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Updated over 5 years ago on . Most recent reply

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Michael Dusold
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How do developers fund new construction?

Michael Dusold
Posted

What is the process that a developer goes through to fund a large new construction project?

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Shane Melanson
  • Developer
  • Calgary AB
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Shane Melanson
  • Developer
  • Calgary AB
Replied

@Michael Dusold - The way I fund my developments may be different than others.  So, it's not the only way to do it.

1st. I buy the land outright- with cash.  As I syndicate, this means, I raise the money from my investors and close on the land.

2nd. I De-risk my Deal

- I don't buy on spec. So, I've either got pre-sales (in the case of my industrial condos - where during due diligence and prior to  removing conditions, we pre-sold 70%).


- Or, I will pre-lease and find my anchor tenant(s).  So my downside is breakeven (provided I've done my homework on construction costs).

I generally have my drawings near completion to go in for a DP during DD.

I will have a very good # from my GC on the development at this time (we won't go to tender until we remove conditions and have an approved DP).

During this, I'm speaking with my bank.  How much debt can I get?  When?  

In a development- you're running many process simultaneous - so it's hard to say do this first and this second.

My main focus:

1. what is the demand for my site (and how much revenue can I generate).  I will adjust my site plan and renderings numerous times to accommodate the demand for the market

2. how long will it take?  Timing is critical (DP, BP, leasing, construction).

2(b). how much will it cost?  Does the deal make sense?  Can I achieve the rents or sales required to justify the development (I like 100% ROE, or 35%+ leveraged returns.  Development is risky, and if I don't have sufficient buffers and incentives, then the deal is too skinny)

3. What are the risks?  what can wipe me out?

4. How much debt will the bank give me and when?  What thresholds are required.  My bank wants about 65% pre-leasing or sales to advance funds.  

5. Once I have this, I raise my equity and then extra.  One of the biggest mistakes I've made in the past is raising too little money and then having to go back to investors for more.  This is something you'd rather not have to deal with.  The project paid out very well still- but, during construction, was stressful for me.

Does this give you enough to work from on securing your debt/equity?

You may want to have a commercial mortgage broker with experience in construction financing assist to.  They can help you through some of the steps above- what I've given you is the high level on how I look at and do my deals.

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