Special Report on Commercial Lending


Perspectives on the Commercial Lending Landscape

Springwood Development

We aked Bill Butler for his insights into a few questions about the current Canadian Commercial Lending landscape and trends for the future, and here's what he had to say.

Q: Who is lending, and on what type of transactions?

We've certainly seen a tightening of availability of capital. To the extent where we've had some development success, we work much harder to find the funds. The safety valve in the West has been the Alberta Treasury Branch and the Canadian Western Bank. They've stayed reasonably active (especially the Alberta Treasury Branch).

The life company lenders we traditionally work with - Great Life, Sun Life and Manulife - have all been tighter with their lending practices.

Lenders are focusing on new spreads and lower ratios, but clearly they want to do business with the people that they've done business with in the past as opposed to being courted by new borrowers.

I think relationships have paid off from that point of view. I think this pattern is going to continue over the next couple of years.

Q: What will likely be the spread between prime and lending rates?

The spread (related to the bond rate) has come down from about 400 basis points to about 300. Our opinion is that over the next six to twelve months you will probably see further reduction in the spread to about 200 basis points.

I think at some point in time lenders are going to relax some of their tougher standards because quite frankly, as they get more and more money coming in they have to put some portion of that money into solid long term real estate. Lenders want to go with tried and tested borrowers. They are certainly looking closely in the retail side at the strength of the tenants you have and the market that you're located.

Q: Where are underwriting and lending practices heading?

From an underwriting perspective they are requiring a greater percentage of the project in developers' equity and more up-front money from the developers for construction loans.

We had historically worked off non-recourse financing. Lenders are shying away from this model or at least reducing the ratios to such a point that non-recourse becomes impractical. Developers are being pressured to bundle projects to get commitments.

Lenders would rather see more public company models where all of your projects are under one ownership. Smaller developers who don't have huge bundles of assets under one company are being asked for personal covenants or cross-collateral guarantees.

Q: What are the major sources of debt financing and what will be the yield expectations?

That question is best answered by the lenders. The disappearance of the conduit lenders will create challenges for many existing borrowers. With respect to yield — the model has certainly changed dramatically. We're going to head back to more traditional practices. It was probably overdue and [the industry] had certainly lost track of values. I think lenders and borrowers are re-calibrating the model and I think we're headed toward a slow, steady market where fundamentals will return to where they were five to ten years ago.

Q: How much more equity will be required from borrowers?

Traditionally, lenders were lending between 65 and 75 percent of value. Now two things have happened, the lending ratios have fallen five to 10 percent, and secondly, valuation of the real estate has gone down by 20 to 30 percent. The combination of the two factors is creating significant equity challenges for developers and for borrowers on mortgage renewals. Small developers are getting squeezed out of the market.

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