(61) Should You Build a Multiplex? 5 Checks Before You Commit
Send us Fan MailShould You Build a Toronto Multiplex? Five Questions to Answer FirstI run a construction company, so it may be against my own interest to say this: not every multiplex project should be built.Toronto’s planning environment has created new opportunities to build fourplexes, sixplexes, garden suites and other forms of small-scale housing. But permission to build more units does not automatically make a property financially feasible.A zoning permission is an opportunity to investigate. It is not a business case.In this episode of Real Estate Development Insights, I share five questions that property owners, investors and first-time developers should answer before committing significant time and capital to a Toronto multiplex project.These questions came out of our Toronto Multiplex Feasibility Workshop, where we built a pro forma for a representative multiplex and then tried to break it. We tested the assumptions behind the design, rental income, construction costs, financing, equity requirements and potential downside.If you can answer all five questions using credible information, you may have a viable project. If you cannot answer one or two of them, you may still have an interesting idea—but you do not have a project yet.That is much less expensive to discover before construction begins.The Five Multiplex Feasibility Questions1. What are you actually trying to accomplish?Before evaluating the property, define what a successful outcome means for you.Are you planning to build and sell, hold the property as a long-term rental, refinance after stabilization, live in one unit or create a multigenerational family property?Building, owning and operating a building require different skills, capital structures and definitions of success. Your intended outcome should guide the design, financing and development strategy.You should also establish your walk-away conditions before becoming emotionally or financially attached to the property.2. What can actually be built—and does it create the right product?The maximum permitted unit count is not necessarily the best development program.A viable multiplex must be capable of being designed, approved, serviced, constructed, rented or sold, and operated efficiently on the specific property.Site dimensions, setbacks, trees, access, grading, utilities, fire protection, building-code requirements and approval risks can all affect what is realistically achievable.Design efficiency matters as well. You may pay to construct 6,000 square feet but only generate revenue from 5,000 square feet. Adding units can also mean adding kitchens, bathrooms, entrances, fire separations, equipment and circulation space.Maximizing unit count is not always the same as maximizing value.3. Who will pay for the product—and can you defend the revenue?Revenue assumptions can make almost any multiplex pro forma look attractive.The question is whether the projected rents or sale prices are supported by the actual neighbourhood, unit sizes, layouts, finishes, parking, storage, natural light, utility arrangements and competing supply.Small rental buildings also carry concentrated vacancy risk. In a four-unit multiplex, one vacant unit represents 25% of the potential unit revenue during that period.A landlord must effectively resell each unit every month by continuing to provide a home that tenants consider worth paying for. Design quality, sound separation, durability, maintenance and tenant experience all affect vacancy, turnover and long-term property value.Do not begin with the rent required to make the project work and then search for evidence to support it. Establish a defensible revenue range first and let the pro forma tell you whether the project is feasible.4. What will the multiplex really cost—and when will the money be required?Construction cost is not the same as total development cost.A complete multiplex budget may also include acquisition and closing costs, design and engineering, surveys, due diligence, municipal applications, permits, demolition, site work, utility upgrades, insurance, legal and accounting fees, financing costs, property taxes, carrying costs, leasing expenses and contingency.Be especially careful with construction costs quoted per square foot. Always ask:Per square foot of what?What is included in the number?How developed was the design when the estimate was prepared?How much uncertainty remains?A cost without a clear definition is not a useful benchmark.Contingency should also be treated separately from profit. If a project only meets its target return after removing a reasonable contingency, it does not truly meet the target return.5. Can you finance the project, survive the downside and justify the exposure?A profitable-looking multiplex can still fail because it requires more equity, guarantees or financial exposure than the owner can reasonably accept.One of the most important outputs of a multiplex pro forma is peak equity: the greatest amount of the owner’s capital exposed before refinancing, rental income or sales proceeds return money to the project.Financing should match the owner’s strategy. The fact that debt may be available does not automatically mean it is appropriate for the project.The model should also test realistic combinations of problems. Construction costs may increase while the schedule is delayed, rents soften and refinancing proceeds decrease.The real question is not simply whether the multiplex makes money.It is whether this multiplex produces an acceptable outcome for this owner, using assumptions the owner can defend—and whether that owner can survive if several assumptions are wrong.The Central LessonSmall projects are not necessarily simple projects. Multiplex developments may have less financial margin available to absorb design mistakes, construction overruns, approval delays or weak rental performance.Professional developers do not build every opportunity they study. They evaluate multiple properties, test different designs, spend money on due diligence and regularly walk away.That is not wasted effort. That is part of development.Your job is not to make the spreadsheet prove that the multiplex works. Your job is to challenge the assumptions and find out whether it works for the site, the market and the owner.Toronto Multiplex Feasibility WorkshopIf you are evaluating a Toronto multiplex and want to see how these questions connect inside a working development pro forma, join the waiting list for the Toronto Multiplex Feasibility Workshop:multiplexworkshop.comLearn more about the podcast and explore other episodes at:realestatedevelopmentinsights.comThis episode is provided for general educational and informational purposes only. It is not site-specific investment, financial, legal, tax, accounting, lending, planning, engineering, architectural or construction advice. Rules, costs, financing programs and market conditions can change. Consult the appropriate qualified professionals before making decisions about a particular property or project.For more information, please refer to RealEstateDevelopmentInsights.comJoin Our Workshop: MultiplexWorkshop.com
