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Creative strategies for a challenging southwestern Ontario commercial real estate market

Ask The Expert: Doug Murray, SIOR, Senior Vice President, Sales Representative, Colliers

Cherry Beach is a high-density residential redevelopment site in Hamilton, Ontario that Colliers’ Doug Murray and Team Murray Faldowski were recently involved in. 
Provided by Colliers Canada.

What challenges does today’s market present for commercial real estate brokers?

Ten interest rate increases in the past year and a half have led to a tightening credit environment. Real estate transactions are down across the market; however, some sectors have fared better than others.

Our clients have shared that lenders are becoming much more risk-averse, even with high-value asset classes such as industrial and multifamily. Media focus has been on interest rates, ignoring other key factors such as regional industrial availability dropping to just 1.4%, and a 10% increase in multifamily transactions in the GTA over the past year. Even when borrowers can find their fiscal balance with current mortgage rates, lenders are scaling back or passing on transactions they would have completed a mere nine months ago.

How have tightened credit conditions impacted the Southwestern Ontario market?

We are observing that businesses experiencing growth or contraction need real estate solutions today. They do not have the luxury of waiting or trying to time the market. Developers are still adding projects to their pipelines, albeit at an adjusted pace. Investors are still looking for returns and allocating incoming capital.

With Bank of Canada’s hold on interest rates at the start of September, we are seeing a gradual return of activity. The motivation to complete transactions combined with diminished availability of credit has resulted in creative deal solutions and structures. 

How can commercial real estate brokers structure deals to continue to close transactions (or save stalled ones)?

With uncertainty surrounding conventional lending, we are seeing more creative deal structures.

Our team, Team Murray Faldowski, at Colliers services multiple sectors, giving us exposure to transactions in almost every commercial real estate asset class. A creative deal structure for one asset class may not be suitable for another, so our approach is tailored to each client and property. 

For instance, the needs of an owner-occupier buying an industrial building for their own operations are completely different from a residential developer buying a high-density redevelopment site.

Creative deal structures can be effective in navigating tightening credit environments, but they also come with risks and complexities. It is essential to work with experienced real estate professionals and legal advisors to ensure such arrangements are structured appropriately and meet the objectives of all parties involved.

Vendor Take Back (VTB) Mortgages – Although we see these structures across asset classes, they are most prevalent in development land deals. Every development land deal our team is brokering has a large VTB component to it. Conventional financing on development land is extremely hard to obtain, particularly if the site requires additional planning and engineering pre-development. In land development, VTB arrangements tend to be for first mortgages, but in other asset classes, they can be first or second mortgages. 

Share Sales – With share sales deals, the owner of a property doesn’t sell the real estate; rather the owner sells the shares of the holding company that owns the real estate. This deal structure was previously used by motivated sellers to leverage a tax advantage from the proceeds of their sale. Now, we see it used by interested buyers to assume the existing debt structure.

Lease-to-Own – This option allows a tenant to lease the property with the option to buy it at a predetermined price within a specified period. A portion of the lease payments may be credited towards the down payment or purchase price, giving the tenant time to improve their credit or financial position before securing a mortgage.

Joint Ventures (JV) – In a JV, two or more parties combine resources to share the risks and rewards of a real estate investment. This can be beneficial in a tightening credit environment where individual investors or developers may struggle to secure financing on their own.

Debt Assumption – In a debt assumption, the buyer takes over the existing mortgage of the property. This can be an attractive option when credit is tight, and the buyer may not be able to secure a new mortgage.

Sale-Leaseback – A sale-leaseback transaction involves selling the property to an investor and then leasing it back from them. This structure allows the original property owner to free up capital while remaining in the property as a tenant.

Equity Partnerships – Rather than relying solely on debt financing, real estate developers can seek equity partnerships with investors who provide funds in exchange for ownership stakes in the project. This can help diversify funding sources and reduce reliance on traditional loans.

What challenges do unconventional deal structures pose to commercial real estate brokers?

Simply put, unconventional deals impact how a broker gets paid. Traditional brokerage commission agreements state that the seller pays us X% when property Y is sold for Z dollars. 

Consider what happens in a joint venture. For this type of deal, a broker has identified a partner and created significant value for the owner but proceeds of sale will not occur until a distant future event. It is incumbent on the broker to have these conversations with the principals upfront before creative structures are employed to complete a transaction.

It takes expert knowledge and experience to navigate the market and select the right creative structure for the right client and the right transaction. Brokers must learn about corporate and personal tax implications in unconventional deal structures, while refraining from offering tax or financial advice to their clients.

Colliers Canada Brokerage

Website: Colliers Canada Brokerage

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