Construction Financing


Accumulation: Arash Fazelipour

Photo: Amir Farifteh

Construction Financing

It looks easy, painless, and the income is fantastic; at least that is what some think when they talk about builders. However, that could not be further from the truth. A construction project, no matter the size, requires a great deal of investment, planning, coordination, and a substantial amount of patience.


Furthermore, financing a construction project is no small feat. From financing the acquisition, securing funds for the construction, meeting the lender’s advance schedule, dealing with the paperwork, appraisers, and everything in between, adds another layer of stress that can take away from the builder’s need to focus on the project itself and the management of the trades people.


The job of a mortgage broker is not only to simplify the financing aspect of this lengthy and complicated process, but it’s also to understand the overall process, limitations, and cash-flow requirements and to try to take away some of the weight off of the shoulders of the builder.


The value proposition of a mortgage broker is to fully understand your past and present portfolio and future development plans and strategize a financing roadmap to secure funds for all of those plans on the best terms suited to you.


The best way to do so would be to understand and review your entire portfolio prior to making a move to acquire land so that a strategic financing structure can be set up from the onset.


In your initial consultation with any new mortgage broker, you should expect to discuss some of the following:


  • In depth discussion of your current business model.
  • Discuss past and present projects – your portfolio.
  • Review your income structure by looking over your business bank statements for the past 12 months.
  • Review your sales in the past 12-24 months by way of the Statement of Account from your solicitor for sold projects.
  • Glance over a list of lenders that you have worked with in the past.
  • Discuss your needs, challenges, and requirements to elevate your business.


To untrained eyes, some of the items above may seem irrelevant, redundant, or unnecessary.  However, for a mortgage broker to be able to do their job properly, all the items above are useful tools in structuring a road map for not just your current or next project, but also future projects.


Construction mortgage lenders, institutional or private, come in all shapes and sizes. Each has their own structure, advantages, and disadvantages.


When it comes to institutional lenders, your gross business deposits can be used to qualify you for an acquisition and construction financing, both from the same lender.


The advantage is obviously the cost: lower rates and fees. Rather than looking only at your declared income on your Notice of Assessment (NOA), some lenders will consider your gross deposits into your business bank account and also net gains on your most recently sold project(s).


Depending on the timeline of the project, you may secure a residential mortgage for the acquisition (which carries a much lower rate of interest) and once the permit is obtained and you are ready to construct, a 2nd construction mortgage can be secured. In such cases, if the subject land has a livable house on it, you could borrow up to 80% of the appraised value or purchase price, whichever is less, for the acquisition and upwards of 65% of the end value for the construction mortgage (depending on the size of the project and your cash-flow).


Some of the disadvantages of institutional financing are: provable cash-flow, source of down payment, pre-set draw schedules, and interest reserve requirements.


When it comes to private construction financing, there is definitely more flexibility on income and draw structures. However, rates, fees, stage in which you can access your 1st draw, and interest reserve can be challenging factors with some private lenders as well.


That is why having a very open dialogue and candid conversation with your mortgage broker can be a game changer for your business and your bottom line.


Lastly, when choosing a mortgage broker, make sure that they have the track record and the understanding of this niche business, and the fortitude to see a project through from start to finish. Another huge requirement for any broker is their responsiveness. Google their name (company name) and read their reviews to see what others are saying about their experience. You can always get a sense of what you can expect from them.