The mortgage financing for a condo or townhouse development project can become complex largely due to all the requirements related to getting condo status and the specific requirements for financing imposed by certain lenders.
These projects basically start out as a townhouse development regardless of the long term intent for use as condo status cannot be achieved until the end of the building process.
So while commercial lending sources are going to require a certain percentage of unit pre-sales to even consider the a project for a development loan, the building is still going to be viewed as a number of rental units on one title to start with.
This directly impacts the valuation of the project for the purposes of establishing the fair market value of the underlying security. For instance, a rental unit complex may be valued at $200,000 a unit while a condo unit from the same complex may be valued at $500,000 a unit.
Even though the lender, builder, and owner may all agree that the end use will be for condos, until the condo status is obtained, the project will still be valued as a rental complex.
This has a significant impact on the leverage that can be provided for construction and development in that the owner will not be able to borrower as much against a rental market valuation versus a condo market valuation.
The second major challenge with financing these developments is the requirements of the lender, most specifically the qualification of the project’s builder.
For some institutional lenders, the related builder must be on the lenders pre-approved list. If a project comes forward seeking financing where the builder associated with the project is not on the builder list of the lender where application for financing has been made, there is a very good chance that the application will be denied unless a qualified builder is chosen.
Traditional banks only service a small percentage of this market. Some of the other sources of mortgage financing include credit unions, pension funds, private investment funds, and mezzanine funds. Mezzanine financing provides a source of equity to the borrower’s corporation which allows for increased debt financing.
If you have a condo or townhouse development that requires mortgage financing, I recommend that you give me a call so that I can go through it together and develop potential options that will meet your requirements.
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I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel