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.
About the Author Joe Walsh
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