Power of Sale - The Basics for Re-Selling the Property (Ontario, Canada - Sellers Only)

Once you proceed to redeem a mortgage now in default, what comes next?  A Power of Sale (POS), as noted in our prior post, is the most efficient and typically quickest means of resolving the default (aka – recovering your funds).

 A properly enacted POS should include much of the following:

·         The mortgagee (lender) has the right to re-sell the property

·          Property should be listed for sale at fair market value

·         Independent appraisals should be obtained (minimum of 2)

·         Document the marketing process (MLS exposure, ads run, signage etc.)

·         Property is Sold on “AS IS” basis with no reps. or warranties

·         Negotiate as with any normal property sale (record all offers/counters)

·         A provision in the sale agreement allowing the mortgagors (borrowers)

    ‘the right to bring the mortgage into good standing’ prior to closing

Although this last point is most often unlikely, legally you must provide for it within any sale agreement. Your lawyer will likely recommend that you attach a POS appendix to any agreement, which will not only address this issue, but also the matter of “no representations/warranties, AS IS sale etc."  This Appendix is a must in re-selling the property and serves to protect your interests with a 3^rd  party buyer.

On the matter of  accounting for all costs associated with a POS proceeding, make sure you maintain a clear record of what these additional expenses are. They typically include legal fees and appraisal costs, but also can involve such other expenses as – property insurance, utility costs, maintenance/management, carrying costs, etc.  Under a properly executed POS, you are entitled to the recovery of such costs which are above and beyond the mortgage balance itself.

Best practice is to follow the clear advice and direction of your lawyer. In addition, seek out experienced commercial brokers in your area, who have an established track record in the marketing of POS properties. 

 

Private Mortgages – What Happens in the Event of Default? (Ontario, Canada Only)

If you’ve invested in a private mortgage, which goes into default – what steps are available to redeem the mortgage and reduce any potential losses? This assumes you’ve taken all the appropriate steps to collect on past due amounts, and the prospects of keeping the mortgage in good standing seem unlikely.

In Ontario, the remedies are primarily:

·         POWER OF SALE

·         FORECLOSE

Power of Sale is a provision within the mortgage document itself, which allows the property to be sold in the event of default.  This is the most common of the two remedies noted above and the one most prevalent in the market. It is the quickest and most efficient means of resolving a mortgage default.

Two key points to bear in mind with respect to a Power of Sale – 1) it allows the lender to recover 100% of their administrative expenses (including legal fees) plus the full mortgage debt, 2) it allows the lender the right to pursue the borrower for any deficiency.

Foreclosures for the most part are very complicated (technical) and time consuming

(expensive). Circumstances under which one would  choose the foreclosure route, might include the willingness to wait on a ‘market turnaround’ (meaning 1-2 years) – particularly if the value is underwater, relative to the mortgage amount. But these are rare instances, and may end up making a bad situation even worse.

Whichever route you choose, make sure you are under the direction of a qualified lawyer who specializes in both real estate matters and handling mortgage defaults. The process is very much a legal proceeding and you need to ensure all the necessary steps are taken to successfully redeem your mortgage.

One final note, possession of the property in the event of a default is often key

in terms of how quickly you can move through the process. Pay special attention to this aspect of any default, as it can often involve untimely delays and additional legal costs.

As always, consult with experienced commercial brokers in your area, when considering default remedies and to help in evaluating the property.  

Private Mortgages - Do They Make Good Investments?

Investing money in private mortgages on commercial real estate  – UNDER THE RIGHT CIRCUMSTANCES AND AGAINST THE RIGHT PROPERTIES – can be an excellent investment strategy. As with everything in real estate, you must weigh the risk/return carefully, before tying up your hard earned capital.

