(28) How To Raise Capital For Real Estate Development? - David Roff - Cranson Capital

In this episode, we sit down with David Roff, Vice President of Business Development at Cranson Capital, to discuss all things related to raising equity for residential real estate development. David explains the intricate differences between equity and debt in the context of real estate projects, covering various forms of financing such as construction loans, bridge loans, and mezzanine loans. He emphasizes the importance of working with experienced developers due to the complex nature of high-stakes projects. David walks us through the detailed multi-step process that Cranson Capital follows for evaluating projects, the legal structuring involved, and the crucial factors investors consider when raising capital. He also delves into common mistakes developers make and highlights key considerations for successful project financing. With insight into current real estate trends and the impact of government policies on development feasibility, this episode offers invaluable knowledge for both new and seasoned developers.

• How To Raise Capital For Real Estate Development?
• What do investors look for in real estate deals?
• What is a good IRR for real estate investors?
• How much equity does a developer need to raise
• Understanding Equity in Real Estate Development
• Developer’s Experience and Project Feasibility
• Legal and Financial Structuring
• Understanding Profit Splits in Real Estate Development. What is a Waterfall?
• How does CMHC financing work? 
• Common Mistakes in Development Projects
• Industry Challenges and Trends
• Timelines and Processes for Raising Capital

Cranson Capital is a boutique investment banking firm based in Toronto, specializing in private real estate investments and private capital markets. The firm provides accredited investors with exclusive access to development opportunities across the Greater Toronto Area and Southern Ontario.

For more information, please refer to RealEstateDevelopmentInsights.com

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Transcript

Payam 0:06

Hello everyone, and welcome to another episode of the Real Estate Development Insights podcast, where we bring you ideas, experiences, and best practices from the real estate development industry. My name is Payam Nhi, and I'm your host here. My guest for this episode is David Roth. He is the VP of Business Development from Cranston Capital. David is the first point of contact for developers who are looking to raise equity capital. For the projects. Kran State Capital is a boutique investment firm in Toronto, specializing in private real estate investment and private capital markets. And this is an interesting episode. There are a lot of numbers. There are a lot of hypotheticals that we talk about. Basically, my goal for this episode was to try and come up and create a quick guide and a roadmap for anyone who's raising capital for the first time for their project, either being a new developer, most likely, or a seasoned developer who needs a little bit more clarification on the overall process. And in this episode, David delivers. There are a lot of factors to consider, I think. Parts of it you might have to listen to more than one time. It's just some, some of the items got a little bit complicated for myself as well. But we do talk about the role of the equity, equity versus debt, the role of, um, someone like Cranston Capital and David. Versus a mortgage broker, how they come in, how they basically vet and do their due diligence on potential projects. And not only the project itself from a viability perspective and a design perspective and a mar market perspective, but also the vet, how they vet the proposed developer who, someone who's coming to them and basically stick handling the project and is trying to put the project together. They vet them, go through a process, make sure there's the right person has the right backing. Has the right experience, and we talk about quite different things in terms of the percentages, the, the, the performas, the threshold, different investors might be looking after right these days or looking at these days to invest in a project. We also talk about the profile of the investors, people who are actually bringing money and invest in these real estate development projects. What do they look like? What are they looking for and what are the thresholds? As always, big disclaimer. Please listen. Consult your qualified tax, legal, and financial advisor before making any decisions. No decision should be made based on the information provided in this episode. Thank you. Please make sure you do your homework. We wanna be responsible here. As always, you can find all the relevant information about this episode and the links to their website on our website, real Estate Development insights.com, real estate development insights.com. And I hope you enjoyed listening to this episode. Please remember to subscribe to the show and please help us by spreading the word, letting others know, and sharing this content. If you're finding it useful, please send it around to your network and let us reach more people. Thank you. Hi, David, welcome to the show. How are you doing today?

David 3:08

Great, thank you and thank you for having me on the show.

Payam 3:10

Fantastic. I'm happy to have you here. We talk all the way all the time, every day, all day, pretty much on these projects and construction and development. At the end of the day, it comes down to numbers. How much does it cost? Can you make the performer work? And I'm very happy to have you on board here for this conversation because this is all about numbers and money. But before we dive too deep into that, I'm gonna ask you to introduce yourself to our audience, please. Who's David, what have you been up to? What do you do for a living? And we go from there.

David 3:42

Great. Uh, David Roth and I'm the Vice President of Business Development at Cranston Capital. Cranson Capital, we raise equity capital for residential real estate development. My role as Vice President of business development is to deal with the developers and look at new projects and, uh, work on the underwriting and of the new projects.

Payam 4:04

Okay, so let's start, let's start there. Equity versus that in the context of real estate development, building a new project. Walk us through that please. What are the differences? When I say where you hear a lot of people talk about fundraising, uh, getting construction, financing, they're getting loans, bridge loans, mezzanine, maybe talk us through those different definitions and what does apply where we go from there?

