Category Archives for Condo Mortgage Financing
Condo Development Inventory Loan
“Condo Development Inventory Loans Are Readily Available For Finished Projects”
Condo development inventory loans are essentially short term financing that is arranged against the fair market value of finished condo units that are either unsold or sold and waiting to close.
There are three basic reasons why a developer would want to secure a condo inventory loan.
The first reason has to do with cash flow. There are times at the end of a condo development when the project is out of cash and is basically waiting for proceeds to come in from condo sales. A condo inventory loan would be used in this case to provide incremental capital to the project to cover the monthly operating costs which would include the debt servicing on the primary construction loan.
A second reason for a condo development inventory loan would be to pay out the construction mortgage in place. Condo inventory loans are priced off of completed inventory that can be sold on the open market, so the risk associated with this type of construction mortgage financing is considerably less than the risk associated with actual construction. As a result, the cost of funds for a condo inventory loan can be significantly less than the construction loan outstanding and there may be a considerable cost saving to refinance the construction loan with a condo inventory loan, even if its only going to be outstanding for a number of months.
A third reason for a condo inventory loan is to draw equity out of the existing project, based on the increase in value from the completion of construction, and invest it into a new project that the developer wants to get going or is in the middle of.
In any of these cases, the process for getting a condo development inventory loan is fairly straight forward as we are talking about new condo units or inventory items where the value is going to be easy to determine through a third party appraisal. Depending on if the condo inventory has been presold or not, condo inventory lenders will look at financing between 65% and 75% of the value of the inventory.
The more presales that exist, the higher the loan to value will be.
Once again, because we are talking about financing finished condo units that in many cases are already sold and waiting for closing, the process for assessing an application for condo inventory financing can be completed rather quickly with funds being available shortly there after.
If you are in need of a condo development inventory loan or would like to know more about them, I suggest that you give me a call so we can discuss your requirements together and go over potential financing solutions that meet your needs.
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The 5 Types of Real Estate Development Project Financing
For real estate development project financing, there are actually 5 potential applications of funds that can come into play depending on the project.
Here is a brief description of each of the 5 financing applications.
- Land Acquisition. The purchase of the land that will be developed and or built on is typically the first type of financing required. A land purchase tends to be a stand alone transaction that will require financing to close before other aspects of development financing can be considered.
- Land Development Costs. The actual costs for preparing the site, installing services and road ways can be secured by available equity in the project which would be typically be secured by a second mortgage.
- Construction Mortgage Financing. At this stage, the prior costs may have been funded in cash, reside in a first and second mortgage, or have been consolidated into a new first mortgage. In any case, the construction mortgage funding will again be secured by equity in the project for the initial draw and then by the incremental increases to property value that occur at the completion of each draw.
- Condo Inventory Financing. For residential and commercial condo development projects, there can be a need for incremental capital before some or all the condo units are sold. Capital can be required for 1) carrying costs to fund the project until condo registration is in place, 2) additional construction costs or trade payables that remain outstanding at or near the end of the construction phase, 3) refinancing of the construction loan to secure a lower cost of financing during the condo sales period.
- Take out Mortgage. Once a project is completed, the construction financing will need to be paid out by a long term mortgage. This mortgage can be put into place after the construction lien period has expired without any claims being made and an occupancy permit being issued. The take out mortgage can be arranged prior to construction, during the construction process, or after construction is completed in some cases.
Each of these financing applications may require the issuance of a mortgage specific to the use of funds. Each development project financing requirement is going to be somewhat unique based on type of project, capital contribution by the owners, location, regulatory requirements, and so on.
If you are a buyer, builder, or property owner seeking development project financing, please give me a call so that I can quickly assess your situation and review the most relevant financing options with you.
Criteria For Condominium Inventory Mortgage Financing
The main reason for trying to secure a condominium inventory mortgage is to generate additional capital for a condo project that is not completed to the point where condo sales can be closed and the related funds from sale injected into the project’s overall cash flow.
This mortgage is secured by paying out the construction loan and putting in place a new mortgage that will function as a line of credit, leaving it open for repayment at any time.
While the refinancing can also generate a substantial saving in interest costs, the savings created on the interest side will likely be offset by the costs associated with setting up the condominium inventory mortgage.
The true value doing inventory financing is securing additional capital to fund the project through its later days. Additional funds are secured based on the appraised level of completion.
To qualify for condo inventory financing, the property owner must be able to demonstrate that the trades and suppliers to the project have been paid up to date, or mostly up to date. If incremental funds were not capable of at least paying off outstanding suppliers, its unlikely that the commercial mortgage would be approved.
Another major consideration by a lender for this type of bridge mortgage financing is the amount of condo unit pre-sales that have taken place. Because this is effectively a short term bridge loan, the lender will want to see that significant progress has been made on sales which will further verify the market value of the project and strengthen the security position of the lender.
Even if a project is 100% completed with respect to construction, there may still be a need to cover off the financing costs being carried by the project until the condo registration is complete and the development has the right to close sales on pre sold units to generate cash flow.
Basically, the closer the project is to completion and the higher the level of pre-sales, the more likely it will be to secure financing and also to secure maximum levels of leverage.
If you have a development project that requires additional capital, I suggest you give me a call so that we can quickly go over your options together and determine the best course of action for your project.
Condo Inventory Financing
For owners and builders that have gotten to the end of a condo development project and require additional funds before the condo registration process is complete, a condo inventory financing solution may fit the bill.
Its not unusual for a condo development project to experience a delay at the end of the construction phase in getting the project approved for condo sales.
Prior to that point, the project takes on more of a townhouse status from a lender’s point of view which can impact the amount of leverage the owner or builder can secure against the project.
And even though the actual construction is now complete, there are still going to be financing cost that need to be paid on a monthly basis to the construction financing lender and perhaps a first property mortgage that would have been used to acquire the property. In addition, there may also be some trade payable to take care of that were planned to be covered by the initial condo sales, but remain outstanding with no new cash inflows in sight.
The solution in these types of cases is what we refer to as inventory financing whereby the inventory of units where sales cannot be completed at the present time can be used to secure additional capital.
If the project qualifies for institutional financing, the construction mortgage will be paid out and incremental funds provided to a level of 65% of the completed project value.
If the construction loan was from a private source, at an interest rate likely between 10% and 14%, the refinancing will also drop the mortgage rate to 6.5% to 7.5%, creating a significant saving in financing costs.
Any commercial mortgage refinancing is going to cost money to accomplish, so the interest savings can potentially offset the costs of getting a new mortgage into place.
A mortgage for inventory financing is set up as a line of credit with interest only payments required and an open mortgage term so that the outstanding balance can be paid off at any time, making this a very effective form of bridge financing.
If you are working on a townhouse development project that is in the process of receiving condo registration and needs additional capital to keep the lights on and pay the bills, then condo inventory financing may be a good fit. For these types of scenarios, I recommend that you give me a call so I can quickly review your requirements and provide available options for your consideration.