Advancing the conversation on land and real estate issues in BC.
The process explanation that follows will give an appreciation of the complexity of our industry and the professionalism and discipline that is required to successfully conceive, launch, commission, manage, and maintain quality real estate developments meeting the housing, industrial, commercial and institutional needs of our province.
Together, this guide provides a high-level overview of the increasingly complex process of undertaking development projects in British Columbia.
Table of Contents
- Preliminary Opportunity Assessment and Evaluation
- Financial Feasibility Assessment, Insurance, and Development Plan
- Consultation, Development Approvals and Construction Costs
- Construction Procurement and Management
- Real Estate Financing
- Marketing Sales and Project
Preliminary Opportunity Assessment and Evaluation
By: David Podmore, RI
The steps required to successfully conceive and execute a development project are essentially the same for commercial, residential, industrial and institutional properties. How does the process start?
It starts with identification of an opportunity, a vision for what may be possible for an identified property—the big idea! Successful developers often have the ability to recognize an opportunity to accommodate housing, commercial, industrial, or institutional needs where others may not have the same creativity or commitment.
They also do their homework—ensuring they understand the requirements of those that may be interested in purchasing, leasing, or renting the development product. Successful developers pay a lot of attention to the requirements of not only their customers but the communities in which they develop, working closely with their neighbours, approving authorities, and special interests.
In my opinion, the majority of developers in our communities are committed to improving the quality of the environment and life through their development activities; the incredible philanthropy and the significance of the development and construction industry’s contribution to the economy of our province and communities is most often not acknowledged or understood.
So, let’s examine how development projects are conceived.
Opportunity and Suitability
Almost universally, these projects start with the identification of an opportunity for development of a property to a higher and best use in the community.
This may be an opportunity for multi-family residential development, land subdivision for single-family homes or low- and medium-density residential uses, or commercial or industrial uses.
Prudent developers start with an assessment of the proposed development site to determine the suitability of the property for the intended uses, including an assessment of the proposed use to be accommodated under current zoning, or the likelihood of obtaining support for amended or change-of-use zoning to accommodate the intended use. This requires consultation with the relevant approving authority and, in most cases, the neighbours and broader community.
In my experience, these consultations are best conducted by the developer directly so that the community gets to meet and know the developer without a “filter” of hired representatives, but this clearly depends on the capability of the developer to communicate directly with the community.
In advance, or concurrently, the developer needs to undertake key due diligence to ascertain the suitability of the property for the intended development.
This includes essential investigation of the physical and legal impediments or constraints that may exist (for example, site contamination, easements, registered restrictive covenants, rights of way, etc.). What is discovered may lead to further investigations or abandonment of the opportunity. For example, on most sites a Phase One environmental assessment (to identify potential for contaminants on site) should be undertaken.
This may lead to a Phase Two assessment, the results of which may lead to the purchase of the property under consideration being abandoned, or it may significantly influence the terms of site acquisition.
In today’s evolving development world, three of the most difficult issues to address in the early exploratory due diligence phase of a development proposal are:
- expectations of the approving authority for development and processing fees
- community amenity contributions (extractions)
- grossly extended approval times.
These issues, combined with an extraordinary escalation in construction costs, make projections of future performance on development projects very difficult to reasonably forecast.
Add to this the uncertainty regarding the direction of interest rates and the threatened trade tariffs affecting many of the essential material costs for the construction and development industry and you realize the importance of very disciplined due diligence and a cautious approach.
Product and Program
Informed knowledge of the demographics of the community in which the development is proposed is key to determining the characteristics of the product that should be contemplated.
This applies to all product types, especially residential condominium, multi-family rental, retail, office, and seniors’ living. An extra effort should be made to assemble as much information from the realty community, existing developments and properties, government agencies, other developers, specialized research groups, and others who could guide the fine-tuning of the target market and refine the definitive program (unit features, amenities, services, etc.) for the proposed development.
All of these considerations and intelligence lead to the assembly of a project pro forma to ascertain the feasibility of a given development project and to test project sensitivity to various changes in construction costs, municipal fees and CACs, timing, interest rates, sales or rental rates, and more.
A very disciplined pro forma projection with adequate contingencies, supported by solid research and pragmatic assessment of current and responsibly forecast future conditions, is essential to successful development initiatives.
Financial Feasibility Assessment, Insurance, and Development Plan
By: Perry Staniscia, RI
Like most businesses, the successful development of real estate must result in a financial return acceptable to the developer. Although conducting business in all sectors has risk, the development of real estate poses higher risk relative to some other businesses due to the length of time associated with bringing projects to market, along with many variables beyond the control of the developer.
Although a higher financial return is usually expected to compensate for this higher risk, the marketplace will dictate the actual financial return that is achieved. As such, successful developers should have a good read of the marketplace and must be able to mitigate risk.
A sound financial feasibility assessment, development plan, and insurance strategy are essential in determining whether the development of a project should proceed.
Gathering information from qualified sources such as expert consultants or others, and making informed assumptions based on that information, is the most important component of preparing a sound financial feasibility assessment. If the assumptions are too conservative, there will be less inclination to proceed with the project due to a lower than expected return.
If the assumptions are too aggressive, there will be a greater propensity to proceed with the project, albeit at a potentially much greater risk due to a higher than expected return. Most developers take a balanced approach in formulating their assumptions, which typically pencil out to a moderate return commensurate to risk.