David 4:30

That's good. Normally, when a developer comes to us, we like to deal with experienced developers who have relationships with debt, financing with banks, alternative lenders. They're coming to us with an idea of what they can borrow either on land or for their construction project. And they're looking to us for the equity piece, uh, for that project, not the debt piece. So let's, if it's a land piece of land that they're purchasing, they'll come to us for the component of equity that they need, and we'll look at that. And usually we will split that with the developer around 80 20. So developer will put 20% of the equity needed and, and. We will raise approximately 80% of the equity needed. Uh, again, depending on the terms of the loan and how much equity they need, soft cost to get them through to construction and the amount of equity that they need to get through the construction of the project.

Payam 5:24

Gotcha. And I think it might be helpful for us to. Imagine, uh, or talk about an imaginary project so that to make things more feasible or more palpable for the listeners. So let's, let's say we're talking about a piece of land that is priced at hypothetically$10 million just to round numbers, right? So if, if you have a piece of land, or sorry, if you're a new developer, you're looking at purchasing a piece of land, and if you're looking at getting, um, equity financing and working with someone like your yourself. You have to have the 20% equity down yourself, and this cannot come from other loans or under other debt. This needs to be equity solid cash. Is that right?

David 6:05

Not unnecessarily. Some developers go out and raise that capital from their friends and family and their network as well. So it's not always the developer's equity. It could be investor equity as well from the developer. Uh, multiple different ways the developer can get that. Uh, they just have to put that up as equity. It's not a loan to the project.

Payam 6:26

Gotcha.

David 6:26

Uh, so on a hypothetical, uh, uh, mid-rise, let's call it mid-rise, 10 million land,

Payam 6:31

right?

David 6:31

The, the land loan will be somewhere between five and 6 million. Let's just say hypothetically, the developer gets$6 million land loan, they need$4 million to close plus closing costs. Plus they're gonna need some soft costs, let's say 2 million in soft costs to get them through to construction. So let's say the whole project needs about$7 million and, and we'll put that together and we'll raise 7 million to get them through to construction and, and hopefully that, that's enough equity to get them take the project right through to completion.

Payam 7:00

So at this point in time, we're talking about overall like 12,$13 million,$7 million would would've come from your finance, or sorry, your capital raising of capital. And the other five or six would come from actually debt against the land. Through probably a major bank.

David 7:19

Again, it depends on who the developer has a relationship. It could be a major bank or it could be an alternative lender, whoever they have a relationship with and, and can get the debt financing for the, the land.

Payam 7:29

Gotcha. Okay. So we, we now have a, we have a potential project. You, we talk to parameters of that project. Can you specify or describe to us what is your actual role? Like, what do you do? Like if I'm, I'm coming to you, I don't know anything, and I say, okay, I need five or$6 million in, uh, equity not loan. What do you do from that point? What do I need to bring to you? What do you want to see from me? What questions are you gonna have for me? Then take us through the next 2, 3, 6 months after that.

David 7:58

That's good. So the first thing is, let's have a discussion. Who are you? What have you done? What's your experience? We'd like to deal with experienced developers. It's our preference. And let's look at your past. Let's look at your track record and let's just have a conversation about, uh, about things like that. And then let's have a conversation about the project. What do you like about this project? Why is it gonna work? What do you see here? Tell me about the location. And it's just, let's get to know each other and let's understand. Can we work together? It's, uh, are we gonna work well together? And do you like the pro? You know, what do you like about the project? And sell that to us and get us excited about the project. So we're excited to work on it as well. From there, it's, it's, yeah, it's numbers. Show me a proforma, a rough proforma, and usually in the beginning, it depends on how far along you are, but in the beginning it's gonna be a very rough pro forma to say, okay, here's an idea of, of what the numbers look like on the project. We're gonna internally take that and we're gonna do a model and we're gonna throw in some costs, probably the cost to raise the capital and some legal fees on setup of a, a structure for the project. And then we're gonna compare that and look at other projects that we've worked on that are similar and say, look, do these costs make sense? Do the hard costs make sense? And do the soft costs make sense? Do you know, do the, you know, does the building size make sense? And if the numbers make sense, great, we can move to the next step and start looking at location. Is it the right building for that location? Is it the right size for that location? What's the zoning? How long's it gonna take to get through the city? Is it contentious? Who's the city counselor? All things like that. On zoning, we're gonna take a a harder look at the zoning to understand. And then some of the technical is there, waters there, water capacity there. And believe it or not, on one side of the street, there may be on the other side of the street. There may not be. So it's one thing we've, we've gotta understand the technical side and make sure that is this project even feasible to go forward? And if it's not, what's it gonna take? Is the land contaminated? Do you have a phase one or a phase two? If the land's contaminated, maybe that's not a big deal'cause you're doing a level of underground and you have to dig it out anyway. And if not, it's what's it going to take to remediate the land and then keep going from there and digging in. How long is the project? How big, how long, what's the sales? If it's a sales project, who we're gonna sell it to? Who's our target market? And and what's it gonna take to get to that? 60% sales to be able to get to construction. If it's a purpose-built rental, again, what's the price for square foot and can we rent it and can, is it again economically feasible to rent? And will that neighborhood sustain the rents that you need when you build that project? And then finally, it's who's the builder who's actually gonna build this project? A lot of developers don't build, but some do. So it's understanding who's gonna be the actual builder for the project. Take it to completion. Then finally, if it's a purpose-built rental, uh, who's gonna do the lease? If it's not a purpose-built rental, if it's a condo, well, there's carryon issues. Who's gonna deal with the carryon issues at the end and make sure everything runs smoothly and closings go smoothly? And finally, it's what's the waterfall to pay out at the end? Hopefully everyone makes a lot of money.

