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Commercial Mortgage Commentary – CMLS Mortgage Analytics Group

Making News

Overnight Rate
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%.


GOC Yields
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.

Investments
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.


Commercial Mortgages

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.


CMBS

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.

CMHC

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.


High Yield

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.

Commercial Mortgages: “How to See the Deal”

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?
  • Etc

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 belowat 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?
  • Etc

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 acrossnext to or upgrade to the property? Do we have an Environmental Site Assessment (ESA)? Will we need one?
  • Etc

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

Commercial Mortgages: How Much Down Payment Do I Need?

“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.

Simply put,

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:

  1. Net Operating Income or NOI
  2. Debt Coverage Ratio or DCR, DSC or DSCR
  3. Loan To Value or LTV
  4. 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.
  5. 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.
  6. 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.

Residential Example

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.

Commercial Example

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

Top 5 Reasons to Use Mortgage Alliance Commercial Canada (MACC)

At Mortgage Alliance Commercial Canada (MACC) we pride ourselves in providing the best service possible. Our number one source of referral is via word of mouth, hence we make sure to conduct business professionally and diligently so all parties are satisfied. Here are 5 reasons we think you should use MACC on your next commercial transaction:

 

Top 5 Reasons to Use Mortgage Alliance Commercial Canada (MACC)

 

  1. Mortgage Alliance Commercial Canada was voted Canada’s Best Commercial Mortgage Broker for 5 years in a row by Canadian Mortgage Professionals Magazine
  2. MACC is Licensed across Canada with offices in Quebec, Ontario, Alberta, and BC
  3. 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
  4. MACC will simplify and manage the entire process of the transaction from loan underwriting to lender negotiations, through to the disbursement requirements to ensure that successful completion and funding of the project
  5. MACC has 30 dedicated and experienced commercial mortgage professional at your service

 

If you have a current project you are working on and would like our assistance or have any questions on the best route to take, don’t hesitate to contact us.

MACC, Your commercial financing solution!

416-499-5454 ext 102

info@macommercial.ca

 

Proud to announce we are nominated as the Best Commercial Broker for a 4th year in a row

For the last 15 years, M. Durand has built and led a firm that has become the largest, most active pan-Canadian firm dedicated to the Commercial Mortgage Brokerage Industry. M Durand’s efforts have been recognized by his industry peers’ who have nominated him in each of the last 4 years as the best commercial mortgage broker in Canada. No other professional in the industry has seen such recognition.

Congratulations Michel!

Take Advantage of Low Rates

MACC secured funding for a $4.1M loan on June 27th at a rate of 1.88% for a 5 year term!

 

TAKE ADVANTAGE OF LOW INTEREST RATES!

Not all financial institutions offer the same interest rates or the same terms and conditions. MA Commercial (MACC) has access to over 50 lenders throughout Ontario and the rest of Canada. This means that your transaction or your client will be directed to the best lender.

MACC will review all options on the market to secure what is most beneficial for you or your client.
We can offer 5-7-10-15 and 20 year terms, as well as amortizations of 20-30-35 and 40 years. The rates are at historically low levels so call us today to secure the best rates for your transaction!

English

If you just want some general information on a potential transaction please feel free to contact us! Together, we will look at scenarios to find what suits the transaction best.

MA Commercial, your commercial mortgage solution!

 

(416) 499 – 5454 ext. 259 or info@macommercial.ca

For all your Commercial Mortgage Needs

Just how safe is the ‘safe’ world of syndicated mortgages?

With its playful indoor slide and five-storey “bio-wall” of greenery, Toronto’s five-year-old Corus Quay building—the headquarters of Corus Entertainment—served as an inspirational backdrop for attendees of Fortress Real Development’s “Listen, Learn and Lunch” event three years ago. Attendees at the glitzy real estate event on the shore of Lake Ontario noshed on sliders and listened intently to speeches by several Fortress executives, including CEO Jawad Rathore and chief operating officer Vince Petrozza, as well as star local developers like Toronto “condo king” Brad Lamb. “There’s many ways to make money in real estate,” Lamb says in a heavily edited video of the event posted on Fortress’s YouTube channel, complete with jaunty music. “But one way to make money in real estate is the safe way, which is buying Fortress investments.” A few moments earlier, a Fortress exec trumpeted the value of the firm’s partnerships with Lamb and a Windsor, Ont.-area developer named Charles Mady, saying they are “some of the strongest partnerships you can imagine being part of.”

Fast forward to 2016: Fortress has taken over one of Mady’s projects in Barrie, Ont.—a building with 82 condo units and an eight-storey office tower—after both the development and developer ran into financial trouble. It’s a good thing Fortress stepped in, too, otherwise potentially hundreds of investors who funded Fortress’s contribution to Collier Centre through what’s known as a “syndicated mortgage” may have lost their shirts.

It was stark reminder that there’s no sure thing in the investing world, including Canada’s supposedly “proven” real estate market (to borrow another term from Fortress’s marketing). Yet Fortress has ridden a wave of enthusiasm for its housing and condo projects in recent years, as eager investors, many of them already homeowners, have sought to double down on their exposure to that overheated sector of the economy.

Headed by Rathore and Petrozza, Fortress Real Developments promises to scout out “high quality” projects with “top developers” across the country, including condos in relatively sleepy centres like Barrie, St. Catharines, Ont., and Regina. The firm then offers developers services that include everything from “analyzing and buying the land, to hiring the architects, to building the sales centre to retaining the planners who obtain permits and approvals from the city to improving the quality of the rental units.”

The real magic, however, happens on the back end…. To continue reading click here.