Top 5 Reasons to Use Mortgage Alliance Commercial Canada (MACC)
- MACC is Licensed across Canada with offices in Quebec, Ontario, Alberta, and BC
- MACC has maintained privileged relationships with all major lenders across the country to allow our clients to access better terms and conditions for their financing needs
- MACC simplifies and manage the entire process of any lending transaction from pre-screening requirements and options; completing loan underwriting and lender negotiations, through to the disbursement requirements, to ensure successful completion and funding.
- MACC is an approved CMHC correspondent and experienced in preparing and presenting applications directly to CMHC for underwriting and approval. This provides access to preferred rates and terms, and higher loan to value ratios. This includes multi-unit rentals, mixed-use, purchases and refinances. We pre-screen deals to determine potential loan amount available based on property information provided such as rent roll, and statement of income and expenses.
- MACC has over 20 years’ experience in the commercial broker industry and a significant track record in deal success covering all commercial industries. We are well-positioned to guide clients through the most complex transactions and obtain the best options in the market. See our website for just a few of the projects completed. http://macommercial.ca/projects/
Marion Cook | November 2018
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In late October, the Bank of Canada (“BOC”) announced the third 25 bps rate hike this year, which brought the overnight target rate to 1.75%. The increase comes after continued strength in economic figures and the negotiation of the “new NAFTA” trade deal with Mexico and the U.S. This pushed the prime rate of major Canadian banks to 3.95%.
Spread premiums between the Government of Canada (“GOC”) 3, 5, and 10-year term bond yields remain extremely tight. Through Q3/18, the premium between 3-year and 10-year tightened by 4 bps, while the premium between 5-year and 10-year remained unchanged.
In Q3/18, Telus sold its Vancouver headquarters, Telus Garden, to a partnership of investors represented by Regina-based Greystone Managed Investments for an undisclosed amount. The property was built as a joint-venture by Telus and Westbank Corp. for $750 million and consists of an office tower and residential building in Downtown Vancouver. Telus is expected to generate approximately $170 million in profit on the sale.
Lenders and borrowers have maintained balanced supply and demand for the 5th straight month with commercial mortgage spreads staying flat. 5-year deals are pricing 145 bps to 160 bps over GOC bonds for top quality assets, while 10-year spreads are pricing at a 10 bps premium for similar risk. The liquidity premium of commercial mortgage spreads over BBBrated corporate bonds remained generally unchanged since our last report with the premium down slightly from 64 bps to 62 bps as a result of a slight increase in corporate spreads. This moves the liquidity premium away from the long-term average of 70 bps.
The CMBS market continues to be challenged by unattractive profitability due to tightening commercial mortgage spreads relative to CMBS bonds. Recent weighted average breakeven mortgage spread for new CMBS issuance was approximately 225 bps and with current spreads around 190 bps, the prospects of profitability falls short by 35 bps. Until the commercial mortgage spreads move past the CMBS breakeven point, new issuance activity is expected to be thin.
Senior Unsecured Debt
In Q3/18, senior unsecured debt issuance slowed to $625 million, down from $1.65 billion in Q2/18. However, cumulative 2018 issuance is up 27% on a YTD basis and makes up 86% of the total issuance in 2017. Since our last report, Crombie REIT issued a $75 million, 2.9- year note with a 170 bps spread. Overall, spreads on BBB-rated unsecured debt decreased through Q3/18 to 145 bps. For now, spreads on unsecured REIT debt continue to receive cheaper investor dollars compared to conventional commercial mortgages with a difference of only 10 bps at the end of Q3/18.
Spreads on multi-family CMHC-insured loans remained stable since our last report with spreads ranging between 80 bps and 105 bps over GOC on 5-year terms and between 85 bps and 110 bps over GOC on 10-year terms. This is partly due to the relatively unchanged spreads on CMHC-backed Canada Mortgage Bonds (“CMB”). 5-year CMB spreads only decreased 3 bps to 28 bps and the 10-year CMB spreads remained flat between July and September.
