By Tracy Hanes

Is lending to the residential construction industry getting tougher? That depends on who you ask — and what type of project you plan on building. Let’s start with the basics. Residential construction projects are typically assessed as small ($1-10 million), medium ($10-50 million) or large ($50 million and over). Major institutional sources of debt capital include the chartered banks, along with some of the larger credit unions and independent trust companies.

These institutions are typically the first-position lenders on high-rise and low-rise projects, although they tend to shy away from raw land financing. Get the required deposits on the prerequisite percentage of presales, and all things being equal, you have a decent shot at obtaining first-line financing at 65 to 75 percent of loan-to-cost.

That still leaves 25 to 35 percent on the table for borrower equity and secondary lenders, not to mention 100 percent of raw land loans. That’s where private mortgage lenders come in; at present, there are approximately 10 major firms operating in Ontario.

“Essentially, we’re willing to accept more risk, and in so doing, fill the void created by the banks,” said Scott Cameron, president, Cameron Stephens Mortgage Capital Ltd. and head of OHBA’s Economic Review Committee. “Private lenders can provide a number of alternative financing options.” (See sidebar)

What about lending criteria, and how has it changed in the past few years? “From our perspective, the low-rise lending market has not changed significantly; we’re still looking for a large percentage of presales with deposits between 5 and 10 percent,” said Brad Lambert, regional vice president, commercial and real estate markets, Royal Bank, Toronto. “The high-rise market, however, has experienced more tightly controlled lending criteria. The market has seen a lot of growth, the construction period is significantly longer than low-rise, the projects are getting larger and there are multiple projects in the pipeline.”

One way to control speculative risk is the requirement of larger purchaser deposits. “Five years ago, a 10 percent deposit was standard,” said Lambert. “We’re now requesting 15 to 20 percent. It’s important to note that developers have also been asking for this as a way to minimize their own risk.”

High-rise or low-rise, first line or secondary, both Cameron and Lambert agree on one thing: “The primary consideration for obtaining financing is the expertise of the developer, followed by the quality of the project, the location and the strength of the sponsorship,” said Cameron. “A strong track record can mitigate a myriad of concerns.”

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