Mortgage Rates & Mortgage Broker News in Canada

Commercial Mortgage Pointers

Here’s a story about how hard it’s become to secure commercial mortgages, versus 2 to 3 years ago. (See Lender Loyalty by Orillia Today)

In it, Chris Doughty, of Dominion Lending Centre, offers a few sage tidbits; namely:

Don’t make idle threats…

• Doughty says: “You don’t want to try to bully the bank into giving you a better rate because it might backfire on you. It might have worked two or three years ago, but it doesn’t work today.”

Don’t get impatient…

• “Sometimes customers are their own worst enemies,” says Doughty. “People get impatient and get other brokers involved. Then all these brokers are shopping the same deal – eventually the deal runs into itself. Lenders think it’s credit seeking and wonder what’s wrong with the deal – and then no one will want to touch it.

Depending on the deal, it can take up to 10-30 days or more to find a commercial lender who can provide a suitable letter of interest (LOI). Then, the full due diligence stage begins, which takes even more time.

Make sure you factor in that timeframe and make sure you find a commercial mortgage specialist. Commercial financing is a whole different animal. Residential mortgage brokers generally don’t have the experience, skills and contacts needed to efficiently service commercial clients.

Commercial Real Estate Recovery Near, Say Execs

The Globe recently interviewed four of the biggest commercial real estate executives in Canada. 

They had this to say about commercial financing:

Pierre Bergevin, Pres. & CEO, Cushman & Wakefield

• “I think what we consider normal is between 18 to 24 months away."
• Lenders are still financing, but rates are 60 to 80 basis points higher than spring 2008.
• Financing is typically being capped at 65% LTV
• A replacement to commercial mortgage-backed securities must be found to add liquidity to the commercial market

Mark Rose, Chairman & CEO, Avison Young

• “Normal” is 12-18 months away
• The bellwether will be rising employment figures
• New forms of mortgage-backed securities will arise to fill the gap in commercial financing.
• Lenders will soon get comfortable with LTVs over 60-65%
• "All it will take is just one lender to jump in to get the ball rolling. Someone will see a competitive edge in making 70% financing available and everyone else will start to follow. Then it will go to 75% and then 80%.”
• “I doubt if we will ever get back to the days of 100% financing no matter how overheated the market gets.”

Stefan Ciotlos, Pres., CB Richard Ellis

• "My view is that recovery will start for real in the second quarter of 2010.”

David Bowden, Pres., Colliers International Canada

• "We have bottomed out but I think we are a year to 18 months away from real recovery."
• Private lenders are “leading the way” and “seeing great opportunities in Canadian real estate…I am certain their success will encourage traditional lenders and investors to follow.”

PwC Is “Pessimistic” on Commercial Real Estate

PricewaterhouseCoopers (PwC) issued a somewhat alarming report on Canadian commercial real estate yesterday.

Among the key points, PwC said:

• “We're very pessimistic, and we think there are going to be big issues in the Canadian real estate market.” (Canada.com)
• “Credit markets remain tight in commercial real estate, with many companies facing the high cost of capital and others struggling to simply access funds.”
• There is very little appetite for commercial mortgage-backed securities (CMBS). Yet, PwC says: “In each of the next three years, approximately $1 billion in Canadian CMBS alone will be maturing, with no clear directive on how funding gaps will be met.”
• “We think there are going to be foreclosures and default situations...”
• Alberta is especially vulnerable with resource money drying up
• The market is expecting notably “higher capitalization rates.”

Frank Magliocco, a partner in PwC’s Canadian real estate division, warns:

"Owners need to immediately implement monthly or quarterly cash flow reviews to understand exactly what their short-, medium- and long-term capital needs are and, perhaps even more importantly, immediately identify what options are available to overcome inevitable refinancing hurdles.”

Properties that PwC thinks are especially risky include:

• Commercial real estate in rural or industrial areas
• Small-to-medium-size strip malls
• Hotel and leisure properties
• Suburban office and industrial space
• Properties with economically challenged flagship tenants

PricewaterhouseCoopers (PwC) is one of the world's largest professional services firms.  It focuses on auditing and consulting services and has over 5,200 partners in Canada.

CMHC-Insured Multi-Residential Financing

Financing for multi-unit (5+ unit) residential buildings comes in two varieties:

• CMHC Insured
• Non-CMHC Insured

People with healthy down payments frequently ask why they’d ever want to pay the CMHC premium if they can simply get a conventional mortgage.

Let’s take a $500,000 loan at 75% LTV, for example, on a 5-unit building.  CMHC’s premium is 2.25% for a 25-year amortization.  That’s $11,250—not exactly chicken feed.

But here’s the thing.  Lenders consider multi-unit financing to be much safer when it’s insured.  That means there’s less of a risk premium and borrowers get better rates on CMHC-backed deals.  “There is a 200 basis point difference between that and a conventional loan,” First National’s, Jeremy Wedgebury, told BrokerNews.ca.

