Obtaining land financing from a private channel lender is a process leaps and bounds more complicated than securing residential financing, but remembering a few fundamentals will save time and prevent headaches.
In determining whether or not to fund a land acquisition, private lenders look at the developer’s experience to help them determine how well the proposed project will be executed. According to Judd Silverstone Rapoport, head of mortgage origination at Downing Street Financial Inc. and a CFA charterholder, also under close scrutiny are assumptions pertaining to soft and hard costs, as well as projected revenues in all proforma submissions.
“We require as-is appraisals rather than as-built appraisals that are based on a set of extraordinary assumptions that don’t reflect the land’s current state,” said Rapoport. “We also need confirmation of the equity that’s being injected into the property, as well as its provenance, because lenders always want to ensure that borrowers are aligned with the deal. Syndicated equity is different than cash out of the borrower’s own pocket.”
Additionally, private lenders require documents that delineate Official Plan designations, zoning by-laws that may affect the site in question, and that determine the type of end product the site can sustain, including its density.
“Environmental phase one and two documentation is also needed,” continued Rapoport, “because environmental issues can have very large impact on land values. Land with environmental issues can still be financed, but it’s imperative that lenders are apprised of both the nature and scope of the contamination. Being able to quantify remediation costs is very important to private lenders.”
Brokers should be cognizant of what Rapoport calls the most common shortfalls in submission files:
“Many borrowers approach lenders with guarantees that lack strength. Lenders always consider the method in which funds advanced will be repaid. In many cases, a construction facility is the method whereby a loan is repaid. Strong financial covenant is a requirement for most construction lenders, and it’s becoming even more important with rising hard costs and development charges.”
Private lenders also observe value that’s added to the land being purchased.
“The nature of rezoning lands to a more valuable use, or achieving site plan approvals for a particular site, can help improve a mortgage lender’s loan-to-value exposure as an increase in land value takes place,” said Rapoport.
Land financing usually takes no more than 60 days to secure, according to Salman Jalal, president of the commercial department at Centum Monest Mortgage Inc., who added that it’s harder to secure financing outside the immediate Greater Toronto Area, where loan-to-values are typically 55-60%.
“Lenders are driven on the GTA as their preferred location,” he said. “If a lender puts a bid on a deal in Toronto, they look for a loan-to-value of 65%. On a good land-approved deal, they can go up to 70% LTV.”
Jalal advises that brokers shouldn’t approach lenders unless all their ducks are in a row, and that includes a bulletproof exit strategy.
“Investors do extra due diligence and take extra time to ensure they have the right exit strategy for the deal,” said Jalal. “On the low-rise side, they want to see a good exit strategy from the client.
“Brokers need to know lending parameters for each lender. You can’t send a deal to just anyone. Every lender has a different product in the market, and as an experienced broker you should know what they’re looking for.”