Payam 11:09

Got it. Okay. I have so many questions, so that was a good. Overview of the overall process, but I'm gonna ask you questions and I'm hoping we can keep it. Don't lose your train of thought, please. Okay. Uh, I'm gonna go up all the way up front. Maybe I should have asked this even for my sake. Where do you stand as opposed to a mortgage broker? Because there are mortgage brokers out there who would be dealing with loan on the land, which would be the debt side. My, my assumption is are there, like, do you deal with'em at all? Is there a distinction that we should highlight here? Because I, I think, I'm just thinking out loud, some people might think, okay, I need to buy a piece of land. I'll go talk to my mortgage broker. But it is that the right approach a a,

David 11:50

absolutely. They will need the debt. And so a again, most of the developers we deal with have those relationships already. So they've already spoken to a mortgage broker by the time they speak to us, and those relationships are already in place. We can refer them to someone for debt, we're happy to, if someone walks in and they need a referral, we're happy to refer them, but we don't provide the debt component. We're just the equity component.

Payam 12:12

It's, it's a complimentary piece, not a substitute, basically.

David 12:15

It absolutely complimentary, and we get many referrals from mortgage brokers who have clients looking for equity, and they'll refer their clients to us. Okay.

Payam 13:15

You repeated something about five times in your answer, and I want to go back because it's, it's very important for us here and our audience here to understand the distinction. You kept repeating experienced developers, right? Which I have a feeling of why you keep saying we want to deal with experienced developers, but I wanna almost reverse the question. And to clarify why not new developers, what are the, what is keeping you away? What are the mistakes that you've probably seen? I'm, I'm assuming, and by all means, correct me if I'm wrong, or challenges that you've seen with new developers that has said, has made you say, you know what? Let us not go that route. What are those red flags that you've witnessed or dealt with? So our audience, if they are in that category, can be aware of,

David 14:00

so we have to talk about different projects, first of all, with experience. Okay. There's low-rise projects, mid-rise projects, and high-rise projects. The bigger the project, the more technically complex they are. Uh, so depending on the project, we want to deal with someone who can deal with the technical complexities of that project. A 50 story high rise is very technically complex. There's big engineering issues, uh, there's finance issues, and we just want someone who's got deep enough pockets to deal with any of the problems that arise because they're on every project. There's going to be problems that arise and as well as, as well as the, the technical issues, having the experience and the, the technical capabilities to deal with that. And normally a, a rookie developer. It's not gonna have the technical capabilities, especially on a 50 story building, on a smaller project potentially. But normally what we see is people start with small, potentially a custom home build. They'll build town homes, things like that, and move up. And that's what we say by experience is if you're moving up from doing custom homes to doing a subdivision, we can work with that. If you're, if you've worked for another developer, now you're, you're working on your own, but you have experience working with another developer. We consider that, you know, experienced, uh, as a developer, what we want to see is someone who's been able to pro solve problems, someone who's seen the problems, uh, of a, a development and understands how the pur the, the flow works and, and everything that, not everything but things go wrong. They, we want someone who can be able to deal with things as they go wrong and, uh, and not panic. Gotcha. Essentially.

Payam 15:38

Is it fair to say that if, uh, like all of this so far is basically you doing your, your due diligence? And correct me if I'm wrong, but my understanding is that you're doing the, your due diligence, not only on the project, but also on the person.

David 15:51

That's correct. So we're gonna look at the project and the feasibility of the project, but we're also gonna look at the developer. We're going to make place calls within the industry, talk to other people who have worked with this person, get references on them. We wanna understand, can we work with them? Uh, we're going out and raising capital from, from investors. We wanna make sure this person's gonna respect that capital and, and, uh, be able to take this project through to completion.

Payam 16:18

Gotcha. At least, at least they have the potential of doing that. They have all the right ingredients, and it could be a team instead of a person. Like if you, if you, if you are, uh, dealing with a team of new developers, which. Each of them might have different CAPA capabilities or different, uh, experiences related that might al also be satisfactory to you, correct?

