Quote:
Originally Posted by Cyro
If you've had confirmation from those in the industry reg: build costs as the major contributor for this project to be shelved, I'll take your source at face value. What was the other project shelved for these similiar reasons?
Just to let posters get the concept of vacancy rates vs.availability rates and where they can find the information you provided and quoted I'll add the link below from the CMHC for the Winnipeg Apartment market for clarity.
http://www.cmhc-schl.gc.ca/odpub/esub/64479/64479_2013_A01.pdf
Reg: Lount and *old money* and the investments they've made over the years to be able to go out on a limb even though the cost for the Conrad development is on the high side .
They do have this luxury. Can't deny it. Although I still feel they are a welcome addition to the market once again. Even though they may be taking a larger risk other developers may be hesitant to take.
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Well, for the sake of anonymity, I can't tell you which project. Suffice for it to say it was a sizable project in the South end of the city by a bona fide developer who doesn't lack for covenant. The project had also hit pre-sales targets for what its worth.
And to clarify, it isn't that Conrad House is an inherently risky project: all told, it isn't risky at all. What I'm referring to when I say there's an old money advantage is that returns on a project with those costs will creep down into territory where the rate of return wouldn't justify the project on a standalone basis. In other words, if you brought it to the bank and showed your cost structure, they wouldn't finance it on the basis of the cash flows and equity alone with the concern that should interest or vacancy rates ever spike, the building would have a difficult time providing its own debt service coverage at a satisfactory rate. But when you're old money with a significant capital base, they'll finance the project knowing that they have recourse from other means. It has to be understood that these projects are not indicative of the state of the broader market but merely the financial wherewithal of the narrow constituent - in this case Lount Corp. The bank will let you erode your wealth all day long as long as they know they have a backstop for
their investment. Manitoba is a full recourse province. If you end up with a larger nut on the asset than its worth, they'll find other means to make themselves whole...
And don't misinterpret that what I'm saying has strict relevance to Conrad House. Conrad House - if built of reasonable quality and care - will be a revenue producing asset for a long time. It may just not be that
efficient at producing it, but that's not of great concern to people who don't necessarily depend on its revenues for survival.
There's also the complex issue of taxation when it comes to companies that have free and clear properties or large recent dispositions. Interest is obviously deductible and so is capital cost allowance. But once you're done amortizing your buildings and paying off the mortgages, you're faced with a decision: pay tax, or invest your money. Most companies would prefer to invest for many reasons, not the least of which is that it creates fees from investors and it puts your money back to work for you even in the returns are less-than-stellar. And when it comes to the older outfits, they'll have all sorts of recapture owing when the disposition of assets happens either at the death of the owner, or the transfer into trust in anticipation of the death. If you've been writing down your buildings to the point where they're at a zero book value and now CRA determines the value at ten times what they were constructed at, you owe the government both all of the capital cost allowance (recapture)
and the tax on the capital gains over the cost base. What's the easiest way around this? Invest in more buildings. Invest in anything, really, but buildings are an easy way to deploy lots of capital quickly. You don't even need to see a rate of return at this point for the investment to make sense, you just need to get the money off the books. And sure, life insurance exists for a lot of this, but generally people try to freeze estates and transfer assets into trust
before they die in order to at least stop the capital gains clock from ticking, so you'll need those breaks now - not upon death.
There are a million things driving the real estate market that have little to do with actual market demand which is why one has to be incredibly skeptical of using construction as a forecast for anything other than employment and materials costing.
It's also why construction tends to go in cycles that end up with 25-30 year gaps in between booms. hence why one has to be concerned about overbuilding. Regina can speak to this right now...