Len 00:02
Welcome. My name is Len Lane, and I am the founder and president of Brokers for Life Inc., and we are Dominion Lending Centers in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.

Len 00:19
Welcome back. My guest today is Sam Dayal. He is a CPA, which is formerly known as an accountant. I guess. I’m not sure what that change made, but Sam works for us as a commercial underwriter with the DLC commercials. So Sam, welcome. Welcome to the show.

Sam 00:39
Thanks, Len. Thanks for having me on.

Len 00:41
You know, it’s always interesting. Although majority of our business is commercial, we are constantly asked questions about different types of loans. Liquor stores come up quite often. People want to buy a liquor store or and, of course, we get lots of requests about apartment buildings, small commercial you and I have done several different versions of that over the years. So really, for the listeners, what’s probably the biggest difference between a business loan and a commercial mortgage?

Sam 01:12
Yeah, so a few key differences between the two. One, a business loan is unsecured lending for a bank, so it’s all based on cash flow, whereas a commercial mortgage is typically backed by security, and generally speaking, you know, a property of some sort. And so a bank or a lender, any type of lender, can take a charge on that property. And so it comes down to, so commercial loan is based on the income of that property. If it’s a piece of land, though, where there is no income, they look at the security value of that property and what’s going to be done to it in the future. Now, the other big difference between security and unsecured lending or a business loan compared to a commercial mortgage is a the higher interest rates. So for business loan, higher rates are again quite higher. It’s all based on risk tolerance and risk for a business loan is considerably higher. Again, no security involved. They do it more… there’s more due diligence involved. They’ll look at the owner, or the person looking to purchase their experience in operating in that industry and offering that type of business. They’ll look at the not only the cash flow, but also just whether they can operate a business successfully, they’ll want a business plan performas and and projections and see what the team is involved. Also, the amortization is shorter for a business loan, you know, maybe maximum 10 years, compared to 25 years for commercial mortgage. And for an apartment building, you can do 50 year amortizations, which I’ll talk about later on, but that’s kind of the key difference is also the cost involved, both whether it’s a business loan or commercial mortgage, everything is more expensive than a residential loan. There’s the rates are slightly higher, the fees, the banks charge a fee. We as mortgage brokers have to charge a fee on commercial loans because we don’t get paid by the banks. You have to have two lawyers involved. And so it’s just way more costly.

Len 03:06
Right, so, so what? Actually talked a little bit about the different types of property that you see in commercial, I know we’ve done everything all the way up to a hotel with you at one time. So what? But I know it’s quite the gamut, and you just mentioned there that raw land is a different category for commercial as well. So what are the, I guess, types of properties that generally fall into that commercial category?

Sam 03:32
Yeah, so there’s a mixed bag of them. And I actually get phone calls pretty much four or five times a day right now for commercial financing business loans. Which is unheard of when I first started, it was, you know, one call a month, maybe. And now I’ve been doing this for 15 years here, and so people have gotten to know me, and I guess they trust what I tell them. And so I get a lot of phone calls on all kinds of applications. And so whether you’re an investor or, you know, a realtor, or any other professional industry, a mortgage broker. Give Len a call, or give me a call, and we’ll kind of quickly work through the application with you. Usually, I can give you an answer within a couple hours, but to answer your question, types of properties, there’s multi family, which is very popular right now, and I’ll talk a bit more about that later. That’s apartment buildings, which we do with CMHC or conventional loans or a private loan. Then there’s office buildings, strata office units for professionals that want to buy just an office space for themselves or expanding or looking to, you know, an investment property there. Industrial base, again, very popular right now. Industrial buildings, industrial base are again for investors or owner occupied businesses looking for, you know, rather than paying rent, they wanna, they wanna buy a property to have an investment as well. Retail strip malls. We’re doing quite a few of those right now. And then, of course, professionals. We have a professionals program with a few banks, and that’s for like lawyers, accountants, doctors. Banks love doctors and dentists right now, and so we can get them 100% financing. I think Len you and I have done an association, actually. We did a union group a while ago. And then the other ones, land development. We see a lot of those. Key for land development is the quick question I ask is whether the person is on a never, never plan, which is just to hold in land and don’t know what to do with it, in which case you often end up with a private lender. Otherwise, you have to, if you want to go with the bank, you have to have a plan within a year of what you’re going to do with that land and what kind of improvements you’re going to make with it. The properties that don’t have a lot of, I get a lot of calls on them, but they’re challenging, is farming, and to be honest with you, I’m not a farmer, and I don’t have experience in that area, so I’ve only done one farm loan in my time, in my 15 years here. Cannabis that was very popular, but unfortunately, a lot of cannabis companies just don’t make money, and that’s been a big challenge. I think there’s been some industry consolidation. I have done a couple of dispensaries. I’ve done those kind of financings, but that was when cannabis first got when it first got legalized, and then I’ve done churches, a couple of church financings.