Best practice is to consider the mortgage, much as a normal institutional lender would. You would want to closely examine the following areas initially:

·         Quality of the real estate (collateral)

·         Stability of the cash flow (both historically & moving forward)

·         Credit/Covenant of the borrower (credit score/net worth/character)

·         Loan to Value (LTV) Ratio ( 70% - 75% - 80%)

One of the earliest questions to consider – why is an institutional mortgage not available or possible? Chances are that it involves one or more of the above points. That should then help frame the ‘risk’ part of the deal – ie. if it’s a credit problem or possibly an LTV issue. Once you identify the risk, then you can determine whether or not the reward (return) side, justifies funding the deal.

Once the decision is made to ‘move forward’, then you enter into the due diligence part of the transaction. Typical details would include -- reviewing the most recent appraisals on the property, credit reports/employment letters on the borrowers, personal statements, property condition reports, environmental reports, and even title searches. Full disclosure of the facts surrounding the transaction is what you are after, and you almost adopt the position of the Buyer in doing so.  

Who should you involve? More than likely an experienced mortgage broker and a seasoned real estate lawyer for sure. The mortgage broker should help in the coordination of the due diligence process and all of the preliminaries. The lawyer then puts into place the actual mortgage document, ensuring your security over the term of the loan.

As always, it’s always a good idea  to consult with an experienced commercial broker in your area, when evaluating the risk/reward potential on a private mortgage.

Private Mortgages - When/From Who/Negotiating Terms

Private mortgage lenders can be companies or individuals who provide necessary financing when normal institutional options are not available. They hold security on the property, as would a typical bank type mortgage, as an asset backed loan.  They can prove to be an excellent alternative to conventional financing in many circumstances.

When

Examples of where taking mortgages out from private sources can be a preferred option:

·        Buying a specialty property (ie.gas station), that banks will not consider

·        Buying a property with physical impairments (ie.environmental issues)

·        Loan to value considerations (needing 80% vs. institutional @ 65%)

·        Poor  credit rating or previous bankruptcy

·        Needing a short term (stop gap) loan for a short period of time (ie. 1 yr.)

·        Small business owner with unverifiable income

·        Needing quick financing approval in order to firm up a sale

·        Seller financing often can include more favourable terms given the

their motivation in selling the property

Who

Private mortgages are best sourced through Mortgage Brokers (MB), who would have a list of companies or individuals who wish to invest their cash into private mortgages. The mortgage brokerage industry has grown exponentially in the last 20 years in Canada, so there are a plenty of MB’s to consider. The key is to ensure they are qualified to deliver a private lender, who can meet your objectives and timelines.

Things to look for include:

·        Will a detailed Letter of Commitment be provided

·        What other costs and fees are involved

·        Time to process the approval

·        Can you meet the private lender to review your situation

·        Costs to Payout Early (prior to expiry of the term)

Terms

Keep in mind that if your intentions and commitment are sound and your mortgage ends up being paid as agreed – it proves to be a good investment for the lender.  The key then is to take this position upfront, in order to help you negotiate the most favourable terms. As with everything in real estate – ‘you don’t get what you deserve..you get what you negotiate’. Even when dealing in the private mortgage market, don’t sell yourself short! 

As always, enlist the assistance of an experienced commercial realtor in locating the best private financing sources available in your area.

Private Mortgages - Need a Written Mortgage Commitment?

If you look to finance a purchase through a Private Mortgage – that is a lender who is not a financial institution – is the process any different with respect to obtaining a formal (written) Mortgage Commitment (MC)?  It should not be and there are a number of reasons to insist on receiving one, before moving forward.

As with any of the specifics involved with the transaction, you want to be informed in advance of all costs and obligations which pertain to the mortgage. All of the same details which we outlined with institutional lenders, may infact apply to the private mortgage. There could also be some additional ones – ie. upfront administration fees, punitive penalties for early payout, mortgage brokerage fees and the list goes on.  Best practice, is to insist on a detailed MC so that there are “no surprises” at closing.

Private lending plays an important role in the commercial property market. It is often a good option and sometimes the only option, in being able to fund a purchase. With that said, the industry is littered with closings (and non-closings), on transactions which involved private mortgages which were significantly misunderstood until the day of closing. The ramifications of this are not only costly, but painful to experience for all concerned.

