Question: I am in the process of permitting a large condominium development; can you provide some phasing direction that will assist with the project financing?
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I am in the process of permitting a large condominium development; can you provide some phasing direction that will assist with the project financing?
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| Commercial Notes is a periodic publication of articles written by professionals at Eaton Partners, Inc. directed toward answering typically asked questions on the financing, leasing, acquisition, disposition and overall ownership of commercial real estate. |
Answer: Adding a financing intermediary or lender to your development team in the early stages can be an advantage for the project financing structure and phasing plan. Larger projects typically involve substantial onsite infrastructure investment and usually offsite improvements of some form. The combination of the two can contribute to front end project costs that can make financing very challenging. Development phasing is utilized as a method to limit some of those costs from having to be paid for up front in the initial stages of project development. Phasing is oftentimes dictated by the physical characteristics of the land parcel, city/town requirements or marketing strategies, but in those cases where there is some flexibility, the lender’s perspective should also be a consideration. In so doing, leverage may be maximized and equity requirements minimized along with other project development cash flow goals achieved. Many of today’s larger developments are financed with a two loan structure; a land acquisition and development loan and a revolving unit construction loan. Many construction lenders prefer to structure the acquisition and development loan, so that it can be largely or fully paid out through the sales in phase I. The challenge is to design a phasing plan with enough units and reasonable initial development costs to meet financing requirements.
An example of a successful phasing plan that achieved a competitive financing structure for the developer and met the lenders requirements is a 135 unit townhouse condominium project that we got involved with during the permitting process. The project, in addition to the roadway network, proposed a clubhouse and required both an onsite sewer pump station and offsite improvements to the project access road. It was determined from the project traffic consultant that the offsite improvements would only be required after 65 units were occupied. Applying that parameter, the developer and project engineer prepared conceptual plans showing various phasing alternatives limiting phase I to 65 units or less. They also located the sewer pump station as close as possible to the phase I roadway improvements, limiting the requirement to disturb areas of the site outside of phase I. Using the project market study, an absorption rate and pricing structure was established to prepare various development scenarios and financing models, in order to evaluate the alternatives.
The cash flows from the financing models were analyzed to determine which of the phasing alternatives best provided the required leverage, allowed the developer to receive minor cash flow at each unit sale and reimbursed the lender at a level that we all felt would be acceptable. The phasing plan eventually approved by the town, provided for the construction of 56 units, the sewer pump station and clubhouse in phase I, with the offsite road improvements deferred until the first certificates of occupancy were issued for phase II. This phasing plan contained enough units in phase I to accommodate a financing structure that met the leverage and cash flow requirements of the borrower and the repayment requirements of the lender.
The client’s objectives were met by a well thought out and designed phasing plan, meeting the needs of both the developer and lender.
Designing the phasing plan with some consideration of the lenders requirements for loan structure and payback, will limit the surprises of securing competitive project financing.
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