David 16:38

That's correct, yeah. We're happy to work again with people with complimentary skills who come to the table as a team. Uh, we've done that before as well.

Payam 16:47

Okay. So, so far, if you're a new developer or you're new, two developments. You wanna make sure first you either have the experience or bring in the experience through, through other people on your team? Potentially. I, I would go on and eliminate it potentially through partnership with other people so they also have skin in the game and bring that in. And uh, I guess the second part, going back to what you were mentioning earlier about make us excited about the project, is you want to see the other guys actually having done their homework. Absolutely. Absolutely. You

David 17:15

wanna see, that's a fair comment. We want to see as much as possible at that point in time. Understanding that early stages, there really isn't a lot to share other than, you know, a, a rough proforma. They may have, they may have some, you know, rough sketches or they may have done a rendering or had some architect do a little bit of work, uh, to see what they can put and what they can fit. Uh, but in the early stages, there may not be a lot, uh, to look at. At that point, so tell us what their vision is for the project, where they want to go, where they want to take it, and where they see it ending up.

Payam 17:51

Gotcha. And, okay, so now we basically have a, let's say, overall framework and a check or a checklist in your mind, or maybe you actually have a physical one. You probably have on the property, on the performer, on the team behind it. And um. I guess maybe one more question before we move on to the next phase. Should I come to you first? If I, if I, if I'm confident that our team has the experience, if we have a team that's experienced, we want, we're thinking about doing a Midrise project, we don't have a piece of land yet. Is it a good idea for you to be my first call before even I go out and start searching for a job? We would. You have potential ideas, pointers. Uh, or let's say you might, for example, would it be reasonable to expect that you might say, listen, these days, go and find this size lot, which would fit a six story building purpose built rental with this coordination. Is that a fair question?

David 18:48

We, we could, we could have that discussion on what we're willing to look at at that point in time. Right now, a condo might be, not be the most feasible, but a purpose-built rental would. Low rise as opposed to a 50 plus story building. So it's, we were happy to have that discussion on, on what we think works at this point in time. And that's always evolving on, uh, as the market evolves, as things change. So we're always happy to have that conversation with people before they go look and see, but uh, most people have a niche that they work in and they're going to find things within that niche and then bring them to us.

Payam 19:25

Right. So, so you almost, I'm, I'm just thinking for, from a perspective of someone who wants to start a new, and the premise of this is that, and, uh, David, for all of our content and all of our previous conversations is that we encourage new developers to come into the market and try and build as much as possible. So if someone is coming in that they might wanna almost get pre-qualified, same way you would get pre-qualified for a mortgage for your house before you go out and start shopping. You might wanna go in and start getting pre-qualified with someone like yourself and say, listen, in your ex in your condition, you're lacking this, or you're missing that, and, and, or, or you have this and this is good, but you, you need just a little bit more on of the financial aspect or whatever. Then you go start looking. So. I'm just, I'm just thinking out loud. Correct me if I'm wrong. Yeah,

David 20:13

yeah. We we're always like, like I said, we're, we're happy to chat with people up front and go through our process with them so they have a better understanding of what the process is, the timelines that we would need to raise the capital and how that would fit. So it would give them an idea of how long they need for a due diligence period, how long they need to close and, and to get the capital. So those are always, upfront conversations are always very good to have with people. So then. They know the parameters when they go to look at a piece of land and not to do a, a short due diligence period that they're gonna need, uh, some time to, to get the capital to close on the land. Right. Okay. So

Payam 20:48

let's, let's move on from that point, like we've gone through the, uh, front end due diligence on your side. You've checked the person, you've checked the team, you've checked the land, you've checked. Do you to perform to some level of satisfaction? What happens next? What do you, how do you, what your interaction goes back and forth with the developer? Do you go hand in hand, start knocking doors? Do you have a pool of people that you say, Hey, here's a new developer with a new project. You guys want to come and look at it? Walk us through that.

David 21:15

So we want a project in hand first. So we want the de developer to have a project, and from there we're going to engage with them and we need to do all of the legal paperwork. Get that all in place with the legal structure and all the legal paperwork. So then we've gotta agree on what are the metrics, what's the waterfall gonna look like on this project? And start going through the underwriting process. And that's gonna take some time to negotiate through all the agreements, get the lawyers to work on all the agreements. Once those are complete, then we're gonna go out to the investors. Once we have a complete package, we're gonna do some marketing of the project, we'll do some webinars, some in-person events. Introduce the developer to the investors and then start the capital raise from there. And so that's sort of the process to start the raise. But we would start with the legal and, and the negotiating of the, uh, the legal agreements first.

Payam 22:11

Okay. Um, you mentioned Waterfall. Do you mind walking us through what that definition is like? What does, what does that look like? I, I assume it has to do with how much money each one gets, each person gets at the end. But maybe walk us through an example of an actual project or a semi actual project.

