Currently, property development and development of commercial properties in Ontario requires a wider variety of financial solutions than at any time before. Thanks in large part to continued low interest rates today offer by lending institutions in Canada.
From a financing point of view, property development business falls under two fundamental categories: owner occupied facilities, and investment facilities. The latter may be speculative for lease, include some pre-leasing, or it might be a wholly-occupied build-to-suit project.
Financing of owner occupied facilities in Canada generally involves commercial banks and similar short-term lenders and includes rather standard pro forma plans that identify the marketplace scope, past performance, revenues, capital costs, and potential for future expansion. Since the owner occupant has available resources it is very easy to establish his ability to repay loan.
Development of for-lease facilities entails a bigger set of requirements and developer commitments. Evaluating the workability of an owner-occupied facility is far easier than assessing the market place, distributing risk and determining feasibility for a "for-lease" facility.
"Capital", in this particular case, is the cash that owners or builders provide toward land acquisition, planning, development, construction and marketing a project. "Financing" is the cash that the developers borrow to leverage that capital. Institutional lenders in Ontario, including insurer, do not normally finance construction unless they are equity participants.
Construction loans usually cover costs during the time it takes to build the project and get it leased up. After that, permanent lenders-- including insurance companies-- should come into play for those projects large enough to get on their radar screen. The name of the game is interest rates.
The object is to lock in lowest interest rate. In low rate markets the developer will would like to complete construction and establish cash flow as quickly as possible to move to the permanent market. In high interest rate markets, the developer may want the construction lender to provide mini-perm financing, typically one to three years until a lower rate environment presents itself.
In Ontario, commercial constructions are funded typical by commercial lending institution, and the forward commitment will "take out" the bank once construction is completed and leasing occupancy has reached a certain level. Administration of this process requires an awareness of the very likely movement in interest rates.
Big, phased projects offer the opportunity to secure construction financing from institutional lenders based on the phased project performance. If leasing activities in the first two phases clearly demonstrate demand by the time development of a third phase starts, an insurance provider may intervene and fund all three phases, putting third phase construction money in escrow.
The insurance lender depends on the fact that leasing earnings in the first two phases are adequate to serve the debt. The obvious benefits of this strategy is to lock in today's interest rates.
However, one must remember insurance provider want stable income. Permanent lenders underwrite underlying leases and the strength of the real estate transaction. They have cash flow requirements and the security of their cash flow is paramount to meeting their obligations.