Len 06:10
Those are tough, you know?

Sam 06:11
Well, they’re very difficult. Again, they’re non-profits, so that’s challenging. Hotels and motels. This is an interesting bag. I actually, in my accounting days, I worked for a large, publicly traded hotel company, so I know a bit about the industry. We had over 30 hotels across the country, and so I did quite a few hotel deals before COVID. Then, of course, COVID completely wiped out that industry. And now, if you’re traveling across Canada, you see that hotel rates, and you know, good luck booking a place. It’s through the roof. Hotels are doing really well, but banks want to see two or three years of financials after COVID to see how they’re doing. So I’m actually, currently, I’m just doing one right now at hotel financing. But for up to now, the banks have had a challenge with it coming out of COVID, and whether this is just a temporary surge or a long team industry change.

Len 07:02
Yeah, it’s interesting because, yeah, when we travel lately, it seems like the price of a hotel is double what it was in the past, right? Doesn’t matter where you go. It’s the same all the way across the country, I’m sure. So that’s interesting about the marijuana industry? It’s, uh, legalized, but it, it really isn’t making any money. So I have to assume the only one making money is the government off of it.

Sam 07:26
Yeah, they’re doing really well. They’re cannabis is really interesting. A lot of people invested in it, a lot of just investors. And I think some did well. Most didn’t. Yeah, I’ve seen a lot of financials in that space and where they expect it to be, where they are, is two different things. There are the few big industry players that have done well, yeah, but we get a lot of lot of calls here on it, and cannabis, it’s also got a stigma. That’s the unfortunate part, even though it’s legal, and I’m actually looking at one right now, which is on the island, but it’s a, you know, on Vancouver Island, and it’s a farmland and I told the client just yesterday, I should go just don’t mention cannabis anywhere, because they don’t actually do a lot of it on their site, and it’s really immaterial the value for it, but to maintain their farm status, they have to do some kind of farming, so they’re doing hemp. And I said, Let’s just not mention it, you know, because you’re getting income from all kinds of other sources on this farm. And we’ll see what the banks say, because the minute they read cannabis, they’re going to say, teah, we don’t like this industry. It’s a reputation risk.

Len 08:33
Yeah, I guess, I don’t know if that’ll change over generations, but I guess.

Sam 08:39
Yeah, and a lot of it comes from, like the big banks, but I’ve been told is they’re scared of the Americans, because they sit there and say, Well, if we lend here, if you’re a BMO or TD Bank, and America finds out you’re doing cannabis loans, they no longer allow you to. They’re worried that they won’t be to operate in the US. Oh, right. So that’s kind of, you know, and then, of course, the kind of people that come into the industry, which is not really true at all, but people do, they still have stigma. Same with tattoo parlours. You know, getting a loan on a tattoo shop is very difficult. Hair salons, funny enough. Nail salons, they think it’s involved in money laundering. I get a lot of phone calls on those properties, like a client has a tattoo business, and they want to buy the retail bay, retail unit, and I’d send it to banks or talk to banks, and they come back. It’s a tattoo shop, but tattoos are not what they used to be. But it still has that stigma to it. Nail Salons here salons, the problem in that business is a lot of people that operate there, they don’t like to report the income, and so unfortunately, if you want a mortgage, and same with pizza shops, right? If you want a mortgage, you got to report it all to the government, your income and then your, then we can qualify. And what we need to see is three years of financials.