Revenue and Risk in the Marketplace
AVERAGE SALE PRICE (REVENUE) per saleable square foot
AVERAGE COSTS converted to costs per saleable square foot
650 CALCULATED RETURN
*Revenues less than the marketplace – lower risk, conservative approach typically resulting in higher absorption rates
**Revenues supported by the marketplace – moderate risk, balanced approach typically resulting average absorption rates
***Revenues above the marketplace – higher risk, aggressive approach typically resulting in lower absorption rates
Just as important, though, is getting the unit mix right. There is no sense in accurately establishing revenues if the types of units proposed cannot be sold due to non-acceptance for them in the marketplace.
As such, a comprehensive analysis of the marketplace, including unit inventory/types, demographics, absorption rates, and more, must be completed prior to deciding on a unit mix and related revenues. Receipt of the identical market analysis will be interpreted and viewed differently by different developers based on their depth of experience, requirement for a certain return, risk tolerance, and myriad other factors.
The developer who makes the most accurate interpretation of the marketplace will be rewarded with a reasonable return while incurring moderate risk. Now that the revenue side of the analysis has been covered off, let’s have a look at the cost side.
Although conducting business in all sectors has risk, the development of real estate poses higher risk relative to some other businesses due to the length of time associated with bringing projects to market, along with many variables beyond the control of the developer. —Perry Staniscia
Accurate costs must also be established to determine whether a developer can achieve the expected return. Cost categories include land, hard and soft costs, financing, and a reasonable profit and contingency amount.
The total of all costs (excluding land) is typically subtracted from the established revenues, with the result being the maximum amount that can be paid for the land. Paying more for the land will result in decreased profits equating to a less than expected return.
There will always be developers willing to take on higher risk by paying more for land in the hope of achieving higher revenues and lower costs. Paying more for land puts the project under tremendous pressure to succeed and places the project financing at risk as lenders tend to be conservative by nature.
As these higher-risk projects are more challenging to finance, higher interest rates are usually incurred along with additional equity typically being required. Additional equity translates into lower leverage which in turn results in a lower overall return.
Highly experienced and disciplined developers shy away from such developments and place significant importance on the principle of leverage in order to increase returns.
Typically, the less equity (higher leverage) contributed to a specific project, the higher the internal rate of return. In cases of higher leverage, lenders may require the mortgage to be insured, which triggers insurance premiums. Even with the addition of mortgage insurance premiums as an increased cost to the project, the return is generally greater than the alternative of contributing a greater amount of equity on a non-insured basis.
The decision to secure mortgage insurance is very strategic and is typically linked to leveraging the project as much as possible (contributing as little equity as possible) and mitigating risk. This allows a developer to take on more projects, thus spreading the risk among different projects. Developers also mitigate risk by purchasing course of construction and general liability insurance. The total insurance cost is included with all of the other soft costs associated with the project.
Based on the developer’s best judgement of the marketplace and tolerance for risk, the pro forma is refined to include all land purchase costs, revenues, hard and soft costs, projected profits, and contingencies. In addition, the required returns and equity amounts should also be confirmed.
An application for a mortgage accompanied by the project pro forma is then provided to the lender. Once a mortgage has been granted preliminary approval, unit pre-sales can commence in accordance with the lender’s minimum number of pre-sales requirement.
Once the minimum number of pre-sales has been achieved and the mortgage granted final approval, construction of the project can proceed. This assumes, however, that local government and other development requirements have been finalized and approved.
Local and other levels of government have a significant impact on whether projects can proceed in a cost-viable manner or at all. Therefore, purchasing land not zoned for a developer’s proposed use poses a significant risk and should only be pursued on a conditional basis in order to minimize the risk of the land not receiving the required zoning.
Land situated in the Agricultural Land Reserve poses a significant risk for development of anything other than agricultural purposes and should be avoided. Other risks associated with land purchases are environmental issues, soil conditions, archeological findings, heritage requirements, servicing upgrades, off-site servicing requirements, the length of time required to secure the required approvals, and neighbourhood opposition to the newly proposed land use.
A change of municipal council during the project’s approval process, particularly prior to the public hearing, can also pose a significant risk. Except for the City of Vancouver, which is governed by the Vancouver Charter, all other municipalities in BC are governed by the Local Government Act and Community Charter.
In addition, most municipalities have enacted a number of bylaws that directly affect a developer’s ability to carry out their business. Refining the development plan must consider all of the city’s requirements prior to finalizing the plan. It is not prudent to proceed on a certain assumption only to find out later in the process, for example, that the city requires you to purchase a portion of the neighbour’s property in order for you to comply with the city’s minimum lot size requirement for your development.
The list of these requirements goes on and on and can vary widely from one municipality to another. It is therefore extremely important that if the developer does not have a good working knowledge of a certain city’s specific requirements that they recruit the required expertise to their team.
There was a project I was involved in that resulted in a developer overpaying for land because they underestimated the bonus density payment due to the city prior to the issuance of a building permit. If they had correctly estimated the bonus density amount payable, they could have avoided overpaying for the land. Establishing a good working relationship with city staff goes a long way in being able to stickhandle the wide variety of city requirements and—just as important—the time, money, effort, and expertise required in fulfilling them.
