Raising capital for commercial real estate in Atlantic Canada

The short answer

To raise capital for a commercial real estate deal in Atlantic Canada, line up the debt first, because the lender's terms set how much equity you need. Then fill the equity from your own funds, from partners who share in running the deal, or from passive investors. Raising from passive investors usually means you are selling a security, so you need a prospectus exemption and legal advice before you accept any money.

The capital stack in plain language

• Senior debt. The first mortgage, from a bank, credit union, insurer-backed lender or private lender. It is the cheapest money in the deal and gets repaid first.
• Subordinate debt. A second mortgage or mezzanine loan that sits behind the first. It costs more because it carries more risk.
• Equity. Your cash and your partners' or investors' cash. It is paid last and takes the first loss, which is why it expects the highest return.

Where the debt comes from

Commercial mortgages in the region come from the chartered banks, from credit unions, from lenders that specialize in CMHC-insured apartment loans, and from alternative and private lenders that will take on deals the others will not, at a higher price. A commercial mortgage broker's job is to match the deal to the lender. Commercial Group Canada does not arrange financing. Its founding sponsor, Indi Mortgage Commercial Division, does.

CMHC-insured apartment financing and MLI Select

For apartment buildings, mortgage loan insurance from Canada Mortgage and Housing Corporation (CMHC) lets lenders offer higher leverage and longer amortization than a conventional loan. CMHC's MLI Select product covers multi-unit projects of at least five units and uses a points system based on affordability, energy efficiency and accessibility. A project needs at least 50 points to qualify, and more points earn better terms. Depending on the points and on whether the building is new or existing, CMHC's published terms run up to 95% financing and amortization of up to 40, 45 or 50 years.

Program terms change, so read them at the source: CMHC's MLI Select page.

What lenders ask for

Enough income to cover the payments. The debt coverage ratio is the property's net operating income divided by its annual mortgage payments. A ratio of 1.25 means the property earns 25% more than the payments. CMHC's published minimum for standard rental housing under MLI Select is 1.10, and conventional lenders commonly look for about 1.20 to 1.25 or more.

Paperwork that proves it. Expect to provide a current rent roll, about three years of operating statements, an appraisal, a purchase agreement, proof of your equity and a personal net worth statement. For most commercial properties, lenders also want an environmental assessment.

A borrower they believe in. Lenders look at the experience and net worth behind the loan. That is one reason partners matter: the right one can change what a lender will offer.

Where the equity comes from

• Your own funds, including equity refinanced out of property you already own.
• Active partners. Co-owners or joint venture partners who share in the decisions and the work. See how to find real estate investment partners.
• Passive investors. People who put in money and rely on you to produce the return. A syndication is this at scale, usually through a limited partnership in which you are the general partner and the investors are limited partners.

The rules when you take money from investors

This is the part people skip, and it is the part that can undo a deal.

A share of a real estate deal can be a security. Canadian securities regulators treat an arrangement as an investment contract, and therefore a security, when someone invests money in a common enterprise expecting a profit that comes at least partly from the efforts of someone else. A limited partnership unit in a real estate project is a common example.

Securities need a prospectus or an exemption. Selling a security to the public normally requires a prospectus. Most private real estate raises rely instead on an exemption under National Instrument 45-106. The common ones are:

• Accredited investor. For individuals, the tests are net income over $200,000 in each of the last two years ($300,000 with a spouse) with the same expected this year, or financial assets over $1 million, or net assets of at least $5 million.
• Offering memorandum. You give investors a prescribed disclosure document. The conditions and investment limits differ by province.
• Family, friends and business associates. For people with a close personal or business relationship with a director, officer or founder of the issuer.
• Private issuer. For closely held companies raising from a limited circle, without advertising to the public.

An exemption from the prospectus is not an exemption from registration. Anyone in the business of trading securities must be registered as a dealer unless a registration exemption applies. Raising money repeatedly, or being paid to do it, can put you in that position.

Each province has its own regulator. In Atlantic Canada they are the Nova Scotia Securities Commission, the Financial and Consumer Services Commission of New Brunswick, Prince Edward Island's Office of the Superintendent of Securities and the Office of the Superintendent of Securities of Newfoundland and Labrador. The Nova Scotia and New Brunswick regulators both publish plain-language guides to raising capital.

Where capital partners meet

Equity follows relationships. People invest with operators they know, or who come recommended by someone they trust. In Atlantic Canada that means the rooms where owners and investors already gather: private networks such as Commercial Group Canada, the industry associations, and conferences such as the Atlantic Real Estate Forum. They are compared in the guide to investor groups in Atlantic Canada.

A note on etiquette and on the law: a networking evening is for meeting people, not for selling units to a room. Offers of securities have rules about who can be approached and how.

What makes a deal easier to fund

• Your own money in it. Investors and lenders both ask how much the sponsor has at risk.
• Numbers that hold up. Actual income and expenses, a rent roll that matches, and projections with the assumptions stated.
• A track record, or a partner who has one.
• A clear way out. Refinance, sale or long-term hold, with the timing and what it depends on.
• Financing already discussed with a lender, so the equity you ask for is the equity you need.