In Q3/18 the British Columbia Securities Commission (BCSC) announced it will not be renewing the exemption that previously allowed Mortgage Investment Corporations (MICs) to operate in BC without engaging in the onerous registration process with the BCSC. The impact of this announcement will be felt in the local industry as many small MICs will now have to endure registration costs.
ABOUT CMLS MORTGAGE ANALYTICS GROUP
The CMLS Mortgage Analytics Group (“MAG”) is a division of CMLS and the leading provider of independent mortgage valuation, risk ratings, market research and software to the commercial mortgage industry in Canada. Our clients include some of the largest institutional asset managers and insurance companies with assets under management ranging from single digit billions to over $100 billion.
Mortgage Loan Insurance for Multi-Unit Residential Properties
CMHC mortgage loan insurance enables Approved Lenders to offer greater financing choices to borrowers providing standard rental housing accommodations in multi-unit residential buildings.
Construction financing, purchase or refinance.
PROPERTY TYPE AND SIZE
● Projects providing standard rental housing
● Minimum project size of 5 units.
Not to exceed 30% of gross floor area nor 30% of total lending value. Loan relating to non-residential component must not exceed 75% of lending value of non-residential component.
MAXIMUM LOAN-TO-VALUE RATIO
Construction financing: up to 85% of lending value as determined by CMHC or 100% of cost, whichever amount is less.
Purchase: up to 85% of the purchase price or lending value as determined by CMHC, whichever amount is less.
Refinance: up to 85% of the lending value as determined by CMHC.
Purchase/Refinance with improvements: up to 85% of the ‘as is’ or ‘as improved’ lending value, as determined by CMHC.
Is your multi-unit project eligible for affordable housing flexibilities or an energy-efficient housing premium refund? Check out the Affordable Housing and Energy-Efficient Properties information sheets for helpful information.
Construction financing: During construction the loan can be advanced up to 75% of costs or lending value, whichever is less. The advancing of additional funds is subject to rental achievement.
● Construction costs are to be reviewed and recommended by a quantity cost surveyor (flexibility may be provided in small markets).
● Construction must be completed under a fixed price contract with a general contractor or under a construction management arrangement.
● First and last advances must be approved by CMHC. The lender has the option to approve advances occurring between the first and last.
Purchase or refinance of existing properties with improvements:
● Where rental income is not disrupted during construction, the loan advances will be limited to the greater of 75% of the “as improved” value or 85% of the “as is” value.
● Where rental income is disrupted, the maximum advance allowed during construction is based on 75% of the “as improved” value. The advancing of additional funds is subject to rental achievement.
Where loan advances are required above 75% level, authorization to advance will be given by CMHC once the Approved Lender has provided evidence acceptable to CMHC, that the property has achieved the projected rent level.
CMHC may consider amortization periods of up to 40 years. A premium surcharge applies for amortization periods greater than 25 years. The amortization period must not exceed the remaining economic life of the property, as determined by CMHC.
First, second and pari passu mortgages are permitted.
Second mortgages are permitted as an interim measure.
GENERAL GUIDELINES FOR BORROWER ELIGIBILITY
The borrower must demonstrate competence and experience commensurate with the size and type of property for which mortgage loan insurance is being sought. The borrower or a corporation affiliated with the borrower must have at least five years of demonstrated management experience in the operation and management of similar multi-unit residential properties. Alternatively, a formal property management contract must be in place with a professional third party property management firm.
BORROWER NET WORTH
The borrower must have minimum net worth equal to at least 25% of the loan amount being requested, with a minimum of $100,000.
Construction financing: The borrower and guarantor must provide their covenant/guarantee for 100% of the outstanding amount owing under the housing loan from time to time until stabilized rents have been achieved for 12 consecutive months, at which time the additional guarantee required may be reduced to 40% of the outstanding loan amount owing under the mortgage, from time to time.
Purchase or refinance of existing properties: For new loans on existing residential rental properties, the guarantee amount required by CMHC is 40% of the outstanding loan amount owing under the mortgage, from time to time.
