Condominium Financing


6 minute read

September 6, 2013

No, I’m not referring to how you finance your own individual condo unit.

I’m talking about how a developer finances the entire development project, how they get their money, who they get it from, what has to happen, and basically everything that transpires before the first shovel goes into the ground…


Being an active Realtor in today’s Toronto market, I get to meet a lot of interesting people.

From the buyers and sellers themselves, to the home inspectors, mortgage brokers, tradespeople, concierges, or even the crazy cat lady next door – I see and hear it all.

I’m constantly on the lookout for ways to fill my head with knowledge, even if it means sacrificing precious hours in the day when I could be prospecting or trying to generate income.

It reminds me of university, in a way.  When I was in 3rd and 4th year, all my friends were taking courses that would lead to a specific career path, and they thought I was crazy for taking “Popular Music” or “Economics of Professional Sports,” when I should be taking ten accounting courses each year to become a C.A., or ten finance courses through 2nd, 3rd, and 4th year to become a C.F.A.

In the end, I just wanted to learn – anything, and everything, and while I didn’t end up with a professional designation, I discovered why the Sex Pistols changed music forever, and why the NHL lockout in 2004 was inevitable, even as far back as 1999…

My point to this is that I’d rather take a two-hour meeting with guys from New York or Los Angeles, that I’ve never met, and that will never do business with me, just to learn from them, instead of spending two hours…..oh, I dunno……doing whatever it is that most Realtors do on a Thursday at 2:30pm…

Last week, I met with an investment group from New York, along with a couple economists, and mortgage lenders from Toronto.  I was fascinated by the differences between the condominium industry in New York and the condominium industry in Toronto, and the outlook that people south of the border have with respect to our market.

But before I get to the differences, let’s talk about how condominium financing in Toronto works.

You all know that most condos are sold BEFORE the property actually goes into construction, right?

We call this “pre-construction sales,” and it’s something I personally rally against, for a million reasons that have been noted on my blog throughout the last half-decade, but I won’t get into now…

You all know as well that most, if not ALL, condominium projects are delayed.  Some take 6 years instead of 2 years, and some just take a couple months extra.

But why are these projects delayed?  What is the number one reason, aside from all other rumors and conjecture?

Financing, of course.

There’s any number of reasons why a project could be delayed, from zoning applications to trades people not being available.  But the number one reason why, is financing.

Think about how it works: a developer wants to build a condominium, but can’t just go ahead and spend $50 Million he doesn’t have.  He has to get financing BEFORE starting to build, and thus he has to sell the units BEFORE he gets financing.

Thus, the pre-construction sales industry, which has been booming in Toronto for the past ten years.

A developer starts his process, after acquiring a piece of land, by going to lenders and pitching the project, trying to get financing to move ahead down the line.  If a lender agrees, they do so with the caveat that a certain percentage of units must be sold before they issue a cheque.

Once upon a time, a lender might provide funds when 50% of the condo units are sold firm, but times have changed.  For the longest time, I thought it was 70%, but during my meeting last week, one of the largest lenders in Toronto (with a big-5 bank that shall remain nameless) informed me that they now only loan when 80% of units are sold.


Think about it – in a 500 unit project, the developer and his team of hot-model-sales-girls have to sell a whopping FOUR HUNDRED units, on paper, before the project can move ahead.

That’s a staggering number to say the least, but wait, there’s more!

The lender I met with told me that there are a few restrictions on which of these sales “qualify,” and that they go through each sale individually, throwing some of them out, and not counting them as part of the 80%.  These restrictions are as follows:

1) Multiple Owners

If a buyer’s name shows up more than once, they throw out the duplicates.  If somebody is on paper to purchase FIVE units in a project, they’ll throw out four of those units from the qualification process.

2) Terms & Conditions

If the lender doesn’t like the terms and conditions of an Agreement of Purchase & Sale, they’ll throw that deal out as well.  For example, if the project is requiring a 25% down payment (staggered 5% in 30 days, 5% in 180, 5% in 270, 10% upon closing), and a handful of deals, for whatever reason (maybe favors from the salesperson, or favorable terms to get a buyer on paper) happen to only call for 10% down, instead of 25% like the rest, then they’ll throw those deals out too.

