Canada: Real Estate & Construction Newsletter Fall/Winter 2016

IN THIS EDITION

It's no secret that the health of Canada's construction sector is often looked upon as an indicator of the health and wellbeing of the national economy, as a whole. While we have to account for differences stemming from specific regions and types of construction, overall the sector seems to be moving forward at a relatively stable pace - although there always remains a degree of uncertainty about what's to come.

In our Road to Success article, featuring Paul Tennyson and his land and residential development projects, we see that conducting business internationally can be challenging, time-consuming, and fraught with uncertainty – particularly when dealing with foreign governments and labour forces. But with persistence, cultural sensitivity, and a properly executed strategy, the rewards can potentially outweigh the risks and uncertainties.

Speaking of risks, they often seem overwhelming when developing or building new properties on a domestic front, as well. There are a host of things that can go wrong when the stakes are high. Be sure to read our Advisors Point of View article with some key tips to ensure a successfully completed project, including the need to plan in advance, secure sufficient funding, and source reputable contractors.

While it's just good business practice to do everything in our power to minimize risks and uncertainties, there will always be situations that fall outside of our control – and sometimes things can go awry. In Patricia Harris' article on Construction Tender Disputes, we look at a few of the most common methods used by forensic accountants to determine the amount of lost profit, when a tender dispute goes to litigation.

In the end, your best chance of effectively mitigating any risks and uncertainties in your business is to surround yourself with experienced advisors you can trust. After all, strength can often be found in numbers.

ROAD TO SUCCESS - CORAL DUNES AND BAHAMA LAND HOLDINGS: A SLICE OF PARADISE AND A LABOUR OF LOVE

Sipping piña coladas on your deck, overlooking the white sand beach; exploring majestic cays and coves by boat; snorkelling through world-class coral reef; reeling in the big one on a deep sea fishing excursion – just a few of the local activities in Hope Town, Bahamas that make Paul Tennyson's day job seem like a piece of cake.

Paul Tennyson is President of Coral Dunes Ltd. and Bahama Land Holdings Ltd - boutique land and residential development companies building homes in the out islands of the Bahamas. The current project consists of 14 unique single family homes in Hope Town, ranging in price from $700,000 to $1.5M USD. It's a little slice of paradise only 150 miles east of Florida with beautiful beaches and breathtaking sunsets, and unlike the more mainstream islands, it's free from cruise ships, huge resorts, and pushy street vendors.

But building residential properties on foreign land isn't all fun and games. "It's certainly not for the faint of heart," says Tennyson. "Dealing at the federal level in the Bahamas to obtain work permits and approvals can be time-consuming, costly, and incredibly frustrating. My experience has shown that although there appears to be a push to attract foreign investment, the government's ability to actually execute is far from perfect. But it can be very rewarding if you're willing to invest the time, build strategic alliances, and work in synergy with the local government."

Home away from home

For almost 45 years, Tennyson has made the Bahamas his home-away-from-home, becoming intimately familiar with the surroundings and development opportunities. He works closely with the local district council who is very supportive of his development efforts and very welcoming of Canadian families and executives who are willing to settle in and respectfully enjoy the islands.

And when Tennyson is not personally available to oversee the development project, he has the comfort of a Canadian supervisor on site, along with a staff of highly-skilled local labour. The majority of construction materials, including top-grade lumber and steel, are shipped via ocean container from Canada, to ensure that best-in-class building materials are used in every home construction.

"Understanding the landscape, the people, and what is necessary to attract foreign investment that fits well with the local flavour and preserves the uniqueness of the culture is key to a successful offshore development project," explains Tennyson. "I have in-depth and hands-on experience in all aspects of offshore structuring, including residency applications for home ownership or permanent residency. Bahamas offers the best structures in the world, and the requirements to pass the residency tests are still very reasonable compared with other Caribbean nations."

So, what's next?

A second land development phase will see 4 estate-sized, ocean-to-ocean homes in the $3M range, and negotiations are currently underway to secure over 1,000 feet of Caribbean frontage to construct a unique multiplex, only steps away from a private dock. Beyond that, he's focused on continued innovative home construction and mini-communities, and perhaps some full-service boutique resorts in partnership with local groups.