During the course of any development project, there are many external factors that influence the project’s failure or success. Outcomes for the project can vary substantially from the finalized financial feasibility assessment, development plan, and insurance strategy.
The developer’s finalized feasibility assessment indicated the level of profit required by the developer commensurate with their accepted level of risk. If the revenues and costs match the pro forma in the execution of the project, the developer will make their expected return on investment.
When factors beyond the developer’s control influence actual revenues and costs to differ from the pro forma, resulting profits may be less, more, or balance out to the same as expected.
A typical experience during the past five years in the greater Vancouver condo market has been for revenues and costs to be higher than expected, but profits to remain as expected. For example, some markets and specific condo units were able to achieve significantly higher price points than estimated while others achieved only moderately higher price points; it is the increased revenues versus the increased costs that have dictated whether profits have remained the same as expected.
To put some numbers to it, if revenues increased by $1 million because of an unanticipated strong market, and costs increased by $1.2 million, all other things being equal, the profits will be lower than estimated by $200,000.
On the other hand, if revenues increased by $1 million and costs increased by $800,000, then the profits will be higher than estimated by $200,000, all other things being equal. It is therefore very important for developers to keep on top of their projects at every turn to ensure there is time to mitigate the risk of things going wrong.
The Role of the Experience
There is no replacement for the experience required by a developer in making money in both strong and weak markets. Novice developers who have made money by having started in strong markets will be tested in weaker markets. If they are able to make money in weak markets, they have most likely gained the experience and skillset required to succeed in the long run.
Due to strong markets masking mistakes made by novice developers, some of those developers continue to unknowingly make the same mistakes in weak markets, which eventually leads to project failures. In strong markets, it seems like everyone thinks they can be a developer.
The true test comes when the market turns. Has the novice or onetime developer been caught in a market downturn and, if so, will they survive? Although no one has a crystal ball, experienced developers are able to make money in both strong and weak markets due to their ability to adapt quickly to factors beyond their control.
They are better equipped to anticipate market changes and adapt accordingly. If, by chance, they do get caught in a severe market downturn, they will be better prepared to weather the storm versus developers with little experience.
Consultation, Development Approvals and Construction Costs
By: Jeffrey Simpson, RI
The real estate development business is a very dynamic field that relies upon the timely coordination of many disciplines, all toward the end goal of delivering the project on time and on budget.
To many within the industry, it is all about risk mitigation. It is relatively easy to plan and budget for known risks; it takes experience and related forethought to protect projects from the downside risk of unforeseen events, which invariably happen. The following three areas of the development process, done well, will minimize risk and enhance the likelihood of a successful outcome.
Consulting and Engaging the Community
Whether the property owner initiates a community consultation process or the authority of jurisdiction mandates that such a program be sponsored, it is the right thing to do on so many levels:
- it ought to be considered a civic duty due to the interface between the public realm and private property
- it will undoubtedly inspire refinements to the design of the project
- without question, it will aid the goal of “defusing” applications that are potentially contentious
- it will broaden social acceptance of the end product
For these reasons at a minimum, community engagement is good business.
Municipalities as well as consultants who specialize in facilitating collaborative processes recommend that an informal venue such as an open house be organized to take place at a convenient time and place (with due consideration to the target audience) and that notice be provided well in advance. It is strategically beneficial to showcase nothing but highly conceptual drawings.
It would be disingenuous of a developer to represent that they are openly soliciting feedback from the general public but then unveil presentation materials that have a lot of hard edges and definitive character.
Rather, use “bubble drawings” to introduce thematic design concepts and profile the interface with surrounding properties to suggest how elements of the project are compatible with and complement the neighbourhood context.
Introduce general ideas with respect to the massing of the project and the associated sensitivities of how and where densities ought to be dispersed across the site.
Touch on linkages such as public transportation and introduce early-stage ideas of site ingress, egress, and how off-street parking will be addressed (as most will have preconceived expectations around surface parking, structured parking, or a combination of both).
As crude as it may be, making sticky notes available for guests to write comments and post them on the appropriate board is a simple yet effective means of capturing feedback that can be subsequently evaluated. At a minimum, it is highly beneficial to conduct a second open house, once design development drawings are sufficiently advanced. In a perfect world, participants who introduced suggestions at the first open house will see their feedback reflected in the second iteration of drawings.
Open houses will bring to light issues that special interest groups regard as contentious. It is valuable to gain an understanding of contrary viewpoints early and in a controlled environment.
Even if the project team and public sentiment are at an impasse, the rezoning case as well as delegations made by the applicant at the public hearing can speak very directly to how such issues are intended to be mitigated.
Tips for Better Consultation
- Avoid polished, slick presentations as they convey the wrong message.
- Be as inclusive and consultative as possible.
- Be intentional about how you communicate in public; offer a direct response to direct questions and resist the temptation to expand your explanation as you could open up unintended issues.
Securing Development Approvals
The market value of land is very dependent upon what the land can be used for. Enabling legislation, commonly referred to as zoning and servicing entitlements, prescribe permitted land uses in detail across an extensive range of zoning classifications.
Bylaws also control the form and character of all improvements. Planning criteria, such as land use, density, lot coverage, the height of structures, setbacks (front, rear, and side), off-street parking, and a plethora of other zoning stipulations will need to be carefully reviewed by each member of the project team.
