Today let’s look at some condo numbers. More specifically, condo developer numbers. Let’s do some math. .Note some numbers have been rounded to assist in readability.
Imagine a developer who buys a parcel of land in the west side area for, oh, 3.1 million dollars. And then proposes to get it rezoned from four floors to nine or so. Of course, the City has so many planning statements, strategic directions, transit oriented development objectives, that it’s easy for an applicant to “paper” an application, to a bureaucracy all-too-willing to acquiesce.
So our applicant tells the city that for his long narrow lot, he needs half the building to 5 stories, and half to nine stories. This, he claims, is just simple economics to get 105,000 sq ft of floorspace “for the building to work”.
We’ll leave aside for a moment that the developer may have overpaid for the lot, that it’s in a poor location for such a large building, etc.. Let’s just run the numbers.
Developers have multiple profit centres. One is on the land price. The industry rule of thumb, or benchmark, I am told, is $30,000 of land cost per apartment sold. The first floor of the proposed building has 19 units x $30,000 = $570,000 (there is less sellable space on the ground floor due to lobby, garbage room, corridors from the three exit stairwells, etc). Floors 2 through 5 have about 20 units per floor, so 20 units x $30,000 x 4 floors = $2,400,000. Add floors 1, 2, 3, 4, 5 together and we have 2.97 million dollars of the total land cost covered.
So adding a sixth floor would turn the land purchase into a profit, ie 2.97 million plus 6th floor x 20 units x $30,000 = $ 3,570,000 or a nice 15% profit on the land.
Or, instead of adding a sixth floor over the whole building, he could build a “tower” portion at one end of the five storey main building. The tower, with 8 units per floor, would need 8 x $30,000 x 3 floors of building, making the project profitable from a land point of view with a five storey wing and a 8 storey tower.
Or, to crunch the numbers a bit differently, a four storey wing (1st floor $570,000 plus floors 2 thru 4 for $1,800,000) thus requiring a tower portion of 40 units at 8 per floor, or five additional floors on top of the four storey wing to make the tower nine floors in total, to make the same profit.
Or, to crunch the numbers the way the developer might, ask for four floors on top of the five floor wing, for a nine storey building in total, which means the extra tower floor would yield 8 extra apartments without any land cost normally associated with them, so they would be very profitable apartments, specifically 8 x $30,000 = $240,000, or a cool quarter million bucks extra profit just by asking the city for an extra floor.
If I were a developer, I’d sure ask for that extra floor(s). Indeed, our hypothetical developer in this scenario might be tempted to ask for 18 floors … those numbers would make the developer very happy indeed.
But recall, the developer makes a nice return, well above breakeven, with a four storey main building with a just five floors more in the “tower” portion, ie a building that is half four floors, and half nine floors. (recall our developer is asking for five floors and a nine storey tower…).
Developers have to sell their condos. The required marketing effort doesn’t come cheap. So Marketing is another cost (and profit) centre for developers. Sales models, temporarily fitted out in an existing building on the site before construction, can easily cost $200,000, all of which is eventually “lost”. Industry rule of thumb, I gather, is to allow a $15,000 marketing budget per unit.
If the developer builds lots of smaller units, that are easy to sell to investors, then the marketing costs may be “saved” and contribute to the profit of the marketing effort. It takes more intelligent staff and a longer time to sell off all the units in a building. Some big builders have developed lists of investors to buy these small units; we’ve all seen buildings sell off 30% of their units in the first week. This is a huge advantage to large developers who have an established investor list.
A proposed building with 100 units therefore has a marketing allowance of 100 x $15,000 = $1,500,000.
And, BTW, while neighbours and community associations continue to lament the abundance of smaller (and cheaper) homes coming in the condo format, 90% of the condo market is for SINKS (single income, no kids) and DINKS (double income, no kids). We do need appropriately sized homes for our kids starting out on their own (we can’t leave them in the basement forever) or ourselves when we tire of maintaining and paying taxes on a too-big family home. And for the perpetually single, and newly single divorced. Adding a lot of small condo homes to an existing neighbourhood made up primarily of ground-related houses actually makes for a more complete neighbourhood.
Actually constructing the building is another profit centre. The target here is to get at least 10% profit out of the construction process. So a building (say, with 105,000 sq ft of area with a construction cost of $190/ft) has about $1,950,000 of potential profit hiding around, waiting to be found. If the developer is a small one, and hires an outside construction management firm, they’ll take at least $975,000 of that profit for themselves. This process encourages developers to be very cost aware. Some developers create their own construction management division, which is not without risk, but the potential rewards are significant.
Underground parking is often a separate profit centre. In normal soil conditions (ie rock that is not too hard) underground parking spaces cost the developer about $27,000 to build. They sell for around $30,000 each, so there is a potential 11% profit there.
Other profit centres include soft costs, which are huge. These are the architecture, engineering, traffic planning, planning consultant costs. The more “rules” that need to be bent, the more soft costs there are. So for our sample building on the west side, the developer is managing to stay within the front, side, and rear yard setbacks. Conventional construction only, no risky new materials or new floorplans. Alas, neighbours might force an OMB appeal, so that cost is added in. No appeal = extra profit, although the no appeal condition might have to be bought with concessions to the neighbours. So, reaching an amicable agreement with the planning dept and the neighbours is quite worthwhile for the applicant.
Small developers often have to get financing, often money from the bank. The bank doesn’t like holding a half-completed building, or worse, a hole in the ground, as security. So their loan rates are 14 to 21%, once all approvals are granted and permit issued. This leaves the small developer very exposed, as he has to front all the risky soft costs. This partially explains why developers are loathe to change their plans once they are laid out. Ideally the development site with have existing rent-paying users on it to cover the carrying of land cost. Parking spaces do very well to cover the holding cost of land, and usually generate a nice surplus, which is why people doing “land assemblies” don’t mind hold ‘vacant’ lots for long periods as long as they have parking.
Sometimes, developers have access to family money. If self financed by a larger developer corporation, the minimum internal rate of return expected from advancing their own money is 5%. A higher rate is obviously more appealing to the developer …
for readers who prefer raw numbers, an “industry insider” provided me with the following:
raw land cost allowance: $30,000 per unit
construction cost, including soft costs: $270/ft, and up
construction cost, sans soft costs: $190/ft, and up
marketing allowance: $15,000 per unit sold
construction profit target: 10%, the construction manager gets its share first, remainder (if any) to the developer
concrete underground parking is $27,000 per stall; selling for $30,000 per stall
as with any rule of thumb or benchmark type numbers, they are averages, and should not be applied to extraordinary buildings, for eg, a boutique (small) building on an expensive inner city lot, or a very very tall building on a small lot, with many floors of garages below. Sometimes it is helpful to imagine a large low-rise building as being simply a taller condo tower laid on its side. Profits are always potential — never guaranteed.