What many don’t realize is that this 2% rate differential translates into big dollars.  On that same $500,000 mortgage, a 2% lower 5-year rate would save almost $34,000 after accounting for the $11,250 premium and CMHC’s $750 application fee.  Moreover, the property cash flows better because the payment is 16% lower.

In sum, with multi-unit apartments, “pay to save” is often a good motto.

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More information on CMHC-insured multi-unit financing can be found in CMHC’s Multi-Unit Reference.

More Challenges Seen For Commercial Financing

Sources quoted by the Globe say Canadian commercial financing has plunged by one third compared to last year.

The Globe’s article had various other noteworthy points:

• A lot of the commercial financing maturing late this year and early next year was supported by mortgage-backed securities. These loans were frequently made at low rates, with little equity, and relatively few conditions.
• This kind of financing is almost non-existent today.
• Last year there was $18 billion of commercial financing available in Canada. This year it’s down to $12-13 billion. The shortage is due to the disappearance of commercial mortgage-backed securities, says Milton Lamb of Colliers International.
• Construction financing has been especially hard-hit.
• Spec builders face huge challenges in getting financed. Pre-sales mean the world, and commercial lenders are now routinely asking for 30-40% equity.
• If you can’t get financed on a commercial project, the article suggests:
• Taking on an equity partner
• Selling other properties to raise cash; or,
• Offering additional properties as collateral.
• Every bit of equity counts. “A 60% mortgage is a lot more attractive to a lender than a 70% one,” says Lamb.

More from the Globe…

Lack of Presales Sink The Ritz

It’s largely about the pre-sales in construction lending these days—and one of Canada’s headliner projects (the $500 million Ritz Carlton Vancouver) just didn’t have enough.

"To get financing, you need a certain amount of presales - and because we didn't have enough units sold, financing didn't turn out the way we wanted," said project spokesman Joo Kim Tiah to the Globe.

62 of the 123 Ritz condos were sold, or just over 50%.  A few years ago that might have been enough to get the project financed and completed.  But not in this market.  In the Ritz’s case, its banks wanted over 60% pre-sales.  (Lenders are now looking for upwards of 75% in other big condo projects around the country.)

Development Financing Blues

If anyone needs a dose of depression look no further than recent headlines about commercial financing...

• Commercial Real Estate Faces Pinch (Globe & Mail)
• Cracks Appearing in Condo Land (National Post)
• Tight credit conditions slow construction pace (Times Colonist)
• Eau Claire Project Could Face Delays (Calgary herald)
• Core Cash Crunch (Hamilton Spectator)
• Sky Towers Future Uncertain After Project Fails to Secure Financing  (Vancouver Sun)
• Kelowna condo project hit by financing crisis (Calgary Herald)
• Cash Crunch Halts B.C. Condo Project (Globe & Mail)

The National Post says developers have had to adjust to "a new reality where credit is constricted; pre-sales, the lifeblood of the construction boom, are drying up; and buyers, amid forecasts of a 13% drop in housing values next year...are growing too skittish to commit."

If developers are "adjusting to a new reality," you can bet that lenders have already adjusted.  There's been some big commercial lenders turn off the tap in recent months for anything but pure "lay-up" deals.  Today, if you're a developer without a significant experience, solid cash in your deal, and/or considerable pre-sales, you'll find that even private money is much harder to find.

"Canadian banks have become very tight on cash and their lending has dramatically changed," says Philip Pincus of Platinum Equities.  The National Post writes that as many as 70% of Vancouver condo buyers in recent years were speculators, for example. "With credit tightening, some are so over-extended they cannot get mortgages, while others simply no longer want to take on units they committed to at the frothy prices of the past few years."

That's making the game a lot tougher says Blair Forster of Harvard Development:  "You want the best opportunity to generate pre-sales that will meet your funding requirements and get going.  But obviously if you can't sell any condos, then you can't get debt."

Meanwhile, the pre-sale bar is being set higher.  Real estate reporter Lori McLeod writes that lenders want 70% pre-sales these days versus 60% "when credit markets were looser."  The Globe says: "there is a flow of rumours about smaller developers who have been turned down for financing even when they had a high level of presales, because lenders are concerned about buyers backing out or costs rising."

On the other hand, not everyone is hard up for financing.  Blue chip deals like Bazis' $450 million "Bloor 1" project in Toronto are still getting done without too much pain.  Developer/Realtor Brad Lamb says, "Any development in the city that has achieved 70% of their pre-sales, and the budget makes sense — in other words, they sold them at a high enough price that protects the bank — banks are lending developers money.”

Even on a smaller scale, Steve Copp of the CHA says, "if you've been in the business a while and you have a good history" with lenders, you "are still OK."