All Forum Posts by: Mario P.

Since the project is fully approved by the city, you value the property on a residual basis. Assuming you plan to service the site and build out the units yourself (ie. No construction has commenced), the Maximum Raw (Approved) Land Value is estimated as follows: REVENUE: Gross Unit Revenue (for the 21 units) Less: sales tax (if applicable) Plus: Any other sales revenue or recoveries = Net Completed Project Revenue CONSTRUCTION COST: Hard Construction Cost Soft Construction Cost Municipal/Regional/State/Federal Charges Builder Profit = Cost to Builder Net Completed Project Revenue - Cost to Builder = Maximum Serviced Land Value SERVICING COST: Hard Servicing Cost Soft Servicing/Development Cost Developer Profit = Cost to Developer Maximum Serviced Land Value - Cost to Developer = Max Raw (Approved) Land Value

Since you own the land free and clear, land equity can be used as part of the financing program. Depending on the value of the land and depending on the total amount of costs for the project, you may not have to put in any cash equity at all.

On December 8, the most recent residential land value report for the Greater Toronto Area and southwestern Ontario was released by MCAP (For more info visit http://www.mcap.com/development-finance/lot-value-...). Here are some key takeaways from the report.

To no one's surprise, the value for every low-rise lot size/type in every market that is tracked either increased or remained the same from the values presented in the Spring 2016 report. This is attributed mainly to the low level of inventory at just under 2,300 units or 1.5 months' supply. To put this in perspective, low-rise lot inventory has been on a steady decline since December, 2005 at which time there were 16,500 units available, representing 13.5 months' supply. The declining supply is due in large part to the Ontario Greenbelt legislation, which has artificially restricted the land supply in the GTA. Additionally, in recent years there has been (and will continue to be) a significant number of people migrating into the GTA. This has increased the demand for housing considerably and builders/developers cannot keep up with the demand. For instance, the ratio of new unit sales to new unit supply was 120%. This ratio has increased year after year since MCAP began tracking this ratio in 2009. 

Like the low-rise land values, the value for high-rise land in every market that is tracked either increased or remained the same from the values presented in the Spring 2016 report. Due to the decreasing level of low-rise inventory, it is reasonable to assume that some of the pent-up demand has shifted to the high-rise market in the form of new unit sales, resales, as well as increased demand in the rental segment. In addition, the new mortgage rules have made it more difficult to obtain a conventional mortgage, which may have also contributed to the increased demand for the relatively lower-priced high-rise units. The increased demand for high-rise units in the GTA resulted in a 10% price appreciation year over year (on a $/unit basis) and a decrease in the supply of new unit inventory to 6.5 months. 

Considering the high level of demand for new housing in the GTA is not being met by the new supply provided by builders, it is reasonable to expect low-rise lot and high-rise land values to continue to increase in the near future. It will be interesting to see the effect of the new mortgage rules and how they effect purchasers, particularly if it has a larger impact in directing demand from the higher-priced low-rise market to the lower-priced high-rise market, which may further deplete inventory and increasing prices as a result.  

Try and work with the seller, maybe they are willing to provide a vtb allowing you to inject as minimal equity as possible. You can also try a sandwich lease with an option to purchase - another way to limit your exposure in the deal and inject minimal cash. There are many ways to work with limited capital and no bank financing. Try searching for other creative financing structures and find the one(s) that work best for you.

Just looking at public listings may not be enough, since many other people are looking at the same listings as you. The best way to find a great deal is to network and let people know you are interested and serious about buying a particular property. Many of the new contacts you make may send you deals that are not available to the public, allowing you more opportunity to negotiate favourable terms.