There are material costs associated with qualifying for and securing such entitlements, including, yet by no means limited to: public open space requirements, community amenity contributions (CACs), development cost charges (DCCs), and a number of fees intended to defray processing costs.
If a development site is zoned for uses incompatible with the intentions of the owner, or the proposed density of the project exceeds the stipulated floor area ratio (FAR), then filing an application to rezone is the administrative protocol.
Depending on the nature of the rezoning case and the authority of jurisdiction, these applications can take anywhere from six months to a number of years before fourth and final adoption of the bylaw is enacted. There are many steps that can and should be taken to streamline the process, not least of which is verifying whether the proposed rezoning is compatible with overarching legislation, such as the local government’s official community plan.
Securing these entitlements can add tremendous value, yet the journey will require fortitude, technical acumen, and staying power. Conducting a pre-application meeting with the local government’s planning department, to then properly satisfy all of the submittal requirements, while respecting due process, will go a long way toward establishing a healthy rapport with the various stakeholders and special interest groups.
Fundamentally, it is very important to take the time to build a solid plan of development as the merits of the proposal will be subjected to political, administrative, and public scrutiny. It is quite common to encounter a circumstance where a scheme-specific plan of development falls short of satisfying one or more technical specifications of the governing bylaw. There may even be situations where a property owner has hardship conditions that render it extremely difficult to be compliant. Securing a relaxation to these highly technical conditions is achieved by filing and processing a development permit variance application. The application needs to contrast and compare the bylaw requirements to what is proposed, outline compelling justification, substantiate that there are no health and safety risks, and that the a variance, if approved, has no detrimental impact on adjacent properties.
To be clear, a variance application cannot be used to vary density or permitted uses. Rather, as touched on above, density and permitted land uses can only be changed by processing a rezoning application.
Prior to acquiring a development site, it is prudent to verify whether the property is located within a development permit area. If so and notwithstanding that a site may already be hard-zoned for the intended purpose, the owner will have to advance the project design process to the point of being able to satisfy permit requirements around building form and character.
Timelines are hard to generalize as the case load of the jurisdiction is relevant as is the quality of the submittal and the time of year. That said, the “normal” processing time is one to six months.
Subdividing vacant land or qualifying to register a strata plan that has gained the support of an approving officer will require engaging the services of a BC land surveyor. There is legislation (such as the Strata Property Act) specifying how access, subdivision standards, public safety criteria, and a variety of other technical requirements must be taken into account.
Tips for Securing Development Approvals
- Research the process and understand the progression of key milestone approvals.
- Adopt best practices with respect to the delivery of required materials; the applicant will gain credibility with authorities of jurisdiction when a robust, technically sound application is filed, and this approach will likely shorten the approval period.
- Work collaboratively with jurisdictional staff.
Refining Construction Costs
Reviewing and refining cost projections throughout the entire design phase of the project, or at least at periodic intervals, will keep cost control rhythm underway.
This discipline should be sustained until a full set of contract documents (plans and specifications) are rendered 100% complete. Developers have many skill sets, but a notable one is the unique ability to “stress-test” the financial viability of a project well before any commitments are made. The budgeting process may very well start with nothing more than a “back of the envelope” estimate that assigns a per square-foot cost to the building, adds a very broad and admittedly crude estimate for soft costs of 25%–30%, and uses this to determine how much can be allocated to purchase a site by performing a land residual.
Essentially, the process takes into account the financial metrics the developer needs to achieve (on a risk-adjusted basis) and then mathematically solves for the unknown variable, namely, the land value the project is capable of supporting. That unit price estimate is then updated as and when a set of outline specifications for the project are generated.
At this stage, a lender-approved quantity surveyor is engaged to prepare a pre-construction budget, which conservatively assigns a value against each component of the project. As and when more architectural and engineering detail is added, the costing process advances from an elemental budget to one based on take-off calculations.
The estimating process is critically important as building area calculations are relied upon to determine material quantities, which labour costs are then assigned to, with general expenses and fees added to account for the cost of mobilizing and sustaining the construction program to completion. Against this sub-total, a general contractor then applies a profit margin on costs to arrive at the total construction budget.
Over the course of the last three to four years, construction costs in BC have risen dramatically. This phenomenon has made it very difficult to make accurate, forward-looking cost projections. Lenders are conservative by nature and protect the downside risk by structuring thresholds or lending criteria designed to preserve loan-to-cost ratios. For instance, the term sheet or commitment letter may stipulate that no less than 80% of approved hard costs have to be rolled in to a lumpsum, fixed-price contract, awarded to a qualified general contractor.
Therein lies one of the most significant challenges of the real estate development business—arriving at a solid set of contract documents that:
- align with market conditions
- satisfy permitting requirements (exacerbated by the introduction of new building codes)
- are fully coordinated between all disciplines (architectural, mechanical, electrical, structural, civil, and landscape)
- conform to the pre-construction estimate of the quantity surveyor • prove to be reliable when the scope of work is competitively tendered
It has become increasingly common to experience a rather nerve-wracking issue: once general contractors have qualified their bid price to undertake the specified scope of work within the scheduling parameters of the developer, the cost often exceeds the developer/lender approved budget.
This circumstance triggers the need to embark on “value-engineering” initiatives. Essentially, the goal is to gain the same or better functionality of each building component yet at a lower capital cost. While this process is by no means easy, more cost-effective materials that have the same look, feel, maintenance characteristics, and longevity are substituted to bring costs down. Successfully executing this imperative requires focused dedication and contributions from every member of the project team.
