Alternative financing strategies

Sometimes innovative funding strategies are needed to fund or close a commercial real estate deal

By
Western Investor
June 30, 2020





Alternative financing strategies. Barry Stuart
— | Submitted

With commercial mortgage rates at historic lows and good availability of funds, we don’t find occasion where alternative finance options are often used. 

There are, however, times when a different finance plan is required for the buyer to fund the deal.

For instance, a buyer may not be able to meet the lender’s typical 75 per cent loan-to- value ratio. The buyer, for example, may be able to come up with only 21 per cent but the seller is motivated to make a deal. 

In some cases, the cash flow from the property may not adequately cover the lender’s typical 1.1 to 1.4 debt-service ratio.

As an example, if the owner of an office building receives $200,000 per month net rent from tenants, a lender will typically not give a loan that requires monthly payments above $160,000, which represents a 1.25 debt coverage.

There are times when a seller may, for many reasons, desire to sell a property but does not immediately require the sale proceeds. 

By offering attractive terms to a buyer, the seller may be able to negotiate a more favourable price prior to a binding agreement.

An agreement for sale involves the basic transfer of control of a property without transfer of title.  

Both buyer and seller execute a binding agreement. The agreement provides similar remedies to a seller that would typically be available to a financial institution, in the event of default by the borrower. 

Vendor take-back mortgages: Unlike an agreement for sale, title does transfer to the buyer upon closing. The vendor registers an instrument against the title in the amount of the mortgage and both parties execute a mortgage document, such as what a financial institution would require. 

Simply stated, this strategy is similar to a typical transaction except the vendor, rather than a bank, is holding the financing.

As a broker I have facilitated both agreements for sale and vendor take back mortgages on several occasions. 

Generally speaking, buyers prefer a vendor take-back because they obtain title and sellers prefer an agreement for sale because it provides an extra measure of comfort due to the fact title remains in the owner’s name.

It’s best to obtain legal advice before entering into either agreement. 

It’s important that both parties are fully aware of their contractual rights, obligations and responsibilities. 

Make sure all the basic terms are identified within the initial sale agreement,such as loan amount, term, interest rate, amortization period, amount of payments (when they commence and whether monthly or bi-weekly) and whether there is a penalty for early prepayment. 

A seller needs to complete a thorough review of the buyer’s financial status, and a personal credit check.

A good commercial real estate broker can help guide a client through the process and provide some useful tips on the questions to ask the lender.

Typically the mortgage broker will charge the client a fee based on the amount of the loan. It is best to deal with someone who does not accept incentives from the financial institution. 

Ultimately good brokers will present options that more than compensate for the fee you’ve paid them.

 

Barry Stuart is a managing partner and senior sales associate with ICR Commercial Real Estate in Saskatoon.  Email: barry.stuart@icrcommercial.com


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