There are many phases in developing an apartment building. A developer has to decide what to build and where. He or she has to acquire the land, line up construction, market the units, and lease the building. One of the most overlooked aspects of developing new apartments is financing the project.
The financing process has changed in recent years as purpose-built rental apartments have become more profitable, but lenders still take a conservative approach to lending. The financing process can be a time-consuming phase of development that can tie up considerable equity. Hiring the right commercial mortgage broker to manage the lending process is essential for a developer to quickly realize their dreams.
Reasons to develop
There are as many reasons for developers to build new apartments as there are developers. Given the rise in the purpose-built rental apartment market, many developers looking to expand their portfolios have found that older rental apartment stock has already been bought out for repositioning. Others have spare land on which to develop an apartment building. Others are former condominium developers who are looking to construct a rental building to provide a steady revenue stream to support their growth during slower build-out periods.
Developers need to know the reasons they are developing because the first task in applying for financing is to convince the lender of your vision. Lenders carefully assess risk based on criteria that can be a challenge for apartment developers to meet. Lenders look carefully at the history of a developer’s previous projects, as well as the performance of the asset class in general before deciding whether or not a project is worth investing in.
Building a lender’s confidence
By definition, a new apartment building has little recent history, which makes it a riskier investment in the eyes of a lender. Not only does the project itself have no history on the rents achieved or the costs incurred, lenders are only now beginning to realize that the asset class is shaking off the issues that resulted in very little new construction since 1975. Promising new markets such as seniors’ housing and student housing are even newer, and remain largely hidden from a lender’s data bank.
Thus the first task of a developer is to convince the financier of the merits of a new project. Developers need to provide data on the potential return on investment. The financing process favours developers who have been building for a while and have a number of projects under their belts.
For developers just entering the field, third parties can help financiers gain confidence in a project to go forward. Partnering with an experienced design and construction firm can not only ensure a new project is successful, it will convince a lender that the developer is serious about a project, and thus be more likely to approve it.
The development budget
Developers also need to provide data on their project, including good estimates of the building’s construction costs, its ongoing expenses and projected rents. The developer needs to be confident the market has a sustainable number of potential tenants who will be able to pay the rents that justify the building.
The best way to provide this data is by contracting a third party to provide a detailed feasibility study on the project. A thoroughly researched study by a neutral observer with experience in the field will provide critical information a developer can take to the bank.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.