We had just purchased a 9 unit building in Kitchener, Ontario. Its so nice to finally have this deal wrapped up. It seems like it took us forever (approx. 120 days) to lock up this place. There were a couple times when we faced both challenges and opportunities from our lender, the seller, and insurance broker but somehow, we ended up on top.
Usually, it takes quite a bit of time to set up the lending for commercial deals hence we started working on financing as soon as the offer was accepted. We ended going with a B-Lender with the following terms: 2-year Variable at 4.99% with 25-Year amortization and 75% Loan to Value. Now you might think to yourself, wow, that is a high interest rate. It depends how you look at it. Since the income of the building is not strong, we had to opt in for these terms to close on the deal, otherwise there would be no deal. The end goal is to increase rents, reduce costs and make this building more appealing to A-lenders or potentially take advantage of CMHC financing. Our goal is to turn over at least 50% of our units and refinance within the next 6-9 months of the project.
We thought we had our lender lined up and everything was smooth sailing until 3 days prior to closing.
We received new insurance requirements from the lender that were very odd for this type of property. We scrambled with our insurance broker however found out that our premiums would have more than doubled. We tried to work this out with the lender and understand why they were asking for “full replacement value” vs a specific $ value. This was a mistake the lender made which they ultimately apologized for after but caused a lot of confusion and miscommunication throughout the week. At one point the lender even thought that we could not get insurance for the property which was far from the truth. In fact, we had 7 different quotes ready to go, we simply didn’t want to pay double the premium based on an error. The lender started talking about holding back funds, the day of closing, and essentially jeopardizing the deal. Here is where the creative financing came into play. While we continued to work with the lender, we looked for a plan B. By the way, we could not have done this without our trusty Real Estate agent, who is always quick on their feet and looking ahead. Thank you Chris!
The Plan B: We approached the seller, explained the situation. We asked if they could provide us with a VTB. They were very open to the idea; however, they needed some funds to close on their new cottage. The seller was retiring, and this was their escape from the busy lifestyle in the city. After working through the details, we were able to get 68% VTB of the purchase price. The terms were 5% with a 4-month term (interest and principal due at end of term). We were still $100k short, so to close, we got private financing that very day to finalize the deal.
This turned out to be a home run financing deal for us. First, we got pretty much the same interest rate from the VTB vs the B-lender. In addition, we have deferred monthly payments for 4 months and the lender does not require principal pay down. This gives us an opportunity to start our renovations, while minimizing the impact of holding costs. Essentially this building is cash flowing just as much as what we would expect after the project is complete. That is unbelievable. This is the power of creative financing and simply asking questions. This is not only a win for us but also the seller. They are collecting interest on the asset that they no longer have to manage on the day-to-day. In addition, they were able to defer their capital gain taxes to 2022. That is what its all about, understanding each others’ requirements and building strong relationships.
Stay tuned for more updates on this building and many other projects. Don’t forget to leave us a comment and share with others.
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