There are a few situations where a development project may require a condo inventory mortgage.
Condo inventory is defined as residential or commercial units where all or most of the construction has been completed and not yet sold.
This is similar to any type of manufactured inventory where you may have a combination of work in process and finished goods.
With condo inventory financing, most of the inventory would be in the finished goods classification.
One of the challenges with these types of development projects is that condo status cannot be obtained until the end of the project when the units are completed.
So in the beginning, the development project is characterized as townhouse development for the purposes of construction financing.
This has a significant impact on the amount of construction financing that can be secured due to the projected completion value of a townhouse versus condos.
As the project nears completion, more capital may need to be required under one of the following three situations:
In the first scenario where construction has been completed, the borrower may require additional financing to cover the carrying costs of the project until condo registration is complete and units can be sold. Because of the level of completion, there may be the opportunity to refinance the construction loan and achieve a higher level of leverage on the property, allowing a capital injection to be made into the cash flow.
Under this scenario, the borrower may also be required to pay out the construction lender prior to registration and a condo inventory loan would allow this to take place without negatively impacting the project.
In the second scenario, the borrower is once again seeking incremental capital to complete the project and would look to a condo inventory mortgage to increase the level of debt financing against the project.
In the third scenario, the condo sales process is not expected to be completed in less than 6 months, so to reduce the higher carrying costs associated with construction loans, the outstanding project debt is refinanced into a condo inventory mortgage.
If you have a condo development that requires additional financing, I would suggest that you give me a call so that I can quickly assess your situation and provide you with your condo inventory mortgage options.
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