Limited recourse: Where a loan does not exceed 65% of lending value, as determined by CMHC, Approved Lenders may request that the loan be considered non-recourse to the borrower. The recourse of the Approved Lender shall be limited to the property and the other assets taken as security and not personally against the borrower.
CMHC may require additional risk mitigation measures as it deems appropriate (e.g. equity retention, replacement reserves, collateral security, personal guarantees).
CMHC mortgage loan insurance provides access to preferred interest rates lowering borrowing costs for the construction, purchase and refinance of multi-unit residential properties and facilitates renewals throughout the life of the mortgage.
Middle-class families in Ottawa will benefit from 243 new rental units being built in the city with an investment from the federal government.
Two projects will be financed through the CMHC’s Rental Construction Financing initiative including $70.8 million for the construction of a twenty-seven storey building with 227 rental housing units. More than 200 will have rents lower than 30% of median household income in the area.
“The project represents a major step forward in sustainable design with ambitious design targets to reduce energy consumption by 50% and reduce carbon emissions by over 75% with an integrated geothermal system for the project,” said Neil Malhotra, Vice President, Claridge Homes who will build the 70 Gloucester development.
The other will be $3.9 million for a passive housing Centretown Citizens Ottawa Corporation project on Arlington Avenue. It will feature 16 rental housing units with rents well below 30% of median household income in the area.
“Through the National Housing Strategy, more middle class Canadians – and those working hard to join it – will find safe, accessible and affordable homes where their families can thrive and have the stability and opportunities they need to succeed. Our Government is committed to increasing the supply of rental units for Canadians through projects like the ones we are announcing today,” added Jean-Yves Duclos, the Minister responsible for Canada Mortgage and Housing Corporation.
by Steve Randall Ι 24 Sep 2018
Investment activity in commercial real estate in British Columbia has continued its bull run in the first half of 2018.
A new report from Avison Young says there were 102 deals with a total value of $3.04 billion, the second highest on record for both deal count and total dollar volume.
However, a more cautious approach is being shown by investors in residential land amid rising political uncertainty, rising construction costs, and affordability issues.
Investors are questioning the high land values, especially in Vancouver. But for other CRE sectors, demand remains strong.
“Rising land values had the effect of increasing the cost of not only land, but any and all commercial real estate assets that included a land play,” comments Avison Young Principal Bal Atwal. “This has been one of the contributing factors of cap rate compression for a large majority of investment sale transactions over the last few years. As the land market now starts to take a slight breath, it remains to be seen over the next few months if the market will maintain its recent upward trajectory, stabilize at current levels or begin to falter.”
How the sectors are performing
Office investment sales activity in BC generated more than $1 billion in the first half of 2018 with 23 transactions valued at $1.04 billion.
The sale of BC retail assets remained exceptionally strong in the first half of 2018 with 43 transactions valued at $1.55 billion following the record-smashing retail investment sales performance of 2017.
Industrial investment activity still remained strong in the first six months of 2018 with 36 industrial transactions valued at $449 million – a slight decline from the first half of 2017 when 37 deals valued at $456 million were completed.
Sales activity of BC multi-family assets remained at historic heights with 42 transactions valued at $674 million in the first half of 2018 with the number of deals falling just short of the first half of 2017 (46) but with greater dollar volume ($652 million) than what was recorded a year ago.
by Steve Randall Ι 24 Sep 2018
Investment in Edmonton’s multi-family residential rental and industrial market helped fuel a record-breaking quarter in 2018 as the province continues to claw its way out of recession.
According to data released by CBRE Limited, Edmonton had its best quarter ever in Q2 this year, recording $1.49 billion in commercial real estate investments, representing a 51 per cent increase from the previous quarterly record of $994 million set in the fourth quarter of 2016. This brings Edmonton’s first half investment total to $2.07 billion, which is an all-time high for a half-year period and up from the previous record of $1.7 billion set in the second half of 2016.
Dave Young, executive vice-president with CBRE Limited, said Friday the growth in investment in the multi-family market is being spurred on by consumers looking for high quality apartment buildings, especially in the downtown core.
