Condo Construction Financing

“Cash Flow Management Is Key Aspect of Condo Construction Financing”

Condo construction financing for condominium projects is one of the more common forms of commercial construction in the province of Ontario. These projects are typically into the ten’s of millions of dollars and some even higher, depending on the area and the market supply and demand dynamics.

Like most construction financing, application for condominium construction financing is similar in that the real estate development has an established fair market value at the beginning of the project as well as at the end of the project, based on the work being completed. What’s somewhat different with condo construction loans, however, is how lenders can determine the amount of money that can be advanced against a given project.

For instance, lets say that the completed condo units will have a market value of $300,000 per unit upon completion. This is assuming that the developer and the completed project will be able to receive condo certification status which can only be granted when all work is done. If at the end of construction condominium status can not be achieved, or there is some sort of administrative or bureaucratic delay in the process, then the end product, from a fair market value point of view, would likely be worth considerably less per unit.

As a result, condo construction lenders will tend to error on the side of caution, at least at the outset of the project, and provide financing as a percentage of the end fair value with no condo status being achieved. Construction lenders will also require more than 50% of the units on average to be presold prior to any construction draws being advanced as an added comfort that the project will be able to generate the cash flow at the end of building to repay the condominium construction loan.

This is why cash flow management is so critical to condo projects as 1) there will be significant equity required at the start of the project to get the first construction draw advance, and 2) if there is any delay in getting condo status, there will have to be funds available in the cash flow to complete the work and cover the carrying costs before units can be sold and the full proceeds from sale received.

If you are planning a condominium project in Ontario or are in the middle of one, please give me a call so I can go over your requirements with you and then discuss different condo construction financing options that can meet your needs.

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