The key to getting the construction financing for a town house project is through a concentrated focus to avoid, reduce, or eliminate the major challenges to getting this type of financing in place.
The major challenges for most town house projects include but are not limited to 1) the loan to value amount required; 2) the sale of the units; and the 3) timing of draw advances from the lender.
Starting with the loan to value challenge, in order to assess an application for townhouse construction financing, a lender will require a recently completed appraisal from an AACI appraiser that they are comfortable with, to show what the “as complete” value of the property will be.
If the appraisal comes back with a value that is lower than what you expect it to be, you may end up having to invest more up front capital into the property to make the loan to value work for the lender. Lenders may also make their own adjustments to your as complete projected value to build in more conservatism and protect themselves against risk in the process, which can further increase the equity that must come into the project before they are going to be prepared to advance any funds.
Now there may be ways around this type of challenge and taking a proactive approach to the potential problem is likely going to yield the most options for consideration.
Another major townhouse financing challenge is the sale of the actual units.
Most “A” lenders are going to be looking at around 70% presales before construction begins.
Some “B” lenders may allows as few as 50% of the projected units to be presold.
In each situation, the lender’s assessment of presales is going to take into consider the location of the development, the perceived “saleability” of the units, and the lender’s own internal policies.
The last of the major challenges we most often see relates to the timing of the draw advances.
Before the project starts, the lender will create a draw advance schedule typically with input from the borrower.
If everything goes according to plan, there may be very few issues with draw advances. But the reality for most projects is that there will likely be some issues related to weather or work coordination that does not allow the work to be completed exactly as planned.
When a draw is requested, a commercial real estate lender will typically ask a third party professional such as an appraiser or engineer to conduct an assessment of the work completed and the work remaining. If the assessment of the work remaining is greater than what the borrower estimates, there could be a delay of the draw and/or a draw reduction which can create a hole in your cash flow right in the middle of the project.
Once again, when these types of issues arise, there can be ways to effectively deal with them without impacting the progress of the work or the ability to manage the cash flow.
The best way to deal with any of these challenges to work with an experienced commercial mortgage broker who has placed these types of construction mortgages and has a track record for helping their clients with overcoming these or other issues when they arise.
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