Tips for Refining Construction Costs
- Establish the discipline of specifying alternates for components of the project most likely to be costly and request that bidders price out alternates when their bid price is tendered.
- When executing a value-engineering program, make sure to track the substitutionary process all the way through so as to avoid the risk of false economies.
- Look for ways and means to streamline the project schedule: track interdependent deliverables carefully, manage critical path items with the respect that is due, and stay on top of long delivery items (such as elevator cabs).
Construction Procurement and Management
By: Nathan Worbets, RI
After working through the design and entitlement process for a project it is time to get to work and actually build the building.
This is an exciting time and depending on the nature of the job, the delivery requirements, and the stage of design, a method of procuring a contractor is required—following which construction can begin.
Many contract variations are available in the market today and a host of factors play into choosing the correct format for your project. Prior to the actual contract, though, the work will need to be tendered.
Once working drawings are completed, a tender set of drawings and specifications is prepared, which will be issued to a selection of capable contractors to bid on. Once the job is awarded to a contractor, a contract will be executed and, subject to permits being in place, construction can commence. Let’s go through these steps in more detail.
Choosing The Type of Contract
While working through the preliminary stages of design, consideration should be given to the most suitable type of contract based on the project timelines, ownership requirements, and risk profile.
The decision really boils down to the transfer of risk and accountability for project costs and schedule. Many owners may want to work with a construction contractor through the design process. Such an integrated approach can lead to efficiencies during the construction phase: opportunities for value engineering and cost savings can be identified as the design is consummated.
Some owner requirements may dictate an expedited construction start to meet delivery targets for potential users and as such need to look at tendering only partially completed design drawings, such as excavation and building foundations, to facilitate the start of construction as soon as possible, with the remaining scopes to be tendered as the design is completed. These scenarios will likely involve a construction management or a “cost plus” type of contract.
These contracts entail more risk for the owner as the owner is generally subject to any price variations or changes in the final design, but they can be delivered at a lower fee from the construction manager due to the transfer of risk.
Alternatively, an owner may wish to transfer all the risk to a design-build contractor, where the builder is accountable for the entire project design and construction process based on a predetermined scope of work and budget. This entails a design-build contract.
Or, another scenario has the owner’s design team completing a set of comprehensive design drawings and tendering the project under a stipulated price contract, where the contractor agrees to complete the work for a fixed price. Within each of these options there are variations, as well as the possibility of agreeing to convert a contract from one type to another part way through the process.
Generally, the circumstances surrounding the particular project will guide you towards a certain contract format, and the requirements of the end user or tenant as well as the owner’s relationships with various contractors will dictate the decision.
The actual contract will generally be based on a standard Canadian Construction Documents Committee (CCDC) contract. These documents are updated over time but have been developed and accepted as a standard contracting framework. Depending on the nature of the project and level of sophistication and requirements, the owner may include a set of supplementary conditions to the contract to reflect their specific requirements on a project and tailor the contract to suit their needs.
Working closely with a lawyer familiar with construction law will facilitate this process and ensure you have an appropriate contractual framework in place for the project in question.
Tendering The Project
With drawings now ready for tender, it is time to determine which contractors will be invited to bid on the job. The nature of the project and its location, timing, and scope all impact the potential candidates available to bid on a project. In addition, the reputation and experience of the various contractors will be important in determining who to invite.
With the above in mind, a list of contractors should be compiled who have the ability to complete the project and capacity to do so at the time anticipated. Depending on the complexity of the project, a tender period could be as short as several weeks or potentially as long as a few months.
In addition, in the current construction climate—with a severe lack of trades and everyone working at capacity—it is important to include a sufficient number of bidders so that you have adequate coverage to evaluate your options, but also not too many that bidders may be discouraged from competing with too many others.
Selecting The Contractor
Once tendering is complete it is time to evaluate the bids received and award the contract. A tender review meeting will be held with each bidder to review their tender and ensure the correct scope has been priced.
This meeting is also an opportunity to understand the sub-trades that the contractors intend to work with and potentially review any possible changes or gaps in scope that may require further attention. It is important to become familiar with the team proposed to execute the project on behalf of the contractor—from the project manager to the site superintendent—and their past experience.
Finally, once satisfied with the evaluation, the contractor of choice will be awarded the contract. This will not necessarily be the lowest bidder, but who the owner feels can complete the project as intended, on budget and on schedule.
Hiring a Project Manager
Beyond the contractor, based on the level of expertise of the owner, consideration may be given to hiring a project manager or others to assist in overseeing the tender analysis and construction phase of the project.
The project manager will work hand in hand with a construction manager or will help the owner oversee a general contractor and manage the contract administration and changes. Throughout the course of construction there will be regular project meetings to review progress, confirm project scope, and negotiate any potential changes.
The owner and project manager will coordinate the consultant team and ensure they are responding to various requests from the contractor.
Construction management includes the review and oversight of many moving parts: requests for information (RFIs), shop drawings, submittals for equipment and components of the building, change orders where something has been added or subtracted from the scope, and project schedule and overall budget.
