It is, literally and figuratively, a groundbreaking apartment construction financing transaction.

Toronto's Peakhill Capital and Z Modular, a modular construction company with a facility in Kitchener, have closed a $26-million deal to build Fuze Lucan, a modular apartment project in Lucan, Ont. north of London.

It is the first modular apartment construction loan in Canada to be insured by the Canada Mortgage and Housing Corporation (CMHC), and it could break the dam for future projects of its kind, says the asset manager closing the deal. CMHC is the Crown corporation which serves as Canada’s national housing agency.

Harley Gold, a managing director at Peakhill Capital, told RENX Homes this should open the doors for similar projects to access better financing terms and proceed to construction.

“There will be more investors and developers interested in this space," he said. "You couldn’t get a CMHC-insured loan before. Now that this can be done, there’ll be a lot more people interested in building modular.”

About Peakhill and Z Modular

Peakhill is a commercial real estate investment manager active in Canada and the U.S. with credit and equity businesses. It invests approximately $3.5 billion per year and has over $5 billion in assets under management.

Active in multifamily, industrial and retail buildings, Peakhill offers about 500 loans per year in Canada and works with REITs and other borrowers across the country.

Gold said Peakhill is “very active” as a construction lender on multifamily buildings, but escalating costs have tightened the returns on development projects. Peakhill explored new ways to develop buildings, and modular housing was selected as a way to deliver “affordable, sustainable opportunities to build across the country.”

Peakhill was introduced to Z Modular through an intermediary, a company Gold described as a “strong group with a lot of experience in this space.” Z Modular’s capital commitment to Fuze Lucan was “quite high,” which made the project easier to work through, he added.

Z Modular, headquartered in Chicago, prefabricates housing components in its facilities and assembles the finished product on site.

Funding Fuze Lucan

Though Peakhill sought to take up its first modular project, financing was an obstacle.

Not all modular housing is built on site and most construction loans are on a cost-to-complete basis. If a project stalls, there is no security for a modular build.

The investment management firm spent time with the CMHC on housing needs in Canada and how modular housing could be an opportunity to deliver units quickly. The CMHC was convinced, and agreed to insure the loan for Fuze Lucan.

“The fact that we were able to get CMCH on our side, to work through the structuring of financing modular construction, makes us want to do it,” Gold said.

About Fuze Lucan

To be located at 280 Main St., Fuze Lucan will comprise two four-storey apartments with 90 units in total. The units will range from studios to one- and two-bedroom units.

Rent for a one-bedroom unit will be $1,300 per month, while two-bedroom units will cost $1,500 per month, according to Gold.

The property will be worth about $40 million on completion, he said.

The target for Fuze Lucan is middle market housing, as Lucan is a small market which Gold believes has not seen a new apartment building constructed for many years.

Amenities will include a 24-hour fitness centre, entertainment spaces, a BBQ patio and bike storage.

Gold said Fuze Lucan will be complete in a few weeks.

Prefabricating Fuze Lucan cut costs and the delivery times, Gold said. The delivery time could be two to three times shorter compared to conventional building techniques, he estimated.

He could not provide a number for the cost savings, only saying it is "substantially" lower.

Opening the door for modular housing

Having CMHC insure the loan for Fuze Lucan could set a precedent for the rest of the modular housing industry, Gold said.

More modular housing projects could be feasible as developers can be brought in with the backing of the CMHC. CMHC-backed loans can be borrowed at a higher loan-to-cost than a conventional mortgage; up to 90 to 95 per cent of the cost on a project, and at an interest rate typically one to two per cent lower than a conventional rate.

Peakhill is already considering several additional modular housing deals. Beside Fuze Lucan, two are planned for B.C. and another one in Alberta, Gold said.

In an email exchange, a CMHC spokesperson told RENX Homes, "Our recent work to better understand Canada’s housing supply shortages tells us we must go beyond building homes as we have always done as a country, to build homes faster and give more people access to housing that meets their needs.

"Modular construction is a way to create vital housing supply, often more quickly and efficiently in comparison to standard construction techniques . . . We hope this project is the first of many across Canada."