The below is a summary of why developers of new rental buildings should consider a forward sale of their project(s).
A Forward sale is defined as “An arrangement between two organizations to buy a particular amount of something for a fixed price in the future.” In the context of a real estate development, this is when the developer delivers a certain product, at a certain phase of completion (vacant, fully rented, or anything in between) to a buyer who has committed to the purchase in advance of the project’s completion. Building a rental building allows the developer to contract into a Forward Sale arrangement of the building.
There are numerous advantages to forward sales of apartment buildings, including:
- Velocity of Money & Financial Return – receive the returns faster, as soon as you deliver the building (either empty or fully leased or in between, based on the agreement)
- Surety of Closing & Financing Assistance – as the construction and mezzanine loan come to a conclusion, money is available from sale proceeds for you to move to your next project; this allows for planning a pipeline of projects
- Elimination of Operational Risk – as a developer you do not need to worry about becoming a rental operating expert
- Avoidance of Interest Rate Volatility – interest rates are at a record low (as are cap rates), and you would be securing a price based on today’s excellent fundamentals
In a forward sale transaction, the potential buyer commits a substantial amount of resources to their own analysis before committing to a transaction. Therefore, the first step in their evaluation is to evaluate the developer of the project, and his ability to deliver on the commitment. If there is a reputational problem, or a lack of a successful track record, or questions about their ability to deliver the product, then the opportunity itself is discounted completely. As well, if the developer is new to building rental buildings, unless he is presented “right” in front of the buyers, the opportunity may be discounted or dismissed.
Our role as brokers is to highlight the developer as trustworthy, reliable, committed and professional. It is, essentially, about “selling” the developer as much as selling the project.
If you are planning to develop a rental building, or have started one already, talk to us first. We can explain the process every major buyer undertakes, timelines, paperwork and fundamentals, as well as review case studies of recent forward sales in Ontario and Quebec.