“We’re starting to see a transition from old to new,” said Young. “If you look at the inventory of apartment buildings, a lot of that was built from the mid-1950s to maybe the early-1980s, so you have a lot of older stock out there and it’s not giving what tenants are demanding.”
Tenants are looking for newer amenities that older apartment buildings don’t have, such as en suite laundry, and developers are beginning to take advantage of that demand.
Ice District has helped to fuel the demand within the downtown core, said Young, but it’s also about a shift in mindset.
“It’s urbanization, it’s densification. In terms of transportation patterns, in terms of traffic and in terms of transit, everything is focused on an urban lifestyle and we’re finally getting to see that,” said Young, citing The Hendrix apartment building, 9733 111 St., as an example.
“Ice District, for sure, has had an impact on our downtown core for the positive, but you also look at 104 Street from basically 100 Avenue all the way to 104 Avenue, there’s downtown urban living there that wasn’t there when I got into this business in 1990.”
There is still some demand for development around the Anthony Henday, Young says, but it’s not as active as downtown.
Out with the old
The demand for higher quality buildings is also being felt in industrial markets.
Tenants are really demanding more functional space and are being more strategic where they invest, said Young. Vacancy rates remain healthy, but the majority of future vacancies will be in older industrial buildings that just aren’t as adaptive.
“It’s kind of like the old apartment buildings where you see tenants getting sucked out into the new ones, the same thing is happening in the industrial buildings,” said Young. “The days of a 19-foot, distribution building just off 142 Street and the Yellowhead, they’re gone.”
When I first started working with Commercial Mortgages about 10 years ago, I had a hard time wrapping my head around what went into putting one of these deals together. Each deal is truly unique and I soon found can have many moving parts. In order to get a better understanding of what I was doing, I needed to put in place a process, or standardized approach that I could follow on all my deals. After a while, I found what works for me and wanted to share this approach. I found that there are several key factors that contribute to a typical deal and how addressing these factors can help you to “See the Deal”.
Since most, if not all commercial mortgages are paper-based and there really isn’t a web-based system like filogix that you can use to enter information into in order to produce a clear picture, the story or summary that is prepared for a commercial deal is very important. This summary gives me a good overview and allows me to “See the Deal” so that when I’m speaking to a prospective lender, colleague or drafting a quick email, I can highlight the critical points fairly quickly and concisely.
One way to “See the Deal” is to use the 3-legged stool or a 3-point triangle like the one at the beginning of this article. Basically, the main points or factors that I work with and focus on in my approach are:
1) The Covenant
2) The Income
3) The Real Estate
The idea is to analyze each point and gather the necessary details for each in order to determine whether that point is weak or strong. What documentation do you need to assess each point? Also, what or where are the risks associated with each point and if necessary how can these risks be mitigated? How can you best sum up each point?
When looking at the ‘Covenant’, consider this;
- What is the Borrower’s net worth? With commercial mortgage financing, the Borrower’s income is not that important since we don’t rely on their income to pay the mortgage – the property’s rent does. The Borrower’s net worth is more important.
- Is the Borrower’s net worth all comprised of real estate or is it well diversified? How much in liquid assets do they have?
- If they needed to inject funds into the property for emergency repairs (ie. Roof or HVAC system needs a replacement immediately) or they need to cover the mortgage payment from their own resources due to unexpected or chronic vacancy, would they have the funds available?
- How’s their personal credit? Are their taxes current? Do they have any other sources of income?
When looking at the ‘Income’, we typically consider what determines and what can affect the property’s rent and this can include;
- Cash flow. What does this look like? How much rent does the property generate? What is the likelihood that it will continue?
- Net Operating Income (NOI), which is Income minus Expenses. The NOI is important since we use the NOI to calculate the two critical ratios used in commercial lending – the Loan To Value (LTV) and the Debt Coverage Ratio (DCR)
- What are the leases like? Short term, long term? Do the tenants pay for any expenses such as taxes, utilities, insurance or maintenance? Ie. Are the leases Gross, Semi-Gross or Triple Net?