David 22:27

Sounds good. So the waterfall's gonna be the payout to the investors and it's gonna be how it's paid out. Every waterfall is, is slightly different depending on the project and the returns on the project. Ultimately, we're looking for a high teens IRR, low twenties annual return net of fees for the investors. And from there we're gonna structure something that's gonna work, hopefully works for everybody. The the developer or the investors. At typical purposeful rental, um, we may have a hurdle rate first. So the, the investors would get back return to capital, they would get a hurdle rate, could be anywhere from, let's say eight to 14%. And then from there, there would be a split with the developer and the investors and, uh, potentially a backend carry for cranson as well of the profits.

Payam 23:17

I, I would assume there's a fee for the, the management of the process as well on development.'cause if, let's say we sell the project for a hundred million dollars, there's$10 million,$20 million worth of profit left solid. At the end of everything, out of the 20, that 20 million it goes to the investors. You pay off the debt, obviously everything is paid. Then you go to the investors, then walk us through that. Maybe I'm just trying to. Position, where does the manage, because I know there's a management fee on development side, so where does that get in?

David 23:47

So the, that's gonna be a project cost, so that's a cost to the project. Gotcha. Not part of the waterfall. And so you're gonna have a, a, a development fee plus the construction management fee if it moves to construction. So you have both of those fees and both of those fees were part of the pro forma and part of the, the, uh, cost of the project. And so the profit is just the split of the profit. Flows through the waterfall after all the costs debt paid, all the costs are paid, profits left, and then capital gets returned to investors and the profit gets split.

Payam 24:18

So a very common question that I get asked these days is if, if someone wants to start a Midrise project, let's say a project that is purpose built rental, eight stories, 60 units, which seems to be the common norm these days in the city of Toronto. Budgets being somewhere between 20 to 20 million,$25 million of construction costs. What would be the entire amount of money or equity, if you may, or I don't wanna say necessarily front end what, what does the developer need to bring upfront and during the process to meet the minimum requirements of this waterfall or atypical waterfall structure? Is that a fair question to ask?

David 25:01

Not necessarily. I. A lot of purpose built rentals now are financed through CMHC. So we need to see what the terms and what CMHC is doing at this point in time. That seems to be a moving target. They tend to change things about every six months, right? So we would look at CMHC and say, where do we want to go qualify, uh, within CMHC? Which CMHC program do we want to use? And go from there. Right now it's probably less, you would probably get it around 85%. Some developers are flexing to 90 and say they can get more. Some are looking and saying, but there's a holdback. If you use CMHC construction financing, there's a rental holdback, so it's a lower 70, 75% amount that they'll finance. So it really depends on what the developer wants to do, obviously. We feel that you need a little more of the debt to make the numbers feasible for a purpose built rental. And then you have to qualify at the backend for CMHC financing for a takeout mortgage, and you need a 1.1 debt service coverage. And so you've gotta calculate that to see what can I take, get on the takeout, uh, at the end, and still maintain that 1.1 debt service ratio. And so that's gonna dictate, uh, the amount of equity that you need in the project.

Payam 26:23

So, sorry, lemme take a step back'cause we're, there's a lot of information and it's in a, uh, audio medium, so I wanna unpack it a little bit. So 75%, 85%, are we talking about construction costs or are we talking about the overall project cost?

David 26:37

Uh, construction costs.

Payam 26:39

Construction costs. So addition to loan

David 26:41

to cost, sorry, loan to cost.

Payam 26:43

Loan to cost on the, so the would that include on the project include the land construction? Yes. Soft cost permitting, potential development charges and everything. So the entire thing, you're saying that it is fair to assume that somewhere between 75 to 85% of that could be financed and uh, the remaining portion would have to be brought on by development team. Did I get that right?

David 27:06

That, that's correct, but I, I think. Again, to make it feasible, it's gotta be on the higher end. We find that projects that aren't financed or don't have enough debt don't seem to be as feasible on the return. The returns are too low, uh, to make them feasible.

Payam 27:22

What is a feasible return these days?

David 27:24

Again, we're looking at high teens, IRR, low twenties annual returns. Net of fees is what the target is.

Payam 27:30

Right. And, uh, so on the other side, when you're talking about the takeout and the, the way you are qualifying that is that you're basically, I'm trying to put it in simple words, and by all means, correct me if I'm wrong, is that you don't want to be borrowing too much. So when the project is done, it's actually not worth amount you borrowed. Is that a fair way of putting it?

David 27:50

That's fair. If, if you've borrowed more during construction, then you can get on the takeout financing. You're going to have to top up the equity. And again, that's gonna hurt the returns or potentially make the project not feasible. So, to the best that we can, we wanna make sure that there the project works and that there's enough equity and at the end, at the takeout mortgage that it doesn't need a top up of equity.

