cmhc construction financing can be confusing even for the most seasoned investor in today's video ER and I are going to try to explain how cmhc construction financing works and some of the intricacies around how you can use it for your next [Music] development [Music] hey guys Josh and a back for another Finance Friday episode and today's video we're going to be discussing cmhc construction debt this is kind of a a mystical thing that even some mortgage brokers don't really understand how to do and it's not the most easy thing to understand so what in this
video we wanted to break down why it would work some parameters as to how you would use it and some reasons why it might not be advantageous for your specific project obviously over the last couple years with the you emergence of high interest rates we've seen a lot of individuals getting pushed into the CM financing throughout the board but you know specifically today we're taking a look at construction financing um you know obviously a few of the the biggest and most prominent benefits of going to cmhc are a much higher like loan to value in
your in your loan to cost I mean you can get up to that 95% loan to cost with your mli select program much cheaper interest rates as well too throughout the actual construction term so you know we're looking at Prime minus versus a lot of prime plus 2 and 1/2 to 3 and 1/2% Deb if you're taking a look at you know institutional and uh you know institutional private type lenders so it's know much cheaper to carry the project and obviously much better takeout financing options on the back end you know cmhc construction loans are
convertible so you know on the day or you know when the project is completed you know your your construction note converts into your term debt you don't have to go through a separate refinancing process where you do when you're using uninsured type financing so obviously there's a lot of benefits with going through cmhc there are some specific requirements that you have to be able to meet and I think in today's market you know this is where we're going to start to get into some of the the tricky parts and the nuances is trying to figure
out how you can navigate um and how you meet those requirements um I obviously a few of them are going to be you know first off the experience of the developer who is developing if you guys are developing a project yourself uh you know that experience has to be there uh you know CMC you know specifically when they're looking at these projects wants to see very similar history of completions to the type of project you're doing so meaning if you developed you know Town Homes uh and now you're going to build some sort of like
six seven story type project you know they want experience with five unit or five story six story type developments not just single home uh detached town home type projects similarly if you're building uh you know uh multi-level Tower with concrete you know they want to see specific development experience with concrete not just wood frame five uh story type development so the construction and the experience of the developer and the Builder is very important when we're taking a look at cmhc and they do scrutinize that you know personal net worth is another thing that we're going
to run into um especially you know when you see things being thrown around like 95% loan to cost and you get guys that get excited because of this you know lower down payment and they want to take on a $20 million build well you know do you have the 2 and a half or the 25% sorry personal net worth requirement of that loan size to even be able to meet this on top of you know your liquidity uh uh requirements getting into the project again you know a daily 20% down just to be able to
show so you know it's very easy to get kind of caught up on these flashy type items uh you know we just want to make sure the understanding is there of how this product actually works yeah the emergence of the need for this product for small to midsize investors wasn't really evident or didn't come into Focus until last few years until interest rates became something that really squished the margins or stopped the margins on these projects and these smaller projects needed to find some sort of alternative way to be able to recoup the cost of
being able to get their Capital back and we've seen quite a few people start to utilize this product and then if you add in mli select and the increased amortization and overall uh increase Lo in the value options of being able to pull out that Capital they're really great um ways to be able to push your development forward and what we've seen is you know the use of these tools wasn't necessarily something that the average retail investor knew about or the average investor um had had used so you know taking a look in how to
use these tools effectively moving forward is going to be you know a great way to be able to move your project along uh next year what we're seeing now is that people who are look who were initially building to sell are looking at CC as a viable option to be able to build and keep so important distinction is if you're looking to build and sell cmhc isn't going to do your loan they don't want to you to or to give you the cmhc financing at Prime minus and give you advantageous financing r rates just to
sell property for a profit cmhc is in the business of helping people hold these assets longer term so if you are looking to build something and keep it your portfolio or build it and then sell it and somebody can assume the mortgage um you're more than welcome to do that but selling this for profit uh this product isn't for you if anybody's tried to pencil in a deal over the last 12 to 18 months they probably realized that the backend financing is the limiting factor to how much Capital you need to inject into a project
and this is one of the reasons why most people are moving into CMH right now is your teof financing on the back end and it's important to understand how this works so most conventional lenders you know they have a 1.2 de servicing requirement they have a 25 probably 30 year am if it's a brand new build but you're limited on the back end by the high interest rate environment we're in right now we predominantly have you know mid seven 7.2 7.1 depending on the uh the credit union or the bank on the take financing so
on the back end of your project you're limited to how much Equity you can take out of your project which leaves a massive amount of money in a deal which is dissuaded people from fostering development and continuing to to scale their portfolio now if you take a look at cmhc and how it works if you're able to use the increased amortization allowable loan of loan the cost uh parameters um people are utilizing these products and tools to be able to allow them to get a higher takeout on the back end which is making them which
is leaving less capital in the deal which is essentially fostering more development down the road one of cmhc's requirements is that you actually have to take that Equity takeout and you have to go and develop or build more multif family property and I think this is going to be a continued uh benefit for most investors moving forward is because if they are incentivized or they need to take that Capital out to build we're going to see more purpose but multif family uh in the investing Community if if you're doing your underwriting at home it's important
to note that CMT uses a completely different spec of of underwriting parameters and expense and benchmarks I think we've talked about this before but you know I I see I've seen quite a few projects where you know they did their own uh underwriting and it's accurate to maybe what your cost might be from your own perspective but when we're taking a look at how cmhc underwrites these it's a lot more aggressive and is a lot differently uh you know underwritten versus what you're going to do at home so you know C is taking a look
