A construction loan is an ideal financing solution if you’re building a home or other real estate project, as it helps you cover the costs (after equity) of building from start to finish – including the cost of the land, labour, building materials and permits. Because it’s a short-term loan, and considered a higher risk compared to a traditional mortgage, your lender will need to know your plan for repaying it. In fact, before you’re approved for funding, you’ll need to have a viable exit strategy in place.
Give your lender confidence
Lenders provide financing when they feel confident that they will be repaid. When it comes to a construction loan, you’ll need to submit your construction timeline, detailed plans, realistic budget, and sales list/lease rates, so your lender can analyze the project viability and associated repayment strategy.
Consider your exit strategy at the beginning
Your construction loan exit strategy is a fundamental part of your project – and not something you can leave to the end of the process. For instance, say you have built a $20 million townhouse project and received $15 million in construction financing. Once the project is complete, you must repay that $15 million by either:
- If the project is for sale townhomes, you’ll need to sell the individual townhomes at or above pre-determined value
- Refinance the construction loan into an inventory loan
- If the project is for lease, refinancing through a long-term loan will be required
Whatever the end product (for sale or rental), the project will need to generate sufficient revenue to repay the loan in full via the sale of individual units or generate sufficient income to secure long term take out financing. Before a lender funds on your project, you must demonstrate that the project will either sell/lease in the market at predetermined prices/leases to ensure repayment.
As a starting point, take a look at our article, Choosing the Right Loan for Your Development Project.
How MCAP can help
MCAP offers a range of financing options to support development initiatives. And, with a depth of experience in the market, our Development Finance Group can create solutions that meet the unique and varied needs of our clients.
Before you begin your project, connect with us, and we can help you plan your project and ensure you have the financing in place for a successful outcome. Contact our Development Finance team.