Financing the Future: Developers Push Major Banks to Reassess Presale Requirements
Developers are calling on Canada’s biggest banks to make it easier for them to get financing to start construction on condo buildings.
With the new-home market in the dumps and individual investors largely gone, developers have been struggling to sell enough of their projects’ units to qualify for construction financing.
The lack of purchases during the preconstruction phase has roiled homebuilders, forcing some into receivership and leading others to either postpone or cancel condo projects or turn them into rental-only apartments. It has also led to a decline in new homebuilding.
“We need to take another look at how the financing model works for condominium construction,” said Ian MacLeod, senior vice-president residential at Dorsay Development Corp., which has been developing condo buildings in the Toronto region for nearly three decades.
Banks typically require developers to presell about 70 per cent of their buildings’ units before they will provide construction financing for the project to be built.
Mr. MacLeod said he has been talking to some of the Big Five Canadian banks about the need to change the requirement. He said lenders appear to be open to lowering the threshold required to get a loan.
Mr. MacLeod is suggesting lowering the presale level to 50 per cent of a building’s units to qualify for construction financing.
“The lenders that I have spoken with have been interested and expressed a desire to work to find a solution to this,” he said.
Canada’s banking regulator, The Office of the Superintendent of Financial Institutions (OSFI), has no presale requirement for construction financing.
OSFI guidance does however say that a developer’s construction financing will receive more favourable capital treatment if presales amount to more than 50 per cent of a building’s total contracts, according to its website.
Favourable capital treatment means the lender will not have to hold as much capital against the loan.
“Banks are free to provide construction financing even if the threshold for the more favourable capital treatment is not met, though they may choose not to,” OSFI spokesperson Cory Harding said in an e-mailed statement.
“The level of presales may inform a financial institution’s assessment of project risk and, in turn, may lower its capital requirements,” he said.
If a bank doesn’t have to hold as much capital against a loan, it has the ability to increase its lending.
A spokesperson for the Canadian Bankers Association, a bank lobby group, said any decision to implement policies “over and above OSFI’s expectations for commercial lending” is a bank’s own decision and dependent on its appetite for risk.
OSFI’s construction financing guideline has been in place since 2023. Prior to that year, OSFI said condo construction financing was treated as a corporate loan and that loans to developers were based on the external credit rating of the developer. Presales were also not a requirement for financing under the regulator’s previous guidance.
However, builders say banks have long required them to presell to a level where the value of the sales is around the same amount as the construction loan.
“They’ll say ‘I need most of my loan covered off by the existing sales before we start,’ ” said Steve Stipsits, president of Branthaven Homes, which has been building homes in Southern Ontario for more than 50 years.
“No one can get to the presale level that they need to give the bank the confidence” that the bank will get repaid, he said.
B.C. developer Polygon Realty Ltd. said that in today’s environment it is unrealistic for a condo tower builder to get to the 70 per cent threshold to secure lending.
“We’re looking at the banks to provide more creativity in advancing construction loans for towers,” Polygon president Neil Chrystal said.
Polygon was able to get financing to start a project in Coquitlam, B.C., without reaching the 70-per-cent presale level. But that project is not a condo tower.
Pouyan Safapour, president of homebuilder Devron Developments, said it is challenging for the banks to change since this model has worked well for them.
About two years ago, Devron launched a condo project in downtown Toronto. The developer is now nearing the 70-per-cent threshold to get financing.
Mr. Safapour said banks in other countries lend without such a high threshold and some lend without any presales.
He said building the product before selling the units would attract more buyers who would want to live in the condo, in part because they would have a chance to see it in person instead of making a major purchase based on drawings and models. Also, buyers could move in immediately instead of waiting for years for their building to be built.
In lieu of that idea, Mr. Safapour said it would help if lenders lowered the presale requirement to 30 per cent or 40 per cent “where there’s some proof of concept from some sales,” while leaving the majority of units to be sold after the building is completed.
In the Toronto region, presales are down more than 90 per cent from their peak during the height of the COVID-19 pandemic. The slowdown has triggered a wave of developer defaults and job cuts, as well as a drop in condo starts.
Last year’s condo starts were the lowest since 2010, according to data from Canada Mortgage and Housing Corp.
“I have long felt that some sort of easing is needed,” said Pauline Lierman, a vice-president at new home research firm Zonda Urban. “Banks can continue to do due diligence with who they lend to but ease back on the presold threshold,” she said.
Dorsay’s Mr. MacLeod said lenders could take a developer’s experience into consideration when setting the presale threshold.
He also said the federal government could take a “more active role in construction financing.”
CMHC provides mortgage insurance and cheap loans to developers that build rental-only apartment buildings. The housing agency does not provide the same support for developers of condos, which are individually owned.
This article was first reported by The Globe and Mail