Depending on the project, many factors may contribute to changes in the project scope and schedule, including unforeseen site conditions, municipal requirements, potential gaps in the design requiring additional coordination, impacts from weather events, and others. Careful consideration and review by the entire project team will be important to substantiate and negotiate the scope or schedule changes.
Throughout the project there will be monthly progress draws from the contractor that will be scrutinized by the project team and approved for payment. A holdback will be deducted from each project draw and once the project achieves substantial completion this amount will be paid out in accordance with the lien legislation applicable for the place of work.
As the project approaches completion, there will be coordination of various close-out documents and schedules to facilitate final inspections and eventual occupancy of the building.
The municipality will ultimately approve the final occupancy permit, at which point the shell building is ready for the use it was intended and the final user can start to move in or commence their tenant improvement work. To this end, in the case of industrial or commercial buildings, beyond the construction of the building shell, the tenant or in some cases the owner will then be required to complete the tenant improvement work.
Such work takes the project from its shell condition to that which includes all the finishes, furniture, and equipment, to facilitate the ultimate operation of the building. This stage of the work can be considered another construction project in itself and is generally managed through the same process or, in some cases, it is managed concurrently with the base building.
The intent is that with a good set of drawings and a strong project team, construction will progress through to completion, on schedule and on budget, and all parties will be proud of their achievements in delivering a new home or a new workplace for many people to enjoy for generations to come.
Real Estate Financing
By: Andrew Tong, RI
At Concert, we view our lenders as financial partners. Partnerships, like many things in life, can be wonderful if managed well. Poorly managed partnerships, however, can be a serious risk to the health of an organization.
Over the past decade the market has had, and continues to have, excellent liquidity and relatively low interest rates. However, the market for mortgage debt, like the broader real estate market, is cyclical in nature. Through both good markets and bad, having a thoughtful and clear financing strategy will be critical to your success.
The Basic Elements of Financing
Types of Mortgages
There are several different types of mortgages in Canada, including:
- construction mortgage (which includes development/land servicing)
- term mortgage (also known as a take out mortgage)
- joint construction and term mortgage
- land acquisition mortgage
The security of a mortgage can have different priorities on title. With a first mortgage, the lender is the highest priority on title and gets their money back first in the event of a default.
With second and third mortgages, the lender is not first in line to get their money back on a defaulting mortgage, so lenders will charge a higher interest rate for this greater amount of risk. Often these mortgages help to bridge the gap between a first mortgage and the equity required from an owner or developer.
- principal: how much is owed, not including interest expense
- term: number of years for which the mortgage agreement is valid
- amortization: number of years in which to repay the principal
- base rate: Government of Canada (GOC) bond yield, prime rate, or banker’s acceptance (BA) rate
- GOC bond yield: return achieved on a Government of Canada bond
- prime rate: interest rate that major banks use to set interest rates for lines of credit and variable-rate mortgages (e.g., construction loans)
- BA rate: return on a negotiable financial instrument used to raise short-term funds in the money market
- spread: additional interest rate, measured in basis points, which a lender adds on to the base rate • mortgage interest rate: base rate plus spread
- loan-to-value (LTV): loan amount divided by appraised market value
- loan-to-cost (LTC): loan amount divided by cost to build or cost to acquire the property
- debt coverage ratio (DCR): ratio used to assess the borrower’s ability to meet their debt payments based on net operating income 40 INPUT
Types of Properties
The different property types that can be financed commercially include:
- residential (condominium, multi-family rental, seniors)
- office, industrial, and retail
- institutional and hotel
- mobile home parks and agricultural lands
Each property type has its own set of risks and rewards and lenders will offer different mortgage terms and lender protections given the different risks associated with each property type.
There are also types of property ownership that affect loans: freehold and leasehold.
Most loans assume freehold ownership; however, a loan based on leasehold ownership affects a lender’s security and potentially diminishing property value.
Questions to consider:
- What is the remaining term of the leasehold interest (10 versus 99 years)?
- Is it a prepaid lease or are there annual lease payments that escalate over time?
- Are those annual lease payments reset over time at a defined calculable rate or is it at a market rate that can be debated?
- Is the landowner a government agency, First Nation, or a private entity?
- Is the landowner’s process predictable and accountable?
Types of Lenders
Just as real estate buyers are diverse in Canada, there is extensive diversity and variety among lenders.
Some of the key lenders in the marketplace include:
- pension funds
- insurance companies
- chartered banks and credit unions
- institutional and private syndicates
- private equity firms
Lenders have limited capital to deploy during a given period, but they need to maintain their portfolio diversification and a return threshold.
The diversification relates to such factors as type of properties, city location, age of buildings, and remaining length of the mortgage term.
These portfolio factors, which vary between lenders, are ever-changing as they are influenced by market shifts and the state of the economy. Each lender will have different risk tolerances, which will limit what type of building or project they will be willing to lend on.
Setting it Up
Some of the most critical work that is required when setting up your financing strategy is to ask some hard questions within your organization. These questions will help form your financing strategy and ultimately determine the risks you are willing to take. What is your corporate objective?
Different developers and investors have different objectives, which will influence the financing approach. Some want to maximize the LTV and stretch their equity as far as possible even though it bears substantial financial cost. Others want to be more conservative and put more equity to work while maximizing the amount of profit.
There are benefits and drawbacks to the different approaches.
- Have you and your investors agreed on the level of risk to take for the potential reward?
- How much equity do you have now?
