Anybody who has visited Toronto in the last 10 years will be able to tell you there is one overarching thing they have noticed about the city – lots of construction. It is no different as a construction lawyer practicing in Toronto, where it is impossible not to notice the hundred of builds sprouting all over the city and outer suburbs, both on paper and just by looking around. Increasingly, many of my contractor clients have been getting in on the game, trying to get a piece of the pie as it were rather than just baking it. But how?
To start the new year, we here at Cotney Canada are going to provide a general overview of how financing construction projects works. Some of the issues can get a little complex, but as always we are here to help navigate.
Everyone knows construction projects can be immensely complex and as a result, expensive. And on thing that differentiates the financiers of a construction project from the builders is that the builders get paid immediately, whereas the financiers collect after the project is complete. For example, let’s say in the case of a commercial leasing development, the developer will incur costs involved with developing and building the project before it realizes the revenue stream from rents. Costs during the construction period will include payment to the contractor for the build, various other development charges and expenses, and soft costs such as fees and expenses of third-party advisors and consultants. From a developer’s perspective, ensuring that there is sufficient funding available to cover these costs is an essential precondition to getting the project off the ground. Further, contractors and other major project participants will also want assurance that the developer has the financial ability to sufficiently cover all project costs prior to committing their own resources to the project and incurring potential liabilities to subcontractors and other third parties. Financing is therefore a very important part of the construction business. As they say – money makes the world go round.
Any number of construction financing options are available to developers. In the simplest case, a developer could simply undertake and pay for a project out of their own resources, such as through cash reserves or proceeds of shareholder equity. However, while this simple example may work on a one-off basis, from a realistic perspective, it will be rare that developer undertakes multiple complex projects on a self-financed or “boot-strapped” basis. From this standpoint, other potential avenues of financing may be considered by developers, and there will likely be a host of creative financing options in the marketplace for a sophisticated developer. That being said – our series on construction financing will primarily focus on the main avenue for financing – the construction loan – and it’s associated advantages and disadvantages.
Written by Jeremy Power, a lawyer in our Toronto office