3) Credit

The lender will run credit checks on all of the buyers into the project, and if they don’t like the credit of a given buyer, or feel he or she isn’t an attractive candidate for a loan down the road, they’ll throw that deal out as well.

So now, let’s go back to the drawing board…

Say that a developer has sold 400 units in the 500 unit development, or 80%, to satisfy the lender.

Now the lender goes through the 400 deals, throwing out 12 units that were bought by multiple owners, 5 units that had unsatisfactory terms, and 9 units that were sold to people with miserable credit who have no business buying a condo.

Suddenly, the developer finds himself with only 374 units that “qualify,” or 74.8%.

To get the financing necessary to start the project, the developer has to go and sell another 26 units!

This is why, in many cases, condominium developments are delayed in Toronto.  Even when a developer has sold 80% of the units, which could take two years, the lender financing the deal might come back to the developer and say, “You need to sell more.”

Not all deals are contingent upon sales of 80% of the units, but many are.  It’s often said that the developers make their money by selling the final 10% of the units, so suffice it to say, the banks are steering this entire process, and they get paid before anybody else.

I’ve talked to principals in the Los Angeles real estate business and the New York real estate business, and they’re constantly shocked by how condominium developments are financed in Toronto.

A well-known real estate “auction” firm in Los Angeles contacted me a year ago to see if it was time to turn their attention to Toronto.  They specialized in taking half-empty condominiums and auctioning off the developers’ unsold inventory.

The guy asked me, “Do you think it’s time for us to enter the Toronto market?” and I had no clue what he was talking about.

“Auction what?” I asked, still somewhat unaware of the massive differences between the condominium construction and sales industries in Toronto and Los Angeles.

“Auction all the unsold inventory,” he said.  “Developers have hundreds and hundreds of units they can’t sell once the building is complete…………..Don’t they?”

Alas, the difference between Toronto and many other parts of the world.

In Los Angeles, not in every case, but in enough cases for a real estate firm to specialize in auctions, many condominiums are built primarily on speculation.  These buildings don’t have 80% of units sold before they get a shovel in the ground, and 95% sold once the building has been completed like we see in Toronto.

In many cities around the world, lenders will finance an “idea,” which is to say that if a developer has a piece of land, wants to build a condo, and some lenders will provide financing with terms that would sound insane to lenders here in Toronto.

In Toronto, it’s the opposite; it’s condo buyers that are purchasing an “idea,” when they sign an Agreement of Purchase & Sale for a condo that hasn’t broken ground, let alone been built.

It’s not uncommon, it seems, for a Los Angeles condominium development to be completed when only 50-60% of the units have been sold, and thus the need for an auctioneer.

As for New York, the sales are far, far easier than in Los Angeles, but developers will still build on spec, and take the risk of having unsold units once the building is completed.

It seems that in other markets around North America, buyers won’t purchase what they can’t see and touch.  That is to say that the idea of a vacant parking lot with a condo sales centre trying to flog 80% of units before excavation is a pipe-dream, at best.

The group I met with from New York shook their heads, and basically concluded, “So long as developers can sell ‘air’ with the promise of a condo on top of it, one day, there’s no real risk to the condo market for developers or lenders.”

They were looking for “the big short,” and it’s just not present in our Toronto market place.

Live a day, learn a lot.  I love meeting with guys like this!  I learned more in two hours than I did in the previous six months, and if anything, it made me feel better about the Toronto market.

Even from afar, the NY’ers figured that the Toronto market was going to keep on trekking.

Yeah, they seemed disappointed.  But at least the strawberry cheesecake was good! 🙂

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. Paully

    at 8:33 am

    Garth Turner has been repeatedly saying that there are more than 19,000 brand-new and as-yet unsold condos sitting empty in the GTA, still waiting for buyers. Is he wrong, or are there just so many condo projects with a modest 5% to 10% unsold that it adds up to such a big number?

    1. Kyle

      at 9:43 am

      “Garth Turner has been repeatedly saying….Is he wrong?”

      I think the answer is obvious

        1. Kyle

          at 10:19 am

          I’m not disputing the veracity of the19K active unsold number, i’m disputing the context in which that clown Turner presents it. The article you attached is an excellent one (and interesting one, thanks for including it!). It provides further insight into the make up of the 19K active unsolds, “A little more than half of those have yet to be built and, thus, don’t pose a threat to the market”.