- What is your project-specific objective?
- Is the project significant to the financial outcome of the overall enterprise?
- What are your return metrics? How attractive is the asset to potential lenders?
- How can debt be used to execute your objective, such as enhance your return, reduce the equity required, or free up equity to reinvest in another project?
- Does the project not work financially given certain interest rates?
- How much financial flexibility and strength do you and your investors have if the project is delayed, the market goes sour, or if interest rates change during construction?
To obtain a better interest rate (or in some cases to even secure the financing at all), are you prepared to put your balance sheet on the line and make the financing a recourse loan to the parent company rather than only to the property? Are you prepared to have someone be an indemnifier/guarantor? Once you are clear on your own objectives and what you’re trying to accomplish, it’s time to put together your financing package and go to market.
Some of the most critical work that is required when setting up your financing strategy is to ask some hard questions within your organization. These questions will help form your financing strategy and ultimately determine the risks you are willing to take. – Andrew Tong
You are only good as your team. Make sure you pick a highly experienced consulting team when you finance.
A solid team would include:
- finance lawyer
- environmental consultant (soil, vapor, water, habitat)
- building condition consultants (structural, architectural, mechanical, electrical, plumbing, etc.)
- geotechnical consultant
- title insurer and deposit insurer
- mortgage broker and insurance broker
Make sure that you choose consultants who are approved by the various lenders from which you are seeking financing. If not, the lender will likely not accept their report or advice on your project.
Borrowers who do not have the in-house expertise and lender relationships, or perhaps do not have the capacity to manage the team and process, should consider using a mortgage broker who can help them navigate through the complexity and array of mortgage financing.
Canada Mortgage and Housing Corporation (CMHC)
CMHC offers insurance to encourage the development and retention of multi-family market rental projects in Canada. Although there is a premium charge for this type of insurance, lenders will bid a lower spread for the CMHC-insured mortgage as the mortgage is backed by a federal Crown corporation.
In addition, CMHC has now taken a greater role—from being an insurer to being a lender—in encouraging the development of affordable housing.
To create your package, you will need to include, at minimum, the following information:
Project and deal
- project highlights
- preferred deal terms
- project details, timeline, zoning and entitlements, and market analysis
- executive leadership team, bios, and organization chart
- track record, experience, and past projects as a developer
- financial strength
- key references Schedules:
- project development plans and renderings
- pro forma with scenario analysis
- current and past audited financial statements
- environmental, building condition, and geotechnical reports
- appraisal, survey, and title
- fixed price construction contract
Once you have the financing package assembled, it is time for you to go to market. Either directly, or through a mortgage broker, you can now connect with the various lenders who fit the risk profile of your given project.
Each lender will have their own underwriting team who will evaluate your proposal and have a series of questions. Once the lender is satisfied with the project details and deliverables, you will receive their proposal.
Some critical aspects of the loan will include:
- loan amount and interest rate or spread
- term and amortization period
- type of security: recourse or cross collateralization
- application and commitment fees
- representations and warranties
- due diligence and title review requirements
- pre-sale and estoppel requirements
- ongoing DCR/LTV covenants and pre-payment provisions
These loan terms are important, and they usually work together. For example, fewer pre-sale requirements and less security would likely result in a higher interest rate or lower loan amount.
Does this lender have the same core values and business culture that you have?
Core values and business culture impact strategic direction and influence management, decisions, and key business lines within an organization. If the core values and culture aren’t aligned between you and your financial partners, no matter how attractive the specific terms of the financing proposal are, it will be difficult to achieve a longstanding and prosperous relationship.
Once you choose the proposal and lender, a commitment letter will be prepared. To ensure smooth execution on the financing, a prudent borrower will only agree to provisions in the commitment letter they are certain they can execute prior to the proposed funding date of the loan.
The lender will then complete its due diligence and will have its lawyers prepare the closing documents with your lawyers. Sometimes there are new, last-minute due diligence or leasing items that surface or additional lender requirements that arise unexpectedly. You should anticipate the needs of your lender and proactively solve their issues of concern, as this approach will expedite the process and build trust.
3 Fostering Solid Relationships with Lenders
Our experience has taught us that lenders value honesty and transparency; they value a borrower whose word is their bond. Lenders also value borrowers that execute their projects well.
These attributes lead to a relationship of trust, strong execution, consistency, and reliability with your lender. While it is important to have loyalty among partners, prudent borrowers must be sure to diversify their base of lenders and financial partners. In a cyclical business such as real estate, when the ups turn to downs, the relationship built and nurtured during the good times will pay off in the tough times.
For borrowers, lenders must not exceed the credit connection limit, which is the total amount of funds a lender is permitted to loan to that borrower. Likewise, prudent borrowers will ensure they are not beholden to any one lender.
The use of debt financing is an important tool in the toolbox for real estate investors. Each owner or borrower will have their own unique objectives when setting up the mortgage financing.
Each lender will have their own unique risk return profile and portfolio considerations. In this dynamic marketplace, there are hard-working, sophisticated, and diverse players on both sides of the transaction.
Starting early, and following a disciplined and thorough process, will help achieve a mutually beneficial financing transaction. At the end of the day, real estate investment (including debt financing) is a people business. Just like in any relationship, if your lender trusts that you will keep your promises and be a good steward of their interest (their money and their reputation), then the sky is the limit to what you and your lender can accomplish together!
