Special Report on Commercial Lending


Four Principles for Weathering the Economic Storm


The past year has been a challenging one for those trying to arrange real estate financing. However, those organizations that have adopted a prudent and thoughtful strategy during the good times to manage their debt requirements -- one that kept sight of the downside risks -- are weathering the storm just fine.

As our company works its way through these challenging economic times, four principles that we have been adhering to for many years have been particularly helpful.

Cultivate Multiple Lender Relationships

No one lender can be the most competitive all the time, or in every market in the country, or for every asset type.

While there can be advantages to working with one lender (stream-lined approvals, pre-negotiated loan documents, standardized reporting), if that one lender's capital allocation to real estate was frozen, or worse, cut over the past year, that could have jeopardized a company's entire ongoing operations. All of a sudden, the advantages don't seem so significant.

Moreover, as capital has become increasingly scarce this year, our experience has been that lenders want to make sure existing clients are serviced first and foremost. It's been much easier to go to a lender to discuss expanding an existing relationship than it has been to start a new relationship.

Look Beyond Pricing and Loan Amount

Make no mistake, pricing and loan amount have to be competitive, but it's equally important to build relationships with lenders that can offer other value-added benefits. We work with lenders who won't impose onerous restrictions on how we run our business, who can help us in all the markets in which we operate, and, because real estate isn't a passive investment, who are prepared to work with us to find solutions when deals don't work out as originally expected.

As the economy slows down, it's more important to have debt in place that gives us the flexibility to make the changes needed to keep our projects viable, than it is to save two basis points when we negotiate the deal.

Match Capital to Investment Timeframe

We generally try to adhere to a strategy of financing core assets that we intend to keep in our portfolio for the long term with long term fixed rate debt. Over time, loan maturities in our portfolio are spread out so that we have minimal renewal exposure in any given year. This has the benefit of providing a natural hedge against sudden interest rate movements as well as insulating the portfolio against a sudden capital shortage.

For our development projects, we try to arrange financing that has a term that is at least equal to the length of our expected development period, with the right to extend for one or two years beyond that. If we're completing a project as the economy takes a downturn, or at a time when a market dislocation has made take-out financing unavailable, it's reassuring to know that we have an existing financing commitment that will carry us through the cycle. There is a cost to having this "insurance", but we view it as a worthwhile investment, particularly this year.

Take the Long View

It's often difficult to know whether any particular financing is going to look good compared to market conditions in six or twelve months' time. Indeed, every financing deal completed between 2004 and 2007 looked bad when viewed in near-term hindsight as bond yields and credit spreads kept contracting.

We try to look at the current market in the context of what the experience has been over the past 50 years. Since markets tend to gravitate to the long-run average (and the lending market is no exception) it's easier to maintain a realistic perspective when looking at a longer time horizon. By that measure, today's situation, where five-year money can still be had for mid 5% and 10-year money for mid 6%, still compares favourably with the long-term experience.

As bad as things seem to be in the Canadian lending market today, our experience this year has been that good quality projects with strong sponsorship can still find financing. Yes, more equity is required, and the money is a little more expensive, and we have to work much harder to find it. Considering the experience in other parts of the world however, so far the Canadian market has fared pretty well.

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