largely removed with a private money construction loan where the process for assessing and advancing draws tends to be less rigid and more timely.
Another key element of a private money construction loan is the potential willingness of the private lender to go in a second position on the property when taking security.
A bank or institutional lender will rarely allow a second position construction loan, insisting on first mortgage financing only. When second mortgage financing would be preferred for a given project, then private money construction financing can be the logical choice.
The key to locating, securing, and administering a private money construction loan is working with an experienced construction private mortgage broker who has the private lending sources as well as the expertise to guide you through the process and help quickly solve any issues that may arise during the period in which the construction loan is outstanding.
If you require a private money construction loan for a project you are planning, or are in the middle of, I suggest that you give me a call so we can quickly go over your requirements and discuss relevant private money construction options available to you in the market place.