Friends in American high places

It’s always nice to have friends in high place, but as Mark David finds out, it’s even nicer to have American lenders willing to fund Canadian commercial deals

 Friends in American high places

Brennan Wood has hit upon an interesting and lucrative development for commercial brokers now scrounging around for financing on behalf of clients.

It’s not exactly a secret, but he’s finding a growing number of U.S. pension funds willing to bankroll his clients’ new-build projects, even as the Big Five get stingier and stingier.

“The banks are definitely getting more conservative, particularly on the construction side,” says Wood, a broker with Mortgage Alliance and one of CMP Top 10 Commercial players this year. “What you are seeing is a lot of Canadian conduits being set up with U.S. pension funds, and so there is a lot of American money pouring into the market, for sure.”

Searching for proper financing can often be a thorn in the side of many builders, and an increasingly cool response from Canada’s big banks are frustrating many smaller developments represented by mortgage brokers.

“Obviously, it’s a little bit difficult to find that money because you [need to] know where to look and who to call, and not everybody in Canada has a contact at Wells Fargo or Bank of America,” Wood says.

The fact that U.S. pension funds have been more than willing to provide financing has created many new opportunities for Canadian commercial brokers, especially those who specialize in one specific area.

As Wood explains, many opportunities exist specifically for brokers who specialize in structured finance deals.

If you have a bank that wants to do 50 per cent of the loan to value, he tells CMP, and then you have some mezzanine financing that will do another 25 per cent, (this will help in) structuring these deals.

“For brokers who know how to do that – and they are pretty few and far between – there are a lot opportunities,” says Wood. The Toronto professional personally brokered $150 million in commercial deals during 2011, a feat earning him the second spot on CMP’s inaugural Top 10 Commercial Brokers list by funded volume.

The banks’ loss has resulted in a major gain for brokers, who have benefitted greatly at a time when more and more investor clients are looking to commercial deals, both big and small, as a hedge against small-scale residential.

“They benefit because developers are used to just calling up their bankers and easily getting a loan,” Wood says. “But now, they’re finding it more difficult. So a broker who is working with foreign institutions like we are can definitely benefit by introducing the money sources into the market with the builders.”

Wood attributes the banks’ collective stinginess to the fact that the markets in many major cities have begun that downward slide analysts have been promising for months.

“In Toronto, for example, it [the market] is starting to slow down a little,” says Wood. “They [the banks] are on the ground, and they have a lot of money out there with some very large builders, and they just aren’t hungry for the product anymore. They’ve filled up that silo, and they don’t need more construction loans. Otherwise, their lending ratios aren’t going to look very good.”

Foreign financers, specifically those based in the U.S., seem to enjoy the prospect of providing financial backing Canadian property builders. According to Wood, it all boils down to the fact that they simply have more money available to those who need it.

“The foreign banks have huge amounts of equity, and they’re hungry for projects,” Wood says. “They need yield, and they’re not getting it in their local markets.”

While the U.S. market has now begun to claw its way back from the housing crisis that ultimately cancelled construction plans from one end of the country to the next, lender confidence in new projects remains muted, says one analyst.

That isn’t necessarily the case for Canadian projects, the success of Canuck REITs (Real Estate Investment Trusts) demonstrating the level of American appetite.

Going forward, Wood predicts that the trend of U.S institutions handing out loans to developers in Canada may grow, even as the Big Six in this country edge toward more conservative underwriting, itself a reflection of regulatory concerns about loose lending practices.

“I think it will continue as long as the Canadian market is perceived as being strong and a good, safe place to put money as a foreign bank,” says Wood. “If Canada’s credit rating begins to slip, or the housing market takes a hard fall, the foreign lenders are going to pull back fast and hard.”

Details, Details, Details:

Although U.S. lenders often seem willing to part ways with their cash in order to fund new Canadian projects, they tend to focus on some specific criteria when determining which horse to back. Their decision is often based on four criteria: product type, loan amount and term and loan-to-value ratios.

Loan term – “U.S. funds seem to have a lot of 10-year money, which can be limited or non-recourse loans,” Wood says of the American lenders’ collective attitude towards Canadian looking for funding. “This is something that just doesn't exist for Canadian banks, which are aggressive in product that is high-quality, but not quite Triple-A, and owned by large, sophisticated borrowers.”

Product type – The types of projects that American lenders look for include “assets that are triple-A, but owned by small clients” and “[assets] where it’s just not good enough for a pension fund because lease up hasn't occurred or there are some leases coming due or there is a little bit of hair on the deal,” says Wood, who adds that “the rates are still great.”

Loan amount – Americans tend to think big when it comes to handing out loans. Wood indicates that “on the construction side, it has to be large, a loan of $10 million or more for them to even start looking at it.”

Even on the smaller side, the loans may seem relatively large on this side of the border. “The minimum loan size is $2 million,” Wood says. “I think the smallest deal we have done with an American lender in (our) office is $8 million. For construction projects, they want loans of at least $10 million.”

Loan-to-value ratios are also important for U.S. financiers. These can vary by the project, but according to Wood, the Americans tend to zero in on a specific LTV ratio.

“It’s all deal and asset specific, but you’re typically in the 65 per cent to 75 per cent range for LTV,” says Wood. “What you are getting with American lenders is some flexibility.”

Mortgage brokers are very much onboard with helping their Canadian clients to find the right American lender for their projects, and have been providing them with good referrals upon request. This is not only beneficial to the clients, but it also has the power to help the brokers in the long run.

“As a side benefit for our clients, recently, we have [had] a number of large clients who are taking advantage of the wonderful opportunities in the U.S. real estate market,” Wood says. “As we do more business with American lenders, we gain credibility with them. We can refer our clients who are buying in the U.S. to American lenders who are more than happy to lend to Canadians buying property down there. So we can help Canadians finance purchases in the U.S.”