A big challenge for developers in building new apartments is applying for financing. Lenders are inherently conservative, and new apartments by their definition have no history. However, developers can convince lenders of the viability of their project. The key is providing good data that can educate lenders in what is possible, a comprehensive feasibility study to show what the developer plans to build, and a detailed budget to show that costs are accounted for.
Control your costs
When building a new apartment, it is important to control costs straight from the beginning. The more capital developers spend in design or land acquisition before construction begins, the more developers will have to get from rents after the building comes on the market. Developers sitting on land they bought years ago when it was cheap have a distinct advantage over developers buying land in today’s market.
This is particularly important for apartment developers. As condominium developers pre-sell their units, those that find out they are wrong about their construction costs for a project can stop before they build, leaving them liable only to the cost of a sales trailer and the marketing campaigns. A wrong decision by an apartment developer may not become clear until a building is already built, making a mistake all the costlier.
Building it right
Apartment developers need to design an optimum unit mix, focus on the right target market, choose the best location and be extremely confident about their risk, or a lender will not share that risk with you. Moreover, with the landscape perpetually changing, the lending appetite becomes a moving target, often forcing the developer to spend more time looking for the solution that enables them to achieve their required return.
This illustrates the importance of conducting a detailed feasibility study at the beginning of the development process. An experienced and impartial consultant can provide critical information on the best unit mix, the ideal sector of the marketplace to approach, the right location and the most effective marketing campaign.
Newer is better
When gathering data, developers can be optimistic about their expenses. A new building will have many advantages in terms of lower utility and maintenance costs. It is important not to go overboard and be too optimistic about projected rents, however.
As few new apartments have been built since 1975, lenders have few good references for rental rates, although these are starting to appear. New apartments will show a leap for rents compared to established properties, but it is important to justify such a leap by ensuring a new building has a high level of finish. Renters today are expecting good amenities and high-quality construction, and this will push up the value of a project and the associated rents.
Going into any project requires careful control of one’s costs. Lenders are looking for discipline and evidence a developer has taken all contingencies into consideration.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.