          Garth Turner prefers to characterize it as 19K empty units that have been built and can’t find buyers. My point is that Turner will happily mangle, distort and misrepresent stats to bolster his arguments, and will never qualify or point out the assumptions implicit in his reasoning. Pretty sure, he’d think nothing of quoting stats from The Onion, if it supported his view. He knows his loyal fans don’t follow him for accuracy, insight or analysis. He knows anyone silly enough to still put currency into anything he has to say, is just being willfully ignorant now, and thus he knows he can get away with spinning his own version of reality to those who are looking for confirmation bias fodder.

  2. Chris

    at 9:02 am

    Very interesting – thanks for this. One thing that I’m curious about though is that you mention how the developers’ lenders do credit checks on every purchaser. Are you sure about this? They would require consent from buyers to run a credit check, and I’ve purchased two pre-construction units over the past 10 years and I know they didn’t run a credit check since it didn’t show up as an inquiry on my credit bureau report.

  3. RLST8Rocks

    at 9:33 am

    Paully, Garth Turner is a perennial douche that has made a mass of money in real estate himself over the years while relentlessly preaching an impending real estate apocalypse in his shitty books so don’t pay attention! Toronto has always had good fundamentals in place so don’t worry!

    1. Darren

      at 4:53 pm

      How come the good fundamentals that have always been there didn’t help in the early 90s?

    2. al

      at 12:37 am

      douche, how do you compare the incomes in TO vs RE prices fundamentals wise???

  4. Frosty Johansen

    at 9:50 am

    Thanks David! I learned enough from you this morning that I’m taking the rest of the day off.

  5. Dave

    at 10:01 am

    @ David Fleming
    Are there delays in the condo market down in the states like there is here?

  6. Alex

    at 11:43 am

    Sounds like a pretty normal comparison of American financial institutions to Canadian ones. Their banks have always been willing to take on a lot more risk than ours have. Since investors seem to be driving our condo market too it makes sense that they’re riskier than the average American buying a condo, and so we end up with all the risk on the end users side. I feel like that credit check of buyers rule might be more recent though, based on that Trump fiasco those people were definitely not checked beforehand.

  7. Potato

    at 2:18 pm

    My understanding is that Toronto used to be that way, but new rules were brought in after the 89 crash. Too few developers with too many highly levered projects magnified the risk to lenders and to municipalities as well (holes in the ground and half-finished steel skeletons help no one). Presale rules were to reduce the risk and spread it around — with enough presales, if there is a correction a developer can finish a project, sell the residual units at a discount, and still make good on the loan.

    That scenario is predicated on the presale buyers closing, which should be guarnteed by the discount they paid by buying preconstruction — even with a 10% correction they should still be near enough to break-even that they’ll decide it’s better to close. Of course, recent presale speculators haven’t been demanding the discount — the market’s been so good for so long, and so many developments finish in mostly habitable condition (even if there is slight disappointment from the showroom). This is a point David’s hammered on a few times. Of course, without that discount the speculators may decide to renege if things turn against them — cascading through to defaults for the developer but now with lawyers and delays thrown into the mix (will have to see how Trump plays out with this).

    Though there are some issues from transferring oversight from large, sophisticated lenders to a collection of small, unsophisticated buyers, the overall systematic risk should indeed be lowered. The question will be what new unintended consequences will result — fewer holes and trustcos going bankrupt, but more severe recessions?

  8. johnny chase

    at 2:58 pm

    The big question is… why was the 2004 NHL lockout inevitable?

  9. young & foolish

    at 10:25 am

    Sure, there are a lot of units, and Turner makes the obvious point that the industry tends to over-shoot. So, there is now a long absorption rate for all those apartments. And for sure, many will always be rentals (no one is building rental apartment buildings anymore … for now).

    No need to hurry into this market, even as David says, the financing here is more stable.

  10. honeyoak

    at 7:45 am

    For the smaller projects, Toronto developers can finance the projects without pre-selling. 32 Camden comes to mind. Also non-Canadian financiers have dipped their toes before and I imagine that they have different standards than the paleo-conservatives, for instance BNP Paribas financed Charlie.

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  12. Construction Loans Alex City AL

    at 3:18 am

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