Hi Michael Richardson Speaking only to the financing side of your project, the lender may lend conventionally up to 75% of completed project value and 85% of project costs (may be more or less depending on the city/state/country, etc). In your case, being that this will be your (and your partner's) first project, the lender may want to mitigate any risks regarding your inexperience and thus may choose to lend you less. In your case, you should prepare for the lender to only offer to fund 60-65% of completed project value. During construction, your financing costs will be interest only, for which the required funds will be drawn out of an interest reserve built into the loan. Prior to receiving a commitment from your construction lender, they will most likely require you to obtain take-out term financing to repay the construction loan once construction is complete. Keep in mind that the term lender may require 1.2-1.3 times debt service coverage once the building is stabilized. Therefore, you will need enough proceeds from your term mortgage to fully repay the construction loan and maintain a stabilized 1.3 (say) debt service coverage. As a note: completed project value will be calculated by applying cap rate to a stabilized NOI for the property. If I wasn't clear or you have further questions, feel free to ask.

Hi @Ricky Brown, I can give you advice based on my development experience in Ontario, Canada. Although there may be nuances relating to local laws and practices, the general idea is similar. Since the development process is so complex, the following is meant to be only a general guide on how to get started.

From the information you provided and based on your experience, there are a few approaches you could take to develop this land (beginning with the highest difficulty/highest risk/highest potential return):

1. Develop and service the land, hire a construction manager/general contractor to construct the units, and hire a brokerage to sell the units;

2. Develop and service the land, sell the serviced lots to a third-party builder; or,

3. Partner with a developer and either take either route 1. or 2. presented above.

As a first time developer, my advice would be to partner with a developer (with the help of a capable and experienced real estate lawyer) and sell the serviced lots to a third-party builder because you can: (a) learn the business from an experienced developer (b) take advantage of your partner's relationships within the industry (c) build your reputation and relationships among those in the real estate community (d) obtain financing easier (lenders are more reluctant to lend to first time developers/borrowers) (e) focus on learning the development side before you tackle the house construction side. 

You should start off by booking a preliminary consultation with a planner at your municipality to determine what the City/Town may be willing to approve in terms of your proposed development. The planner will outline the approvals process and timeline to obtaining approvals and permits (it can vary from municipality to municipality), give you an idea of what density you could achieve on the land, outline what reports will need to be submitted, outline what applications will need to be submitted, and detail the $ amount of fees that will need to be paid to the municipality. 

Next, you will need to understand the value of your land in terms of what its worth now (raw land value) and what it will be worth once it has been developed and serviced (serviced land value). These values are important because:

- you can roll the raw land value into a joint venture with your developer partner; this will be considered your equity in the deal (assuming the land is free of any mortgages) and your partner should inject cash equity into the deal (an amount that must be negotiated and must be sufficient to ensure the developer is motivated to perform)

- a lender will provide financing and base their LTV exposure on serviced land value (the higher the value, the more a lender will be willing to provide)

These values can be determined using direct comparables or through a residual analysis. I would suggest getting an appraisal to determine the two values.

Using the above information, you can approach potential developer partners and negotiate your ownership in a joint venture for your development. Once a deal is in place, you will be able to utilize the developers knowledge and expertise in bringing your development to life. You can also begin to reach out to local builders who may be willing to purchase the serviced lots in your development once your subdivision has been registered. 

There is obviously considerably more involved in the development process. If you want more information, feel free to ask.

Hi Brian, I'm not familiar with obtaining financing in Virginia, but I assume it would be relatively similar to my experience in Ontario, Canada. The construction lender may lend up to 75% of completed property value and up to 85% of costs (conventional financing). In a basic sense, this value is derived from applying a cap rate to a stabilized NOI. The construction lender may require you to first obtain a commitment for take-out financing prior to receiving construction funds, which is usually up to 75% of value and 1.2 debt service coverage. Hope this helps.

Hi everyone. Just a bit about myself:

My name is Mario and I live and work in downtown Toronto. I raise capital from institutional investors to provide project financing solutions to developers/builders in the Greater Toronto Area in the form of equity, mortgages, and/or subordinated debt. 

I hope to learn from the BP community and to leverage my experience and knowledge in the finance/development/construction field of real estate to provide meaningful insight and valuable answers to BP members. Ultimately, my goal is to become a real estate developer in the near future.

Feel free to connect and/or ask a question regarding Toronto real estate, development, construction, or project finance!