As a final note and with respect to a Vendor Held Mortgage (with the Seller), a major benefit is that you are able to incorporate the terms of the MC within the body of the offer. You can not only outline mortgage amount/rate/term/amortization (the basics), but also cover prepayment options, specifics on guarantors, any details on secondary financing etc. Some of it may need to be negotiated, but you at least get it on the table

and they become terms within your Agreement of Purchase and Sale.  The Seller is often your best source of Private Financing, so make sure that is your first stop!

It’s worth repeating - the “DEVIL IS IN THE DETAILS”. Again, it’s always a good idea to review a MC with your lawyer and your Experienced Commercial Realtors upon receipt, and especially given the fact that much of it affects their task in closing the transaction.

Mortgage Commitement Letters - For Buyers Only

Many versions of Mortgage Commitment Letters exist within the commercial mortgage market. This document provides written proof that the lender is willing to loan a specific sum, by way of a set mortgage amount, which allows the Buyer to complete the purchase of the property. They can be ‘conditional’ or ‘non-conditional’, but in most instances they are conditional - meaning the Buyer (or mortgagor) must meet certain conditions in order to qualify for the advance of funds.

Typically it should contain much of the following:

·        Mortgagor Details – Name, address, postal, email coordinates

·        Collateral – Description of the property type and location

·        Interest Rate – Fixed or Variable

·        Term – Set for a specific period

·        Amortization – Time period for 100% payback

·        Title Insurance – possible requirement

·        Survey – possible requirement

·        Guarantor Requirements – corporate/personal

·        Prepayment Options – if any (NB: if not included, mortgage is closed)

·        Expenses – All costs to lender, including legal,registration, and admin.

·        Secondary Financing – may not be permitted and excluded specifically

·        Expiration Date – time period by which MCL is executed & mortgage finalized

Specifically in the case of a conditional MCL, it  may include the following:

·        Satisfactory Environmental Report(s)

·        Full Appraisal Report (supportive of the value)

·        Structural/Physical Building Report (indicating no deficiencies)

·        Financial Reports – either corporate or personal as necessary

·        Credit Reports – to the satisfaction of the lender

Again, be aware that any conditions contained in the MCL must be met before the commitment is set and binding. As always, the DEVIL IS IN THE DETAILS, so make sure you understand the requirements as they are contained within the letter to ensure your funding is in place come closing date.

As a final note, it is always a good idea to review a MCL with your lawyer upon receipt, and especially given the fact that much of it affects their task in closing the transaction.   

Mortgage Discharge Penalties - Cost of Early Payout (Attention: Sellers)

One of the more controversial aspects relating to commercial mortgages, are the discharge costs to pay off a mortgage prior to its maturity date. There is realistically no common method of determining an early payout cost, as most typical commercial mortgages are deemed “closed” – meaning they run until maturity, without allowing for an early payout provision.

If a lender is to agree to an early payout of an existing mortgage, some of the more common discharge penalties may include:

·        Three months interest cost (based on the current balance)

·        Interest rate differential (actual interest rate vs. the re-lending/current rate)

·        Greater of either of the above 2 methods

·        100% interest recovery for the balance of the term (ouch!)

·        Any variation of the above (AKA – negotiating a better discharge fee)

It is important to note, that the lending institution has an obligation to outline the penalty that they could charge within the actual mortgage document. But this assumes, that you review (read) this detail within the mortgage terms, and that you understand what the financial consequences may be at some point within the mortgage term. This is a clear planning matter at the time of closing a deal and advancing a mortgage – your plans should account for such contingencies, so that there are no major financial surprises later on.

Other suggestions may include – negotiating with the Buyer to return to your lender for financing, paying down the rate for a prospective buyer to remain with the lender, or perhaps financing other properties with the lender. Lender’s are often more negotiable, if they can gain new business as an offset to the loss of the mortgage being discharged.

As always, SELLERS seek out the advice of experienced commercial realtors within your market, ensuring you account for discharge penalties on all existing financing prior to marketing the property. There may be more negotiating to do, than just with the Buyer!