Payam 28:14

Gotcha. So don't build, don't build something or don't spend too much money on building something that it's, it does. No, it's not worth it. Like it needs to have that initial in, uh, intrinsic value at the end of the project based on whatever measure they're gonna appraise it, uh, put a value on it or evaluate it. We wanna make sure that ended up happening, otherwise we're still lifting a hole and it's not a good situation to be in. Uh, I think we covered a lot here, but aside, I guess, let me go to diver from that. In this process so far, what are the top. Three to five mistakes that you would see new or even experienced developers have made during your tenure. I

David 28:55

don't know so much of mistakes in, in that sometimes to make a project more feasible, they've either increased the rents or they've been aggressive on the rent numbers that they need. They might use a cap rate that's too low, once again, to try and get those numbers to make them achievable. They've made a debt assumption that's too high, uh, as well, uh, product mix. They haven't done the right product mix. Potentially they've shrunk the unit sizes to make it fees more feasible to make the proforma more feasible. Well, small units do work and people are okay with small units, but what our understanding is there's higher turnover in smaller units. Not something we're that interested in, but there are places and, and, and for that type of product, and as long as people understand that they will get higher turnover with smaller units, it's not a terrible pro product. Those tends to be some of the things that we see looking at, uh, projects and proformas on, uh, purpose-built rental.

Payam 29:55

Right. Is there any big red flag that if you look back 10 years ago and you say, you know what? We're never gonna do that type of project again, or we're not gonna work with that type of client again. Does anything come to mind that you can share?

David 30:09

We haven't had really any big problems. Good. Over the last 10, like over the last 10 years attributable to the developer. We've had lots of problems. Uh, some of the things we wouldn't do today is underground parking because the parking's so expensive. We find if you're going down more than one level, the proforma doesn't work. So. We find it's better on transit oriented, uh, land cost. A lot of people have purchased land and come to us and say, look, we've got this land and we can do a purposeful rental here. And, and the land cost is just too high. They've paid too much for the land. And so I. At this point in time, it's not gonna work because of the land cost. So that's some of the things, or making assumptions that are too low, your construction costs are too low. I had one developer who didn't have HST in a condo project, and when I pointed them out, I asked them where their HST was. They said what? HST. This, and this was someone who had great experience doing projects in the US but hadn't really done much in Canada. So you, you see all kinds of kinds of things. Okay? So make sure,

Payam 31:14

make sure you have your HST there and make sure you have your numbers for

David 31:18

condo, for condo, for purpose-built rental. They've removed the HST now.

Payam 31:23

So I, I think, I'm just gonna think out loud here. I think by the time I'm talking to you as a new developer or as, as a, for, for a new project, I probably have my planner involved. I probably have an, uh, architect involved to some degree that has done some sketches for me. I probably have talked to my mortgage broker and, uh, potentially a cost consultant before I come to you. Is that a fair assumption?

David 31:44

That would be great if you had all those things. Yeah. Yes. So that's a, it, it's a great step to come in. Some people come in beforehand where they. Tied up the land, uh, they've put down a deposit and they're in a diligence period, and, and they come in before they have those things. But having those things makes the, a more fruitful discussion. Uh, it allows us to do more work on the project and to give a, a, a very, a much faster yes or no to the project if we're interested or we're not interested in the project.

Payam 32:13

Right. And when you say you are not interested or you are interested is because basically the money's not coming from you guys. You are underwriting the project, you're basically saying, we're satisfied that this project with this team has a decent chance of success or has a very high chance of success, and that's what where you stand. Did I get that right?

David 32:33

That's right. But not only a high chance of success, high chance of us being able to raise the capital from investors, what we may like a project, it may not be something that investors will invest in. They may not like the area, they may not like the size of the building. They may not like the duration. They want a shorter project rather than a longer project. So we have to look at things from the lens of an investor and say, will we be successful raising the capital from our pool of investors?

Payam 33:02

Right? Just because you have a winning card over there and winning project does not mean that it will necessarily attract all the money. That it needs. Right. Which I guess, so let's talk about that for a second. If, uh, if I'm a or, or, let me ask you this. Who's your investor? Who are the people who are bringing in, what's their profile and how would one come through that avenue to you?

David 33:24

So our investors tend to be high net worth individuals. They're doctors, dentists, lawyers, account accountants, small business owners, people who, who are credited, investors who want to invest in residential real estate development. We also have some family offices that invest with us. A few institutional partners as well, but for the most part it is individuals who are, who are investing and they can contact any one of our sales reps. We do events as well and we're happy to chat with people who, uh, wanna invest in this type of project.

Payam 33:54

And so the criteria for them to be able to invest in such a project through you guys. Would be, they have to be an accredited investor, which I think means they have to have a portfolio of$1 million.

David 34:06

That's correct. Or a, uh, income, I believe of over 200,000. Again, I'd have to check the exact definition, but it is over 1 million in assets, investible assets.

