A new company is providing commercial real estate developers with deposit financing on real estate transactions, freeing them from tapping into lines of credits or using liquidity to lock down deals.
Toronto-based FULECap provides developers deposit loans ranging from $100,000 to about $1.5 million at a cost of one per cent monthly interest for a minimum of two months, a three per cent administration fee and legal fees.
Mickey Baratz, FULECap co-founder and principal, says a client asked him more than a year ago if he could arrange deposit financing for him. Baratz, a chartered accountant and licensed mortgage broker, looked into the idea and decided it made sense. Developers he spoke to were “just floored by the idea,” he says.
“For a reasonable fee, you free up and you don’t have to tap into your line of credit or affect your liquidity.”
Banks typically don’t provide deposit financing because their mandate is to lend against collateral, Baratz said. As a result, developers have to come up with money for the deposit from a bank line of credit or money on hand.
In the latter case, money that would otherwise be deployed for existing projects ends up being used for the deposit and sits in the trust account of a vendor’s solicitor during the due diligence period.
FULECap has financed about 20 transactions
Baratz has been quietly testing and tweaking the product since last June. He’s provided financing for about 20 transactions during that period, for a total of about $5 million in deposit financing loans.
So far the deposit financing has been mostly for land transactions in the Toronto area, but FULECap provides deposit financing for any real estate purchase that requires a deposit.
FULECap’s capital for the deposit financing comes from a few silent investors.
It took about nine months before Baratz was set to launch FULECap officially, but then the coronavirus arrived. “We are now ready to move full steam ahead.”
FULECap caters mostly to small- and medium-sized developers who do not necessarily want to tie up their lines of credits and limit their liquidity, Baratz says.
“If you are a big, well-known developer, chances are you don’t need our services. Larger developers can afford to put deposits on multiple opportunities without blinking an eye.”
More diligence for CRE transactions
Baratz notes the due diligence period for commercial real estate transactions is of far greater complexity than it is for residential real estate and often extends for three or four months.
A deposit on a commercial real estate deal is refunded if the buyer aborts the deal, but is not refunded if the buyer waives conditions, he says.
Vendors typically ask for deposits ranging from 2.5 to five per cent of the transaction cost, Baratz says, meaning the deposit on a $5 million land acquisition could be $250,000.
“Obviously the buyer wants to put as little as possible, (while) the vendor wants the buyer to put as much as possible as a sign of good faith to show they’ve got some skin in the game.”
Baratz says FULECAP’s requirements are minimal. As long as the lawyers on both sides are credible and in good standing, all that is required from the client is the agreement of purchase.
Face-to-face meetings with borrowers are not necessary; meetings can be done online via Zoom.
Turnaround time is rapid and the deposit financing can be in the trust account of the client’s lawyer within 48 hours.
Baratz, who has more than 40 years of experience in commercial real estate and finance, is the founding partner of private mortgage brokerage Empirical Capital Corp. He was previously for many years the principal broker at Vector Financial Services Ltd.
FULECap’s advisory board
FULECap has assembled a team of advisors that comprises Kevin Adolphe, former president and CEO of Manulife Asset Management Private Markets and former president and CEO, Manulife Real Estate; Deena Pantalone, founder and managing partner of venture capital group Venturon L.P.; and Jim Emanoilidis, founder and CEO of Westmount Guarantee Services Inc., which provides condominium deposit insurance.
FULECap’s services are available throughout Canada. Baratz says since the company officially launched June 17 he has spoken with potential clients in Montreal and Calgary.
Baratz says a developer can make use of FULECap to obtain additional breathing room to buy additional or better properties. FULECap can also be used as a tool to get a better deal from a vendor in exchange for offering a higher than requested deposit.
Baratz adds many people he has spoken to told him, “I wish I met you a month ago, because I had a transaction that I had to drop because I didn’t have the deposit.
“Their money is tied up.”