Most owners of apartment buildings have either had to, or are currently contemplating capital improvements to upgrade building quality. While many owners consider building improvements, there is often uncertainty about how to finance those upgrades.
Darryl Bellwood, Assistant VP at First National Financial LP, has worked with many different types of owners to help them figure out the best financing options for their impending capital improvements. While many financing alternatives are available, owners need to understand and consider the severity of the issue.
“There are two main categories of severity,” says Bellwood. “Safety is one category. For example, unsafe balconies demand urgent attention. Integrity of the property is the second category. If there are holes in the roof or the underground parking structure is deteriorating, it’s important to address those issues as well.”
Financing approach: what makes the most sense
When Bellwood sits down with clients, the financing approach is usually the first topic of conversation. They discuss whether financing out of pocket or drawing equity out of the property makes the most sense.
Owners that choose to finance out of pocket must be able to access the money from their own source of funds. Drawing equity out of the property can mean taking out a second mortgage on the unused portion of the equity in the property.
“Most property owners are aware of their responsibilities to undertake capital improvements. If they have properties in a high-demand location, it’s basically a necessity to maintain the building’s level of income,” says Bellwood.
Assessing borrowers for financing: the lender’s perspective
Bellwood has helped many owners obtain financing for capital improvements. In some cases, mortgages were maturing, and the owner was able to refinance the property and draw equity out. Others chose second mortgages to complete upgrades on balconies, parking garages or roofs.
As a lender, Bellwood structures financing based on the diligence of the owner. “When I’m refinancing, I place a lot of weight on whether the borrower has been proactive or not. Track record certainly impacts my decision making.”
Owners that take initiative to contact engineers, arrange assessments, get quotes and even start with preliminary work are more likely to receive their funds up front. However, owners with urgent needs that haven’t taken advance action can usually expect a hold back on the funds.
“If the owner is proactive and diligent, I feel more confident about their desire and commitment to complete the capital improvements on time and on budget,” says Bellwood. “However, there are occasions with certain owners where I hold back funds until they complete the work.”
Be practical and be proactive
If you’re looking to secure financing for capital improvements, it is important to evaluate your needs honestly and determine whether your focus is safety or integrity. It is also critical to take initiative and demonstrate a strong commitment to executing and completing the capital improvements in a timely, efficient manner.
“Track record makes a difference when it comes to financing capital improvements and assessing the associated risk. Ultimately, my goal is to work with owners to support them in maximizing the value of their assets. Owners that are investing significant effort toward that same goal make my financing decisions a lot simpler,” says Bellwood.