While in theory that can make perfect sense, in reality there can be many complicating factors that don’t allow things to play out so clean and neat.
When posed with the question of how to finance a residential subdivision development, most people would assume that there would likely be financing required for the land purchase, the planning and site development, and for the build out of the residential homes.
Financing complexity can come in many forms depending on the specific subdivision being developed.
For instance, even though a subdivision project is classified primarily as residential, it may have a commercial component to it which could require a different form of financing.
Lenders that fund development projects will also be very focused on the achievement of different milestones at different times in the project which might not match up with the cash flow needs of the developer.
Basically, each stage of subdivision development can require a different form of financing so if key milestones can’t be met to complete a certain stage, the property owner or developer might not be able to attract the additional capital required to continue to move the project forward.
Here’s an example to better make this point.
Let’s say that a developer has acquired property and secured a first mortgage at 50% loan to value on the bare land to complete the purchase. This would be the first stage of required financing. Then the developer starts spending his own money to move the planning process along and do whatever site development work he is allowed to do at this point.
In order to get stage two financing for some of the site development costs, the project will require a new appraisal to determine what the value of the property will be once approvals are in place and the project is shovel ready.
The challenge at this stage of development is that regardless of how much money the developer ours into the property, its hard for him to be given credit for improving the land until the shovel ready milestone is reached. So if the project all of a sudden does not have the cash to get to the next milestone, it can be very difficult to secure additional capital.
One way we deal with this type of situation, which can be quite common, is to work with lenders that have considerable development experience which allows them to better assess the progress of the project prior to the full approval milestone. If the body of work done to date shows the project being on track and heading to a profitable conclusion, a private lender may be able to place a price second mortgage against the property that will provide enough incremental capital to get the developer past the next milestone required to refinance everything into a larger development loan.
This is just one of many examples of how project the manner in which project details play out can work against getting subdivision financing in place.
In order to get to the next stage of the project, there are times when alternative short term solutions need to be put into place as outlined in the example above.
Our focus is help you secure all the funding you will require for your project from land acquisition through building construction as well as the other requirements that may materialize in between.
If you are in need of residential subdivision development financing, please give me a call so we can go over your particular situation and discuss potential options for providing the necessary funds to move the project forward.
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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