Over the years, we have worked with countless apartment developers across Canada.
Developers who know they can get the highest price by working hard on their marketing lease-up to get a fully stabilized building charging top rents, leading to an optimal valuation and purchase price, especially in today’s strong market.
Sometimes, however, our developer clients have different priorities: they may have a new opportunity they wish to take advantage of sooner rather than later; they may have expensive mezzanine financing they wish to pay off quickly; they may be building a multi-phase project with many complexities; or they may simply be a self-declared merchant apartment developer looking to capitalize on the current market.
In these instances, and others, a developer may instead look to the option of a forward sale. A forward sale is a binding contract between two parties to enter into a purchase-and-sale agreement at a fixed future date, the terms and conditions of which are agreed upon today.
A forward sale is complex and requires an experienced brokerage team which has the skills and expertise to handle the delayed timing, the buyer and the structure of the deal itself. Oftentimes, these transactions lead to complexities and not just financial ones.
Benefits for both buyer and seller
For example, in a multi-phase project, there can be emotional challenges as the new buyer is already operating the first building while the developer is still present at the site, working on the newer buildings.
The purchaser’s different style of operation can sometimes create tension, and these are the unique situations an experienced broker can work through with a client.
There’s never a dull moment!
When it comes to the sale of a rental apartment building, it is key to maximize revenues in order to generate the best sale price. Even in the case of a forward sale, this can still be applicable.
Depending on the terms of the purchase, which can be fully customized based on the intent of the parties, maximizing revenue in early stages of a development can still lead to a higher sale price for the developer.
A forward sale ends up being a win-win for both the developer and the buyer.
The developer can “de-risk” the project – having surety of a sale and the ability to keep money moving onto the next project. These benefits are worth the discount in price.
The buyer on the other hand, by choosing to enter into the deal at an earlier, more uncertain stage in the process, receives a share in the development profit by way of a price discount.
Some tips for the developer
Here are some helpful tips, for the developer, when considering a forward sale:
- What challenge would a forward sale solve for you?
- What monetary value do you place on the solved challenge (knowing in advance is vital)?
- Engage professional assistance with the necessary skills for orchestrating and negotiating the unique nuances of a forward sale.
- Engage professional assistance with the ability to connect you to quality buyers.
- Modify your development pipeline to benefit from the forward sale process.
One thing I love about the work we do for our clients is that each situation is unique – there are always personal or deal-specific circumstances that require creative, out-of-the-box thinking to achieve success for the parties involve.
Forward sales are the perfect example of this and we are seeing more and more of them as new apartment construction continues to increase.