Despite the apparent easy money to be made by developing condos in Toronto, many developers hit the market only to find out they can’t sell enough units to get the bank financing they require to actually build. “Every year there have been guys who haven’t been able to make money, because you really have to appeal to 100 or 200 or 300 individuals that want to own what you’re building,” says Michael Cooper, the chief executive officer of Dundee REIT and Dundee Real Estate Asset Management (DREAM), one of Canada’s larger condo investors and developers.
It took Mr. Feldman roughly a year and a half to negotiate the city’s rezoning process and win approval for a condo tower. He agreed to protect the heritage façade of townhouses that the city says are a rare example of Georgian styling, to replace rental units that were on the property, and to pay $1.6-million to the city for local improvements. Mr. Feldman also had to agree that his proposed building would have more than 80 parking spots – which meant taking on the expensive chore of digging down five levels to construct a parking garage.
The biggest single battle with the city was over height. “Our first proposal was for 33 storeys,” Mr. Feldman recalls, adding that a city councillor “almost threw us out the door.”
“They wanted to give us 21 floors, and I needed 24,” Mr. Feldman says. He had determined that 24 was the magic number that would let him build enough units to achieve a solid return. “Just in case a mistake occurred or there were cost overruns or something, it gave a little bit of cushion and I needed that.”
The city ultimately acquiesced, and by then Mr. Feldman was sure he wanted a partner to take the project to completion. Mr. Hoffman’s CentreCourt agreed to buy the land, which is valued at more than $10-million, for the same price that Mr. Feldman paid, and to give him a portion of the development profits.
The moment the deal closed in November, the CentreCourt team sprinted into action. Mr. Hoffman was determined to plan the project, design the units and begin sales in just three months. He says taking too long reduces the annualized return for his investors, ultimately requiring him to charge condo buyers more.
In the condo business in Toronto, developers like Centre Court put up a small portion of the project’s total cost, with a chunk of the rest coming from buyers who are willing to part with large deposits for condos that are still years away from becoming a reality.
In the case of the Core Condos project, total capital costs are expected to top $65-million. CentreCourt obtained $5.2-million of third-party financing early on, amounting to half the land’s value. The balance of its costs will be funded by equity from the developer and its partners, largely institutional investors, until construction starts.
The money for construction is typically in the form of a bank loan, which will amount to a bit more than half of the total capital costs. Before granting a loan, banks generally require developers to have pre-sold at least 75 per cent of their units – which, among other things, means collecting a 20-per-cent deposit from buyers. One-third or more of the amount of the loan must be guaranteed by the developer and its institutional partners.
If everything goes as Mr. Hoffman plans, the institutions that put in the initial equity will enjoy a return of more than 20 per cent a year on their investment. In his previous projects, he’s always managed to exceed that target, an impressive track record that has allowed him to attract some high-profile backers from the U.S. and Canada.
DREAM CMCC Capital Fund, which provides investment capital to developers, is one of the investors in Core Condos and is unfazed by talk of a potential correction in the market. “We’ve got a lot of people moving to Toronto and they need places to live,” says DREAM’s Mr. Cooper. “We’re not going to have a big increase in single-family homes, so it’s going to be in multi-family.”
He acknowledges the market did get out of hand for a while as developers without a history of building condos in Toronto rushed to get in on the action. “We were starting to see just too much stuff,” Mr. Cooper says. “As somebody said to me today, everybody who ever built a house in the 905 [area code around Toronto] became a condo developer downtown.”
On average, about 20,400 condo units started construction each year in Toronto between 2008 and 2012. More than that are expected to come on stream in each of the next three years.
For now, the new supply is running well ahead of the underlying demographic demand. Will Dunning, a housing market analyst who is also chief economist for Canada’s mortgage broker association, estimates that the Toronto area will require about 12,800 to 15,800 condo units annually in coming years. But he doesn’t see a crash ahead. Today’s building boom is making up for a lack of construction more than a decade ago, he argues, while long-term demand will continue to be strong and building is likely to slow.