Marketing Sales and Project
By: Greg Zayadi
The sales and marketing role in the development process is an important contributor to a project’s viability and success. For everything that leads to the sales and marketing stage—from site purchase, to assembly of consultant teams, through to project and municipal planning processes—the completion of any for-sale project (residential or otherwise) requires a successful strategic marketing and sales program.
For more than forty years, rennie has been Metro Vancouver’s industry leader in real estate sales and marketing, partnering with the region’s top developers and consultants to contribute to the success of their development programs.
The Function of Sales and Marketing Teams
At a high level, sales and marketing teams leverage strategic insights gained from past experience, empirical data, and market comparables to inform key decisions throughout the development process.
The goal is to ensure that all decisions—from those pertaining to unit design and appliance brands to target buyers and price points—are calculated to limit risk and optimize return based on market conditions, key economic and demographic trends, and the needs and wants of the homebuyer.
More specifically, sales and marketing teams look forward to aid in the design of the right product for projected launch-time market conditions and buyer demand, and they provide expert consultation on buyer demographics, market movement, and the competition to achieve the optimal building design, suite mix, and price point.
The marketing team facilitates the creation of a project brand, including a project name, logo, printed material, advertising, presentation centre, and website. The look and feel of the brand, along with the strategic messaging, is designed to create strong emotional and logical connection with the consumer.
The marketing campaign generates a qualified database through integrated print and digital ad campaigns, planned events, and other marketing initiatives. Sales Working with the developer, the sales team establishes a sales target in order to meet either financing requirements that will trigger construction to start or other goals agreed to in the planning stage.
As a means to achieve these sales targets, a comprehensive pre-sale strategy is developed to generate interest and identify specific potential buyers prior to opening the doors of the presentation centre.
Typically, once the potential demand target is achieved and would-be buyers are qualified, the sales team opens the presentation centre where the development’s details—including renderings, models, and display homes—are made public. Indeed, one of the primary goals of the presentation centre is to amplify the buyer experience and to describe the offering in an engaging and accurate manner.
The marketing team then works to generate consistent traffic to the presentation centre while the sales team focuses on engaging and converting buyers, ensuring they are informed and comfortable throughout the entirety of their home purchase journey.
Initial Strategies and Challenges
Each project has its own sales strategy, but the goal is always the same: efficiently match the right homes to the right buyers. Depending on the project, however, various opportunities and challenges present themselves. For example, projects situated in established transit nodes or along frequent transit corridors tend to generate a lot of initial demand relative to their less transit-oriented counterparts.
In these cases (Surrey’s City Centre, for example), the primary challenge for the sales and marketing teams is to manage the inventory of the homes available for purchase in order to ensure that buyers get the home they want while revenue is also being maximized.
Conversely, projects in newer, less established neighbourhoods tend to require a longer period of engagement with would-be buyers to allow them to achieve a level of comfort with the notion of being pioneers in an up-and-coming neighbourhood (think about the idea of Southeast False Creek’s Olympic Village—before it was the thriving village it is today).
The job of sales and marketing teams is not complete until the last home in a particular development is sold. Once the initial pre-sale targets are achieved, the sales strategy transitions into what is referred to as “tempo” stage. The goal of a tempo campaign is to optimally evaluate conditions to ensure that each home sells at fair market value.
Strategies will also shift to target specific buyers depending on remaining inventory. The tempo campaign continues even once the initial presentation centre is closed and, furthermore, once the building is complete. It is common to see an integrated presentation centre in finished product, when there are still homes to be sold.
Relationships are everything
In order for a pre-sale development to be a success, sales and marketing teams must maintain strong relationships within the industry and, more specifically, within the realtor community.
Realtors play an integral role in each project’s success, serving as conduits between homebuyers and the developer. In order to effectively engage with realtors, a commission structure is established early in the sales process, with commissions ranging between 1.5% and 3% of the final purchase price.
In some cases, additional realtor bonuses are employed to further incentivise transactions. When purchasing a home on a pre-sale basis, a buyer is contractually required to pay between 15% and 25% of the final sale price of the home prior to construction of the project completing.
Most often, 10% will be required by the developer at the time of contract signing, with the remaining 5% to 15% being required between 180 and 365 days after that date.
The job of sales and marketing teams is not complete until the last home in a particular development is sold. Once the initial pre-sale targets are achieved, the sales strategy transitions into what is referred to as “tempo” stage. The goal of a tempo campaign is to optimally evaluate conditions to ensure that each home sells at fair market value. —Greg Zayadi
Project Wrap Up
From the point of contract signing through to the completion of the project—and everything in between—sales and marketing teams provide conveyance services to administer the sales contract, disclosure statements, amendments, deposit collection, and lawyer coordination between the buyers, realtors, and developer.
The collective job of sales and marketing teams is done only after homeowners receive their keys to their new homes. Buying pre-sale can be a stressful undertaking for buyers, but it’s also an exciting one.
The sales, marketing, and conveyance teams at rennie work diligently to help alleviate the stressful elements through their transparent sharing of information, offering of advice, and professional administration of the entire pre-sale process.
If you haven’t yet purchased a home on a pre-sale basis, or if you’re just interested to find out more about some of the projects we’re currently selling, check out the New
Developments section at www.rennie.com or, better yet, come visit us at one of our presentation centres.