The Multi-Family financing market is in continual flux due to the so-called sub-prime crisis. The rules seem to change on a month by month basis.
The following is an article written by Peter Cook, Assistant Vice President of Commercial Lending at First National Financial Corporation. First National is one of Canada’s largest apartment lenders.
It provides insights into the market, choices that need to be made when considering the financing of your Canadian multi-family properties.
THE LOWEST RATE MAY NOT ALWAYS BE THE BEST DEAL
The emergence of the World Wide Web has had an amazing impact on our day to day lives, especially in the way we shop. The convenience and speed of the Internet has turned many industries into a commodity. Searching for the lowest airline tickets and car rental rates, purchasing shares of your favourite stock or finding the lending institution with the lowest home mortgage rates has become a simple process without leaving the comfort of your home computer. The days of obtaining sound advice and great service from your travel agent, stock broker or banker is becoming a thing of the past. The lowest price seems to be the only factor when consumers make major purchases or financial decisions.
When arranging new mortgage financing apartment owners should be careful not to convert the commercial lending industry into a commodity. Selecting a lender based solely on the lowest interest rate quotation may not always be the best deal.
Securitization has increased the number of lending institutions and commercial mortgage products available to the apartment industry. Borrowers have their choice of financial institutions including chartered banks, life insurance companies or a number of mortgaged-backed security lenders. Financing products available include CMHC insured, conduit and conventional mortgages. The method of determining the interest rate, the timing of when your rate may be set, borrowing costs and closing requirements will vary depending on the lender and product you choose. Signing a financing offer and providing a deposit to the lender with the lowest rate may be a costly mistake.
Interest rate quotes provided sixty days prior to the funding date may have little value if you’re not permitted to establish the interest rate until five days before closing. In a rising interest rate market this type of limitation by your lender may cost you several thousand dollars in additional interest. Several lenders will allow the option to set the rate early with or without additional cost. Borrowers should have their lender disclose details of when the interest rate may be established and any additional costs associated with an early rate set.
A clear understanding of how the lender determines the interest rate is also an important factor that varies among institutions. Most commercial mortgages are established based on a spread over Government of Canada bond yields. Bonds yields are published daily in major newspapers or may be found at the Bank of Canada website (bankofcanada.ca.). A number of institutions have moved to setting their rates on a spread over their internal cost of funds. Borrowers may be at a disadvantage as the lender’s cost of funds are not published and do not always fluctuate at the same time as bond yields. Request that your lender provide a quote based on a spread over Government of Canada bond yields only and define which bond they will be using to set the rate. Another convenient option of determining interest rates for smaller commercial mortgages is a spread above or below residential posted mortgage rates.
Borrowers often do not consider the lender’s closing costs when choosing a financial institution. The difference in costs between lenders may be equivalent to adding several basis points to your interest rate quotation.
Third party report costs will vary depending on the appraisal, engineering/structural or environmental companies that are approved by your lender. I’ve had appraisal quotations on the same apartment building range between $2,500 and $5,000. Environmental reports and engineering/structural reports will also vary depending on the engineering firm completing the investigation. The difference between firms may add $2,000 to $3,000 to your borrowing costs.
The lender’s legal fees may vary by several thousand dollars depending on the law firms approved by your lender. We recently had three quotes for legal fees on a $2,000,000 mortgage that ranged between $2,500 and $5,000.
Insurance requirements also differ between lenders. Increased liability coverage or other additions to your policy required by your lender may add several hundred dollars to your annual insurance premium.
Lender’s processing fees may range from 0.10% to 0.50% of the loan amount depending on the institution.
Hiring a mortgage broker to arrange your mortgage financing is often a great idea to help navigate through the lending process and shop for the best rate. However, a half point brokerage fee adds 0.12% (12 basis points) to a five year term and 0.075% (7.5 basis points) to a ten year term mortgage.
Although most lenders will not provide details of future renewal fees and requirements, having a basic idea of their current structure and fees may provide an estimate of costs at maturity.
The following is an example of two quotations on a $2,000,000 mortgage with different interest rates and closing costs. The example proves the lowest rate is not always the best deal.
Lender A Lender B
Loan Amount $2,000,000 $2,000,000
Interest Rate 5.15% 5.0%
Term 5 years 5 years
Amortization 25 years 25 years
Interest Costs – 5 years $482,498 $468,069
Lender’s Processing Fee 2,000 10,000
Appraisal Report 3,000 5,000
Structural Report 1,200 2,500
Environmental Report 1,200 2,000
Legal Fees 2,500 5,000 Additional Insurance Requirements nil 3,750 ($750/yr)
Total Cost of Borrowing $492,398 $496,319
Although the quote from Lender B was 0.15% (15 basis points) lower, the total cost of borrowing over the first five years was $3,921 higher than Lender A. If the borrowing costs were converted into the interest rates over the five year term, the equivalent rates would be 5.27% for Lender A and 5.35% for Lender B.
Also, having a great relationship with a commercial lender is a key to the success of any real estate investor. Borrowers should take into consideration the level of service provided by the lending institution, including location of where their mortgage will be administered, staff response time, industry knowledge and product availability. Saving a few basis points in rate on your mortgage may easily be off set by obtaining the wrong advice or receiving poor customer service.
Borrowers should take their time when arranging new mortgage financing and receive written quotations from more than one lending institution. The financing proposal should not only include the current interest rate but how and when the interest rate is to be determined. Also, request a detailed list of all costs associated with the transaction including estimates for legal fees, third party reports and insurance requirements.
