New Development Funding Approvals

Many developers approach the process of funding their projects with the enthusiasm of going to the dentist.

Just like going to the dentist, it is a necessity.  The truth is that there are so many different things that need to come together to make a successful development come to fruition, so that great execution and good luck are all necessary.

Fortunately, development and construction financing continues to flow into our client’s markets. By that, we mean the lenders understand and continue to have confidence in the standard capital structure:, which is made up of (i) a developer’s equity, (ii) the purchaser deposits (typically up to 50 percent of the purchase price), and (iii) the construction loan. There was a point a short while back where several lenders were not entirely comfortable with the new purchaser deposit structure, but as developments began and purchasers posted their deposits at the agreed-upon benchmarks, i.e. upon signing, then upon groundbreaking and then upon building top-off or floor completion, the lender’s confidence grew.

One thing traditional and non-conventional lenders have in common is that they want to see developers join forces with a very experienced team of professionals, including architects, general contractors, sales team,s and legal counsel, among others. A seasoned development team gives them confidence that it will be able to mitigate risks and successfully complete the development.

Based on the volume of transactions our firm handles, we have identified an interesting trend among financial institutions. Lenders making acquisition loans for developable land are, from time to time, including provisions in their loan documents that grant them either (a) the right to first offer a construction loan on the project, or (b) the right to match any term sheet received by the borrower for a construction loan on the development. This is a smart strategy. If a lender agrees to make an acquisition loan it is because the lender trusts the developer and believes in its vision for the site. Therefore, when it is time to develop the property, that lender may want to play a role in turning that vision into reality. Lenders are looking to do business with highly experienced developers; so, this is a way to guarantee they will have a foot in the door when the borrower is prepared to commence construction and go vertical.

A key consideration for bonding companies and lenders is how qualified are the pre-sales.

Working with a company like PreApproved Capital, both prequalifications and pre-approvals can be generated for each client, and attached to the registrations or APS.  It will provide additional confidence to lenders and stakeholders during the due diligence processes.

Working with a Brokerage for Client PreApproval Considerations:

• A mortgage pre-approval is typically valid for a period of 90-120 days at maximum, at which point terms would need to be re-negotiated.  However, it is an important step to weed out speculative investors, hedge your risk as a developer.
• Clients should not commit to their bank before they shop around other offers. Every bank is different, and every bank has different qualifying metrics.  As a high traffic broker, we can mitigate various factors to provide extremely competitive quotes from sources that the average client would not have access to otherwise.
• Access to HELOCS:  if a client puts 20% down on a $400k pre-construction condo, and at the time of closing its assessed value is $500k, they can get a line of credit for the $100k in capital gain and use that however they want (more pre-construction condos, of course).
• We can provide commitment letters at todays interest rates to provide guarantee of security.
• Self employed individuals and difficult eligibility requirements for A series banks for mortgages.

We specialize in spending time to customize programs for new development projects whether freeholds, townhomes, or condominiums.

For one leading development company, success and double-digit sales weekly growth came with a cost: an overburdened sales team focused on pushing through registrations, that didn’t ask for pre-approvals.

The client outsourced a specialized realty company.  It is an excellent firm. They empowered their sales agents to make decisions on fly and incentivized commitments.  Within 4 months, the 15-floor condominium tower was pre-sold at 90%!  A spectacular number.

The client was very happy with their investment.  They felt very secure to be able to turn to lenders with such an effort to show demand for their development and likewise the availability to show potential deposits to use towards the construction of the project.

The investment process of developers into the sales efforts is usually heavy upfront.  Along with the land acquisition, pre-construction soft costs, it is one of the highest costs of a project.

Developers then look to that investment to pay off with good results on the presale bookings, and to be able to use those deposits towards their construction efforts.  However time and again, they seem to neglect to qualify those pre-sales.  The efforts are note aligned upfront and usually left for the lender to confirm the quality of those presales during the lender’s due diligence qualification efforts.

Challenge

Our client had gone into discussions with a lender for construction funding.  They were looking to raise $38M for a 15-story condo tower development in SW Ontario.

The lender asked to review the following documentation from the developer: unit sales agreements, the deposit structure, the bonding company agreement.

• The pre-sales agreements weren’t documented properly

The sales teams rushed their efforts on a few of the highest-value condominium units, and many did not have ID captured in the documentation with the sales agreements

• The pre-sales agreements were not pre-qualified

There were notes on the agreements that the client was pre-qualified for a mortgage for the value of the condominium.  Prequalification tends to refer to less rigorous assessments, while a preapproval can require you to share more personal and financial information with a creditor. As a result, an offer based on a prequalification may be less accurate or certain than an offer based on a preapproval. However, there was documentation to support this assertion with any of the documents that made up the sales agreement.

• Lender required greater rigor

While the lender was impressed with a number of 90% as a presales benchmark.  The lack of proper documentation, rigor in the execution of the sales efforts, and lack of qualification for the sales, ultimately shook the lender’s confidence in the project, and in the team.

Solution

In order to win back the confidence of the lender in the project, the team had to act quickly.  They need to update the documentation, and to prequalify 144 pre-sold units and the purchasers.  The developer tasked his sales team to reach out to clients to collect the outstanding ID documentation and likewise tasked PreApproved Capital to work on the pre-qualification of their clients.

• Improve Client Experience with Alignment

We looked to ensure that we provided a valuable experience for the developer’s condo purchasers while executing our task.  We worked with the sales team not to duplicate calls to people with outstanding IDs so that only 1 call was made.  As we would require ID for preapproval, our team would complete both tasks.

• Determine the right approach

We worked with the developer to identify the individuals for the preapprovals.  We created calling scripts and emails for approval by the developer prior to engaging with their clients.  We also created an agreed-upon timeline for completion.

• Optimized Documentation & Processing for lender

Our team engaged with 144 clients on behalf of the developer.  While we created a communication plan, we also engaged a digital platform to allow clients to sign off on their pre-approvals, which provided a copy to them, and one that was shared with the sales team, and likewise left a copy in the data room for the lender to review along with the respective sales agreements.

Result

Within 12 days of original engagement, 144 clients were contacted via email and outbound calls.

123 clients received preapprovals from lenders for their purchases.  10 purchases were identified as not qualified.  The remainder either did not respond or did not want to participate in the prequalification process.  However, we and the developer were able to go back to the lender within 14 days with over 74% of his pre-sales preapproved, and all with full IDs attached to their sales agreements as well.

The deal proceeded with the lender’s confidence in the deal restored.  The client received a commitment for $38M for the construction of the project.