"This is a labour of love" explains Tennyson. "I work so hard on these development projects because I believe in the end product and the positive impact it will have on the Bahamian economy. Our homes are truly unique designs on prime real estate. The land is limited and once it's gone, it will demand an exponential increase in value. The Bahamian currency is pegged to the US dollar. The Bahamas is in the same time zone, is safe, easily accessible, full-featured, and offers a stable British-based government – it's really a vacation and financial paradise that's only a few hours away."

ADVISORS POINT OF VIEW - RISKY BUSINESS: CONSIDERATIONS FOR REDUCING THE RISK OF A CONSTRUCTION PROJECT

By Mike Stoyan

Building or developing a new property can indeed be a risky business. Managing and overseeing a range of trades, remaining on-side with your bank's lending terms, and staying on time and on budget are just a few of the concerns that might keep you up at night.

But with some careful attention to a few key areas—regardless of whether the project is for a new or substantially renovated home or commercial development—you can minimize your risks and help ensure a successfully completed project. Here are a few of the main considerations to keep in mind:

  • The need for extensive upfront planning;
  • Ensuring that the project has sufficient equity to enhance the likelihood of favorable construction financing terms from a lender;
  • The value of working with a reputable builder and architect to ensure all aspects of the project are properly managed.

The importance of planning

As an owner, it is important for you to manage expectations at the outset of a project and schedule regular meetings with both your builder and architect throughout the duration of the project to prevent unnecessary mistakes from being made. Planning from the outset is critical, and any work deviations from the original plan should be supported by a properly documented change order, signed off by the owner and the general contractor.

Securing equity and favorable terms for construction financing

A construction project may require that the lender look to the land as the contribution of the owner's equity when considering construction financing. Construction financing may range up to 75- 80% of the budgeted construction costs. Lenders will advance construction funding based on stages of physical completion of the project. These draw requests are usually at various stages of project completion such as excavation and foundation work, rough framing and enclosure of the building envelope including installed windows and roofing, with further advances being drawn thereafter as construction continues.

Construction loans are generally for a one-year term with 4-6 draws scheduled as the project advances. Each draw request is inspected by an agent of the lender that verifies physical completion of the work. Quantity surveyors typically perform this role on behalf of the lender. Given that construction financing takes place as the stage of completion occurs, it would be wise for any homeowner or borrower to ensure that they have ample savings or bridge financing in the form of a line of credit to fund the time between laying out funds to the trades and the time of receiving ultimate funding from their lender. Not being able to fund trades can ultimately lead to project delays and inefficiencies resulting in potential project cost overruns.

Subcontractors and the various trades have a right to file a builder's lien on the property to protect their interests, and a lender will not advance subsequent draws until the lien has been removed. Lenders also try to protect themselves from being encumbered with a project that cannot be finished because the borrower runs out of funds or, for some reason, unanticipated delays wreak havoc on timing. For this reason, lenders rightfully pay great attention to cost of completing a job to ensure that the owner/borrower always has sufficient equity in the project. This way, any remaining unfunded component of the construction loan has a better chance of being sufficient to complete the project. No lender wishes to be in the unenviable position of realizing on their security which is only compounded with a partially finished project.

By law, statutory lien holdbacks of 10% are required and released only after 45 days from the date of substantial completion. These retention holdbacks ultimately require the issuance of a certificate of occupancy and, at times, formal notification in a published newspaper allowing time for trades to come forth.

Construction financing usually requires interest-only payments, and you will want to ensure that permanent or take-out funding is lined up, upon project completion, to replace the interim financing. Permanent mortgage financing will have more favorable interest rate pricing when compared to the interim construction loan. Loan to value ratios will determine if sufficient value is available to take out the full construction loan.

Working with reputable and insured contractors

As an owner, you and your builder also need to pay attention to insurance for the duration of the project. Your construction loan will require that you or your contractor carries General Liability Insurance, covering harm to people or property caused during construction. Builder's Risk Insurance, which covers damage to the unfinished building, is also necessary.

By law, make sure that your General Contractor carries Worker's Compensation Insurance for all employees. These types of coverage mitigate any potential damage that you, as an owner, may face if sued by an injured employee or by a passing neighbour should they be injured. Make sure you have this discussion with the Contractor you end up choosing to ensure that they are adequately insured.

In summary, while the rewards can be great, there are many risks when building or developing a new property. These risks can be mitigated by up-front planning, access to sufficient financial resources to ensure project cost overruns can be dealt with efficiently, and by choosing both a reputable lender and builder with experience and proven track records.

To read this Newsletter in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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