- Do all the leases come due at the same time, in the same year or are they staggered over several years (this is known as Rollover Risk)?
- Are the rents below, at or above market rents? How do they compare to similar properties? Are there yearly increases (step-ups)?
- What type of tenants are they? Weak or strong? For example, Tim Horton’s is a great tenant; stand-alone restaurants, not so great. What’s the history of the tenancy?
- What is the vacancy like and how has it been historically?
- Does the client have a properly prepared Rent Roll?
Finally, when looking at the ‘Real Estate’ (which IS the lender’s main security) some of the points to consider are:
- What type of property is it? Conventional, unconventional or special use? Can it be easily converted for other uses?
- Where is it located? Is it urban or rural? Is it located in an area with other similar properties? Or does it stand out?
- What is the property worth? How does the value compare to similar properties? Do we have an appraisal?
- What is the property’s condition? Are there any major repairs or upgrades that are needed in the short or medium term?
- How old is the property? Is the property too old to repair? Do we have a Building Condition Report (BCA)? Will we need one?
- Are there any sources of environmental impact on or near the property? What is located across, next to or upgrade to the property? Do we have an Environmental Site Assessment (ESA)? Will we need one?
I’ve ended each section with Etc because by no means did I include all of the possible things to consider or questions to ask.
By being able to “See the Deal” a commercial broker will be able to discuss the file clearly. Discuss the strengths and weaknesses. Discuss the risk factors and what can be done to mitigate those factors. This will also help in gathering the necessary documentation and identify what will be required in order to proceed, quickly and efficiently.
The benefits to developing an approach similar to this are many. This allows for a more streamlined and standardized process which will also make a broker’s life easier when putting the deal together and making the process as painless as possible for the client.
It also instills confidence in the lenders you will be marketing the deal to since it shows some thought and insight into your underwriting. Also, one factor I know is critical with most lenders, is to have some conviction and to believe in the deal; when submitting a file for review I find that really standing behind the deal, “…I recommend the deal based on…..” and list your thoughts goes along way versus saying, “….I have a deal….what do you think……?”. “Seeing the Deal”, makes it easier to stand behind the deal and express why. This will only strengthen your relationship with your lenders.
In the end, this will result in a quicker turn around and the ability to get a better deal for your client.
Ermanno Tasciotti | January 2018
“It Depends”. These are the two words I frequently use when discussing a commercial mortgage. Whether it’s how much of a downpayment is needed, what the rate is, amortization, etc. It depends.
Let’s consider the first one; downpayment. How much does a client need to put down for a commercial property purchase? When determining this amount, the process isn’t as simple as it is for a residential deal but in some ways is very similar.
Please note that the following discussion pertains to when underwriting a deal based on the property’s cash flow and when dealing with a lender that will look to the rental income as the primary source of repayment.
With residential, the clients can get a preapproved mortgage by calculating how much they qualify for using their income and existing debts. They can then make a Purchase based on their Pre-Approved Mortgage plus their Downpayment.
Preapproved Mortgage + Downpayment = Purchase Price
With commercial, you really can’t get a preapproval since the mortgage is generally based on the income of the property and not the borrower – having said that, I can take the income and expenses on a commercial property and approximate how much of a mortgage it can carry, while not a preapproval, it can give you some guidance – contact me for details!
So you start with a Purchase Price and then work backward similar to a residential preapproval and end up with the Qualifying Mortgage amount and subsequent Downpayment. The process looks like this,
Purchase Price – Qualifying Mortgage = Downpayment
The best way to illustrate this is with a couple of examples. To make things simple I will be looking at conventional and not high ratio financing.
Please note the following terms:
- Net Operating Income or NOI
- Debt Coverage Ratio or DCR, DSC or DSCR
- Loan To Value or LTV
- NOI. This is the net income once all expenses pertaining to the property are deducted from the rent collected. Typical expenses can include, property taxes, property insurance, utilities, snow removal, routine maintenance, etc. There will also be allowances made for Vacancy & Bad Debt, Structural Expense and Management. Every deal is different and it depends on the specifics of a particular deal which expenses will be included. Note that these expenses do not include mortgage principal and interest.