Fortunately, the Internet has yet to turn the commercial lending industry into a commodity. Experienced real estate investors know the importance of a lender in their long-term success and do not always base their financing decisions solely on interest rate. Obtaining a competitive rate along with low costs, sound advice and great customer service is still a necessity and available in our industry.
Peter Cook is the Assistant Vice President of Commercial Lending at First National Financial Corporation. First National is one of Canada’s largest apartment lenders and has over $16,000,000 of mortgages under administration. Peter may be reached at 416-593-2913 or 1-800-465-0039.
This article first appeared in the FRPO’s Fair Exchange magazine and is published with permission from the author Peter Cook.
Friday 20 June 2008
Sunday 1 June 2008
The Must Have Books - Recommended Reading
In response to hundreds of request, I have begun to create a Recommended Reading list. These are books that have had a substantial impact on my life or business. Plus a few others that are just great reads. They cover many genres, and many types of business philosophy.
The Dip by Seth Godin
The Mystery of Capital by Hernando de Soto
Happier by Tal Ben-Shahar (Author)
RoundIreland
Must Haves:
Law of Success: The 21st Century Edition by Napoleon Hill (Author)
Law of Success
Winners Never Cheat by Jon M. Huntsman
It is true, nice guys DO finish first. Discover that you can live by high standards, morality and integrity and still be incredibly successful. What a revelation, Chapters include Check your Moral Compass, Pick Your Advisors Wisely, Get Mad - Not Even, the Bottom Line and many more. Written by a true winner and self-made billionaire, everyone should read this at least once per year. The most important $21 you’ll ever spend.
Real Estate & Business
Commercial Real Estate Investing in
Commercial real estate, which include multi-family properties, is a complex world in which to invest and having a solid background in the business of analyzing, buying and operating a commercial piece of property is critical. This book, all 672 pages of it, are packed with insights, strategies and key metric that any serious commercial real estate investor must understand.
101 Tax Secrets for Canadians 2008: Smart Strategies That Can Save You Thousands by Tim Cestnick
OK, tax time is over. Whew. Now it is time to plan for next year so you don’t miss some key tax planning strategies that need to be started today. Don’t wait for next years deadline to look back and see the opportunities you missed. Whether you own real estate, operate a business or have a job, you’ll find some simple steps to take.
101 Tax Secrets for Canadians 2008
The Power of Focus: How to Hit Your Business, Personal and Financial Targets with Absolute Certainty by Jack Canfield, ...
Focus is the Number one habit that the most successful investors and business owners continually work on. This practical guide will give you tools and action steps to help grab back more of your time.
The Speed of Trust: The One Thing That Changes Everything by Stephen M. R. Covey
Building relationships that you can trust in business is one of the cornerstones of long-term success. Stephen Covey provides insights into why some relationships are doomed to failure from the beginning, and why others last a life-time. If you are having a difficult time getting business deals done and closed, or just want to learn how to build you business more quickly, then this book is a must read.
I learned a long time ago, when you want to get something done, always give it to someone who is busy. Counterintuitive maybe, but it works. In today’s society, there seems to me increasingly more to get done. David Allen provided me with a system to get more done AND have more free time for myself, my family and my hobbies. A very simple book that even the busiest of us MUST take time to read so we can grab our lives back.
International Real Estate Handbook by Christian H. Kalin
Buying outside of
International Real Estate Handbook
The Dip by Seth Godin
Really, any business owner should have the complete selection of Seth Godin’s books. His innovative and unique way of looking at business can shift you out of your patterns and habits to discover opportunities, you had never seen before, sitting right in front of you. In the dip, you will discover that sometimes the best thing to do is quit… the key is to know if it truly is time to dig in our jump out!
The Mystery of Capital by Hernando de Soto
Written by the President of the 2nd most important think tank in the world (according to The Economist Magazine) this very important study of world economies and how property rights can be the one catalyst that can turn a poor country into a prosperous one. There are 5 mysteries of Capital and the author reveals them all and shows how they affect the world. A heavy read worth working your way through if you are serious about understanding the base of capitalism.
The Power of Tact by Peter Legge
The subtitle says it all for this book – “It’s not what you say or do, it is HOW you say and do it.” Today’s society is filled with people not even knowing that they are repelling those they want to attract and you can see it in business, real estate and social settings. I think that everyone should read this book at least once in their lives, and it wouldn’t be too bad if it was a mandatory course in school. (or at least parents teach it to their children so that life becomes more easy for them).
Other
The New Nutrition by Dr. Michael Colgan
A book that changed how I looked at food and nutrition. By opening my eyes to the reality of nutrition (not the marketing hype) I was able to grab control of my energy, have clearer thoughts and live life with much more enthusiasm. Did it happen over-night, of course not. But this book was the catalyst of this major change.
Happier by Tal Ben-Shahar (Author)
A simple title for a not so simple process – creating more happiness in your life and the world. This book is the basis of a very popular course at
Law of Attraction: The Science of Attracting More of What You Want and Less of What You Don't by Michael Losier
This book adds the missing component from the much talked about ‘The Secret.’ Real life strategies that anyone can use to help attract more of what they want in the life, business and real estate.
Law of Attraction by Michael Losier
Three Cups of Tea – by Greg Mortenson
An epic real story about how one person can make a massive difference in society, by bringing passion and vision and not allowing others, or road-blocks, to push them off their dream. Amazing true story of courage, vision and determination that will inspire anyone who reads it.
Searching for Bobby Orr by Stephen Brunt
An incredibly well written account of the NHL’s transition from a 6 team league to what we know today. Stephen Brunt’s writing makes the story leap off the pages and puts you back in front of the black & white TV on Saturday night for Hockey Night in
Round
One of the funniest books I have read in years, a PERFECT book for summer holidays. It is a well written journey around
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