at you know like a an appliance replacement Reserve cost um a certain amount of cost per elevator in the building they're also taking a look at you know your utility setup and do you have AC heat pump structures and there's going to be a replacement cost there there's also different types of repairs and management and maintenance um costs if you're if you're building with wood versus concrete and then also how many units so you know again if you're sitting at home and you're taking a look at your project and you see hey I can afford
this at 95% I can tell you right now that there's not a lot of projects that qualify at this 95% loan to cost when we're taking a look at new builds they just they just don't in today's markets um I'd say the average that we're seeing is somewhere between 7 to 85% you know 85 being on the higher end probably 75 in the middle 7580 so you know don't get too excited at that 95% you know send us the deal or send you know your trusted mortgage advisor the file and let's just run it through
these cmhc uh you know underwritings and expenses just to make sure that you know you guys have the right amount of debt allocated and whatnot moving forward cuz you know obviously that 95% versus the 75% on some of these large buildings is a you know quite a big difference when it comes down to equity involvement now most cmhc lenders have different parameters internally for construction loan size uh some lenders have a minimum cut off of $10 million and some have a minimum cut off of a million dollars most larger lenders prefer to do larger loans
because of the work it takes to be able to manage a construction cost or construction build overall now um that loan size you know if you're around the $8 million to $10 million Mark most lenders will have an appetite for it anything under that can be a little bit dicey at times now keep in mind that this doesn't outline the C C takeout on the back end so CMAC takeout financing is entally C at around less a mill over a million dollars um but your construction financing if you're looking to get into like a $2
million project you just may be limited by how many lenders actually have an appetite to facilitate a deal like this uh so when you are looking to run your numbers for both the construction and the take of financing just make sure that you're on the same page cuz your Takeo financing lender may not be the same lender who's going to give you the financing initially to construct your project another question we get a lot with CC financing is because CMC specific construction financing automatically converts into a takeout type Term Loan is can I refinance my
building and take out further Equity so there's a couple kind of pieces to this question so first off we have to understand that when we're submitting in our performance to cmhc for the construction you're typically submitting at your at your absolute top dollar because you know why would you not you're trying to get your building to qualify for as much loan as possible so this means that the average deal out there if you're submitting in at let's say you know $2 million gross rent you're going to qualify at as much loan on your loan to
cost as you can at that $2 million in rent that's what you're submitting at the majority buildings out there just don't happen to in today's market qualify for 95% loan to cost again like we stated you're somewhere around that 75 80% if you're you know on a good building which means if you're submitting at your top dollar rents you can't therefore go try to refinance afterwards cuz you're already limited it out now if over the next couple years you're rent increases further and you know somehow your expenses drop or you know rates drop and you
can qualify for maybe a Perry pasu after 12 months you could take out a little bit of equity through that secondary mortgage but in most cases these purpose built buildings don't have the ability to take out extra Equity after completion again just due to the fact you're already submitting at your top Market rents now there might be some exceptions like maybe a student rental that just has you know insane amount of income that comes in but these one-off type buildings aren't really the norm so again if you're getting that 75% loan to cost or that
80% loan to cost and you want to try to get that additional income out you're most likely going to have to wait at least 12 to 24 months for that building to stabilize further increase rents before you can try to take that out uh but it's not going to happen right away at conversion and accidental construction financing yeah the fundamentals around cmhc are different when you look at refinancing a purpose built multif family versus know your Takeo financing on construction you're refinancing on purpose built multi family is based off of the actual value of the
asset and usually you're increasing the rents during that period to be able to pull that money out whereas your take out financing on construction is really just limited to the cost of actually completing the project the soft cost the hard cost the land cost 95% of those costs so on your takeover for construction you have Capital still in the deal like you're not getting all of your investment back but you are attaining a massive lift usually you're attaining a massive lift so you have a large Equity position with the actual project itself but you're not
getting all your money back whereas you know refinancing and using this tool to refinance other purpose built multif family that's when you actually acquire capital and and get an equity take out back yeah I'd say you know like last advice when you're running your expenses you're putting together your expenses make sure you consult you know Professionals in that industry if you're taking a look at you know what your utility is going to be well if you're doing an Energy Efficiency type program talk to that energy consultant they're going to be able to let you know
you know based on a per door per unit type basis this is what your cost is going to be for you reach out to your insurance agent run a buy them you know get a solid quote on the insurance not just running that to similar type buildings that you have in your portfolio or you know maybe a friend of your has and this especially goes for property taxes if you're building a 30 unit building the 30 unit building property taxes on a new build are not going to be the same as a resale type building
they're typically drastically higher so you know a consult a property tax consultant you know you want to make sure that your expenses are as close as possible um you know a feasibility study would also be a good idea you know have a professional whose job it is to consult in these costs and these expenses to make sure you're running your numbers correctly if you go and you buy a 30 unit building and you have $10,000 in property taxes I can tell you that that new build property is not going to be $10,000 at that same
unit account so again we just want to make sure using the most amount of accurate numbers possible and your expenses and your data you know to ensure that your uh your your financing is going to be as accurate as possible and you have the amount of equity needed to inject in your project yes as many of you guys can see cmhc is as complicated as ever and uh it's not a oniz bits all situation so um you know we we are experts at doing this we help people build develop construct refinance stabilize we help use
these products in many different types of investing strategies so if you have any questions about how this works you know each individual person and their situation is different and unique and these products are different and unique based off of how you're looking to execute and where you're looking to execute on your your plan so feel free to reach out to Erin and myself if you have any questions about a prospective project coming up or one that you're currently dealing with right now ER and I going to keep you up to date on all new cmhc
requirements that are coming out in the new year as well as any changes that might happen from now until then so feel free to keep in touch with us if you really like this video please hit the Subscribe button hit the like button it allows us to make more content like this for you if you have any questions our contact info is down below really appreciate [Music] it [Music]