Payam 34:15

Okay. So, so if you're, if you're a high net worth individual and have those criteria, you could go and start investing. But then it comes to those criteria that we've been discussing so far. Okay. So that's, that's good to know. Only go on a broader scale a little bit. Um, what is the one thing that you think as a, as an industry. As an industry who are working at this in terms of developments or engineers or designers or even authorities, jurisdiction, politician, is there one thing or two things that stand out to you that say, you know what? Why is no one thinking about this? If we were only to do this change or this shift, or maybe this modification, it could solve or it could facilitate a lot of our problems. Does anything come to mind

David 35:01

in the construction industry today, in the development industry today?

Payam 35:05

Yeah, it could be in that context. Yeah.

David 35:07

And in that context, there's so many problems. Right. Let's start with the municipal level and development charges and government charges on a project are 30% of the project. Right now, we're having problems building and making things economically feasible. We need governments to look at. What they're doing and, and making changes there between development charges, between HST, between time it takes to approve projects. There's so many things that, that the government can, can change and so many levers they have to pull. That could make the process faster and less expensive to make housing more attainable for people. And so that's sort of the, the biggest change right now that could be made to help build more houses.

Payam 35:55

Yeah, and that's, that's a very hot topic these days that a lot of conversations happening around it. And, uh, with that said, I guess, uh, do you think, or do you see any particular trends out there? I know we talked about condos and rentals. That's probably one of the biggest trends. Do you see any other trends or do you see any, uh, hot areas of opportunity into either being a geographical area or being a typology of a project?

David 36:20

We're, we're looking at, uh, town homes. So we like town homes again, as an attainable project. Three bedroom, two to three bedroom units that are family sizes. So they're attainable for a family who doesn't want to be in a condo and a, in a high rise condo, they want a little more space. There's some areas outside of, of the Toronto proper where again, you've got more space. So we've looked at low rise there. Whatever we'll sell right now, we'll work on, uh, but personal rental right now because you don't have to have those presales. Something that's working for people, um, and that a lot of people that are stuck with condo projects are looking to pivot so they can move their project forward. So many people are just pivoting to purpose-built rental pivot's not always that straightforward and easy. There's slight design changes that potentially have to be made to make a condo into a purpose-built rental. Those take time. You may have to go back and update a site plan, which may take some time. You have to get new architecture, new drives. So it's not just, it's not a straightforward process to say, I'm gonna pivot from condo to purpose-built rental.

Payam 37:26

I'm a little bit surprised by the town homes working these days because I, I would've thought that they are even harder than mid rises to make work. But I guess maybe there are areas that town homes. Can work better depending on the, the municipality, I guess, right?

David 37:40

Again, it depends on the municipality and the size and the pricing. If you can come in at a price point that's attainable there, they potentially could work. We like, uh, potentially infill projects within the city of Toronto. Uh, those, if you can get the land at the right price, not use underground parking, but do surface level parking potentially that there, that's something that can work. But it's not easy to find land at the right price.

Payam 38:05

Yeah, land. Land has been very hard to make work over the past few years. I wanna go back to your investors. In my experience, and I have friends of all those categories that you mentioned, dentists, doctors, accountants, lawyers, and we have, we've had over the years, many, many different conversations about construction and industry and development industries. Some of them just somehow get it. Some others just are so afraid of getting involved in something as messy, as messy as a construction project that they walk away. Do you have any comments or any guidelines or any pointers for some of those investors who want to get involved but also don't want to get out of their comfort zone and get into something which could be continually risky?

David 38:50

Like any other part of your portfolio, you need to have diversification. There's good projects. Not so good projects. It's like a stock. You can have a great stock and you can have one that goes down. And so you want a diversification within your projects and not be invested in just one project. And I think that's probably the way to look at it, is if you're gonna go in, probably have a few different projects within your comfort zone. Invest what you're comfortable in. Recognize that these are high returns, but that's because they are high risk projects for the most part. If they work out, they're gonna work out well, but. Things go wrong in these projects. And so the returns can be variable. Uh, depending on economic climate, depending on government, it could be a strike. There's lots of things that can go wrong. In these projects, and again, that's why investors are getting these high returns for the risk that they're taking on the projects.

Payam 39:42

Is there a minimum, uh, requirement of investments? If, if someone hypothetically has a million dollars who wants to invest through you or in one of your projects, can they hypothetically break it up into five, 200,$200,000 pockets and invested in five projects, or do you guys have limitations?

David 39:58

We, we don't, we think it. Break it up into many more than five projects with a million dollars. So we do have limitations normally. Our, uh, we have a minimum for RSP and TFSA eligible projects of$25,000 and a minimum of$50,000 for projects that are not RSP and TFSA eligible.

