finance

But I have a great business plan

I spent some time on the phone yesterday with an individual that has put together a transaction involving a parcel of land that he thinks would be a good spot for a mini storage. The town he lives in is currently experiencing growth and he sees an under served market – storage. He has managed to find the land, get some drawings done and has arranged for the contractors required to do the work. He has about 10% of the total cost in cash and is looking for financing for the balance. He called several banks and was not able to get a loan for many different reasons the least of which include loan size (too small) and lack of interest from a banker.

As we chatted through his deal I let him know that he may be able to get mid market money but would need to bring someone else into the deal to help guarantee that the financing would be repaid. As the land is crown land he cannot ask for a vendor take back mortgage but with the right partner he could be built out and refinanced with a bank in less than a year.

He was confused about why the bank wouldn’t give him money as his plan showed that once the project was completed it would be worth exponentially more and the bank would have lots of equity to protect them. There in lies the rub – he has to get there. No bank wants to take the risk that a project won’t finish and that the borrower doesn’t have the financial strength to see a project to completion. 10% is not even enough to cover contingency costs (construction budgets rarely go according to plan).

It doesn’t matter if you think you have a good plan – anyone lending you money has to know what their risk is and what happens if you don’t do what your plan says you will do.

In this case I am sure a partner will be found and this project will be a success. Real estate is an opportunity that rewards individuals for being appropriately creative.

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