- DCR. This is the ratio of the NOI to the mortgage principal & interest payments. Depending on the deal, an acceptable DCR would be as low as 1.10 (or 110%) to 1.30 (or 130%). This should always be greater than 1.00 or 100%. The ‘extra’ or excess over 100% is a cushion that gives the lender comfort to account for any interruptions in rent due to high or chronic vacancy, unexpected costs, etc that could reduce the income for a period of time.
- LTV. The ratio of the loan or mortgage amount to the lesser of Purchase Price or Appraised Value. ‘Rule of Thumb’ LTVs can range from 60% to 70% for most commercial deals and 75% for multi-family (m/f) properties. (Note this 75% for the example below). Each lender is different.
Clients are looking at purchasing a single-family dwelling. They are preapproved for a $562,500 mortgage (GDS/TDS are in line) and have $187,500 for the downpayment. Using the formula above,
$562,500 + $187,500 = $750,000
Pre-Approved Mortgage + Downpayment = Purchase Price
They can purchase a home valued at $750,000. This works out to an LTV of 75% ($562,500/$750,000). Assuming that the credit is good and the property is acceptable – the deal could be fairly straightforward.
Now let’s look at a commercial property selling for the same amount of $750,000 and again, the client has $187,500 to put down.
We’ll assume the subject is an 8-plex m/f. The subject is fully occupied with a rental income of $7,200/mo or $86,400/yr. Applicable expenses come to roughly $46,400/yr.
The NOI in this case is $86,400 – $46,400 = $40,000.
I’ll assume that the property is appraised at $750,000. As you will see below, the property value won’t be a factor in determining the mortgage amount. The driver will be the DCR.
Now here’s where they differ. In order to get an acceptable mortgage amount, we will use a trial rate (let’s go with 3.5%) and generate a P&I payment based on a 5 yr term & 25 yr amortization. Working backwards we make sure to stay within an LTV of 75% and a DCR of 130% (In this case – some lenders may go with 120%).
Trial and error yields a mortgage of $515,000, a DCR of 130% and an LTV of 68.7%. Using the formula above,
$750,000 – $515,000 = $235,000
Purchase Price – Qualifying Mortgage = Downpayment
So if they are buying the subject for $750,000 and the property qualifies for and can only support a mortgage of $515,000, the client will have to come up with a downpayment of $235,000 or $47,500 more than they have. As you can see, you just can’t take the purchase price and calculate an amount based on either 60, 65 or even 75% LTV. Furthermore, if the same property sold for $800,000, the mortgage amount is the same since the NOI doesn’t change and the client would now have to put $285,000 down (64.4% LTV).
In this case the client now has three options if they wish to proceed:
1) Come up with the difference from their own resources.
2) Secure a second mortgage. This will likely be at a higher rate & fees and note that the lender providing the first may have to approve allowing the second due to serviceability.
3) Look at an alternative lender (private, etc) that will do the full amount requested ($562,500) or even higher but at a higher rate & fees.
In summary, when calculating downpayment for commercial, treat it like a residential preapproval and work backwards.
- The ‘client’ would be the property and the ‘client’s income’ would be the NOI.
- The DCR would be the qualifying ratio much like the GDS/TDS.
- Once you have a ‘Qualifying Mortgage’ (ie. Pre-Approved Mortgage), then you look at the purchase price/appraised value for the difference.
Now I must stress that the numbers alone DO NOT determine whether or not you have a deal; they’re just a guide or an estimate to get the analysis going. As per the Mortgage Triangle I will discuss in a future post, the Income is one point that must be fully analyzed; there’s also the Real Estate and the Covenant.
I hope this helps give a clearer picture as to how the downpayment needed for a commercial mortgage is determined. As you can see, it depends.
If you have any questions or comments, please feel free to call me at 647.302.8065.
Now is the time to think commercial!
By: Ermanno Tasciotti | January 2018
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Term: 10 Years
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