Payam 40:16

And what would make a project RSP and TFSA eligible,

David 40:20

we would have to do an offering memorandum and to do that and, and to go to that expense. The project has to be big enough. And normally we look to raise about 12 million plus of equity on a project before we'll do an offering memorandum just because of the cost of doing that, and we'd need about 150 investors as well. So to get 150 investors into a project, once again, we need something$12 million plus in equity. Otherwise, we're, we're not eligible. We're not gonna raise, uh, um, we're not gonna have enough investors. To, uh, qualify as a mutual fund trust to make it RSP and TFSA eligible.

Payam 40:58

Understood. But if you, if it works, just so I understand, so someone who has, let's say, a million dollars, I don't know if it's even possible, let's say they have a hundred thousand dollars sitting in their TFSA, which by definition is tax-free savings account and they can invest it into a real estate project, which the dividends of, or the results of which proceeds of which are still gonna be tax free. Is that correct?

David 41:24

That's correct. So if they're, if they're investing through the mutual fund trust in their, their RSP or TFSA, the income that would flow to them would be tax free. Gotcha.

Payam 41:33

Okay. So that opens the door potentially for a lot of individuals and, uh, but I guess, I guess they have to be accredited.

David 41:40

They, they would have to be accredited investors. Okay.

Payam 41:43

Okay. Gotcha. That's good. I didn't know that. That's, uh, that's an interesting benefit.

David 41:48

And, and again, we, we can, there there's other ca categories of investors. Okay. And you don't have to be accredited. It's normally, uh, it just makes it more difficult, the level of, uh, paperwork and things you have to do. For the non-accredited investors, we don't normally, uh, do that again because of the rules and, and the, uh, the paperwork that has to be done. So we, we, for the most part, stick with just accredit investors.

Payam 42:12

And just to clarify, the reason I, or I think the reason behind allowing only or limiting it or making it easier for accredited investors to do this is that you don't want someone to lose their entire livelihood or portfolio in one investment case. Is that a fair assumption?

David 42:29

Even within credit investors? We don't want that. It, I, I, I believe the securities regulators will put these in rules in place.'cause they believe if someone has enough money to be accredited, they're, they're more sophisticated than someone who's not. That's my understanding of Right. Why the securities regulators have put these rules in place.

Payam 42:46

Perfect. Okay. Um, this has been very informative. I, I learned a lot. I asked you quite a bit of questions. Is there anything that I haven't asked you that you think our audience should be aware of?

David 42:57

I guess timelines that it takes, if a developer's coming to us to raise capital, it does take time. So there's a diligence period. There's a period where we would need to negotiate a, a, a deal with the developer. We'd need to get the paperwork done. And then we need to go raise the capital. So this all takes time and that the developer's gonna have to plan that time within their timeframes. On, uh, when they go and close the project on their diligence and their closing and make sure that, that they have enough time to do that, and we have enough time to raise the capital for the project.

Payam 43:31

We're not gonna hold you to it, but can you give us some ranges, like range of timelines? Are we talking 30 days, 60 days, six months or six years?

David 43:38

Roughly 90 to 120 days to raise all the capital for a project. We like to say it's 30 days for diligence, 30 days for legal, and, and 30 to to 60 days to raise the capital is a ballpark timeline, and again, depends. Everything sort of moves and can bleed into the other a little bit, but a, a ballpark that's about the timeline that it would've taken.

Payam 44:01

So if I want to go and put an offer on the property, I guess in layman's terms, uh, I want more, I don't wanna waive my conditions less than 30 days. You said like financing condition?

David 44:11

No. You wouldn't wanna waive less than 30 days.

Payam 44:14

Yes. And the, the closing to be what? Like four, 120 days. Then

David 44:18

the longer you can get, the better.

Payam 44:20

Yeah. It depends on the climate, I guess the, the economy

David 44:22

situation that, and it depends on the seller and what the seller's willing to do.

Payam 44:26

Perfect. Thank you very much David. I very much appreciate you being here today. This was very informative. I know it's a lot of numbers. I have to go back and listen myself just to make sure I wrap everything. You guys deal with the numbers and make projects work so. It's a very important part, and I think, um, a lot of new developers or people who are new to development will benefit from working with a someone like yourself who's, who's experienced in doing this Thank you very much for being here, and we talk to you later.

David 44:56

Excellent. Thank you.

Payam 45:08

Just one last thing before you leave. We've created a document called Real Estate Development Toolbox, which you can download for free from our website at real estate development insights.com. This document is basically the result of us asking our network and our listeners, what is the top tool that you use on a daily basis to keep yourself, uh, aware of information that's going on in the industry that changes the trends. Technologies, the regulations and or if you, the tools that you use, make sure that you deliver quality results to your clients and customers. The tools that help you with productivity in what you do. And also any softwares, specialized softwares that, uh, you think are useful to share with others. So if you think there are resources that you're using on a daily basis and you would like others to know about them, please make sure to let us know and we will make sure to include it in the next, next iteration of this toolbox. Thank you very much and I hope you find this document useful.