For some real estate developers, higher leverage could mean less equity tied up in a single project and potentially more capital available for the next opportunity. But conventional construction financing may often come with limits. A rental construction loan in Ontario demonstrates how the right financing structure could create more flexibility.

As the real estate market shifts from condominium development toward purpose-built rental housing, developers are rethinking not only what they build, but how they finance it.

Laurentian Bank has helped structure the construction financing for many rental projects. One in particular, a multi-residential rental building in Ontario. Syndicated with partner lenders, the loan covered majority of costs. Including deferred development charges, total leverage amounts to 85%, without CMHC-insured construction financing.

Joseph McGrath, Vice President, Real Estate Financing, Central Region at Laurentian Bank, shares various insights on the financing structure behind a $100-million-plus Ontario rental development, with a perspective on leverage, syndication and project execution in today's market.

What makes this transaction noteworthy?

The answer is because the transaction is so representative. Purpose-built rental is now one of the main areas of activity in Canada, just like condos used to be. In Quebec, where rental housing occupies a major place in the market, Laurentian Bank has helped financing apartment buildings for a long time. In Ontario, not many were being built until recently. Today, many of the rental buildings the Laurentian Bank finances in the Greater Toronto Area (GTA) were originally condo sites that are no longer feasible for that purpose.

What makes this project interesting isn’t the building, it’s the leverage. Many lenders are looking for a solution: the less equity a project could require, the higher the investors’ potential internal rate of return, and the more capital they could have left for the next project. Generally, a lot of lenders cap conventional construction loans at around 75% of costs. 

Leverage is not free, and the market understands that. The developer's experience, the location of the project, and the viability of the takeout strategy. But when it’s structured well, leverage could be what moves a project forward.

How was the financing structured?

The financing could be based on three sources of funds:

equity from the developer;
construction loan;
deferred development charges.
In Ontario, these charges could be deferred. For example, 20% could be payable on completion, then 20% year after year. The charges have to be paid, but they may not need to be funded upfront. 

How to arrive at 80% conventional financing with only 15% equity from the developer?

Our expertise in financing CMHC-insured loans, including the MLI Select program, could allow us to underwrite the construction loan to a CMHC-insured takeout at completion. That takeout could offer a higher loan-to-value, and that is what could make the leverage possible during construction.

Many developers focus on the leverage itself, but from a lender's perspective, the key question is whether the project remains financeable all the way through to the permanent financing stage.

What role did syndication play in the transaction?

Given the size of a loan, syndication is essential. When an initial lending partner is unable to proceed, we draw on our established network of co-lenders to find the right fit. Because these are lenders we've worked with for years and who understand our approach to credit, we are able to preserve the financing structure and keep the transaction moving forward.

What does it take to successfully execute a high-leverage financing transaction?

Some developers are looking for leverage, but they might also seek certainty of execution.

Business moves quickly, and you might need access to funds without unnecessary delays. This is what makes Laurentian Bank stand out. Even in the case of a syndicated loan, funds are generally available within three (3) months and quicker still in the absence of syndication. Sometimes, the answer is “no”, but a timely “no” still has value.

Consistency matters too. Construction projects can take years, and one thing clients appreciate is continuity. With Laurentian Bank, whenever we structure a loan, we are the one who will follow the project through to completion. Our clients tell us that they appreciate such a relationship. We operate more like a boutique: an experienced, stable team, offering a flat structure and welcoming flexibility. If and when a project runs into something unexpected, having an experienced lender may benefit the borrower.

In the case of big transactions, the ability to structure the financing, coordinate lending partners and stay involved through completion can indeed be just as important as the leverage itself.

What should developers take away from a transaction?

A key takeaway is that a conventional construction loan could go further than you might think, as long as the project holds up all the way to the exit. 

Every project has its nuances. 

A conventional construction loan shows that it can sometimes go further than developers might expect when the fundamentals are strong and the financing structure is built around the realities of the project.

What makes the difference, beyond the numbers, is a lender that can structure the financing around the project, bring in the right partners when needed and stay involved all the way through.

Looking to optimize leverage for your next rental development? Laurentian Bank's real estate financing specialists combine structuring expertise, flexible solutions and an established network of lending partners to help move your project forward. Don’t hesitate to connect with our team to explore your financing options. https://www.laurentianbank.ca/en/business/specialized-industries/real-estate-financing?module=2#business

We, us, our, the Bank, Laurentian Bank: Laurentian Bank of Canada

The information contained herein is provided for informational purposes only and should not be considered financial, legal, accounting or tax advice. While reasonable efforts have been made to ensure the accuracy of the information at the time of publication, Laurentian Bank Group makes no representation or warranty, express or implied, regarding its accuracy, completeness or currency.