Len 09:50
Right? And that that makes them hard for you to be startups, for sure, right? That they have no background in that industry. Might have the background in the industry, but never actually ran actual business with it, per se, right? So, yeah, no, that’s interesting. It’s, I think you and I actually looked at one in Calgary that had both the tattoo shop and a pot store in it.

Sam 10:13
Yeah, the perfect, the perfect strip mall for the owner, but you can’t get a mortgage on it. Is a tattoo shop, nail salon, hair salon, cannabis shop, yeah, they all all the tennents make a lot of money, yeah, but the bank won’t give you a loan on it.

Len 10:27
No, I can see the the banks being scared of the US, because really, it’s only in pockets, in the US that it, that it’s been legalized, right? So it’s, I know, Colorado has made a small fortune off it almost eliminated all their their state debt because of the taxes that they’ve collected on it, right? But, of course, you cross the border out of Colorado, you’re illegal with whatever’s in your in your car.

Sam 10:49
I think the rules are, I don’t I think Washington state is also legal. But I think if we cross the border into like, I’m in Vancouver here, if you drive across, but I think that’s federally regulated. If we tell we got marijuana, they’ll, we’ll be banned from crossing. But it’s legal here in BC and it’s legal in Washington State, but you’re not allowed to cross that border.

Len 11:09
It’s that thin line in between there, but they keep wanting to move. So I know we’ve looked at this quite a few times, setting up the expectation for clients when they’re getting ready to purchase a commercial property. What kind of cost can they look look at upfront? I know we’ve talked about appraisals and a few other things over the years, but what, what is the biggest numbers that they that they have to be aware of?

Sam 11:34
Yeah, I like to be really upfront with the clients. I don’t want to, you know, I like to be honest, that’s my thing. Tell you up front, I’m not always 100% right, but you know, I’m pretty close to it. But I’d like to tell you up front what you’re what you’re going to see, rather than telling you later on about hidden costs you know, or surprising you later on, saying oops, we didn’t, you know. I’ve been doing this long enough that I should know what’s going to be involved. I do give you general information. The reason is because our job, Len and I, is to shop the market for you on your behalf and represent you to the market. So I don’t know what you know TD is going to do, or Service Credit Union or something, but I’ll give you a range. So on commercial, it’s kind of the smaller the loan, the higher the rate and the cost, the bigger the loan, the cheaper the rates and costs and and the reason is because whether I do a loan for our minimum kind of is a million dollars, I’ll do some loans smaller than that, but I like to keep it a million plus. But whether I do a loan for a million dollars or 10 million it’s the same amount of work for Len and I and and so that’s, you know, why we have to charge the same. And also, banks, banks, just like bigger numbers, and it’s a lot easier for them to deal with bigger loan amounts. So in terms of minimum cost, you’re kind of looking at, I would say, 10 grand. And, you know, so an appraisal report for commercial, it’s a bit of a sticker shock for people, but, you know, you’re looking at two grand for a strata unit and up to $10,000 for a proper hotel appraisal, right? And so it’s a big range of what it costs. Now, a big difference on commercial is that you, as a client, you pay for this report, and so you actually get to keep the report. But Len and I, like I we do have recommendations on who to kind of use. There are approved lenders or good appraisal firms, and I have a bunch of you know considerations. Or if you have somebody in mind yourself, just call me and say, hey, you know this is what, who I’m thinking of using and and usually what you know, I’ll let you know whether it’s good or not. Or I might even give the appraiser a call. What banks look for. And then same with other reports, which is an environmental report, and then a building inspection report is not required. An environment report, sorry, I should back up. Is like a phase one report, then there’s a phase two report and phase three. Now, phase one is basically what an environmental firm does, is they check the library, check the history of the property and how it’s been used. Phase two is when they cost lot more. It’s about $25-30,000 and they have to go in and do drilling and testing of the soil to see if there’s any environmental contamination. Then a phase three, it’s pretty much game over. But you know, some I’ve had a couple of clients go down that route, which is they come in and actually remediate the soil, and now you’re into the hundreds of 1000s of dollars, right? But they had no choice, because they want to operate their business there. Yeah. So those and then the other report is like a building inspection report. It’s not required, but if you’re going to spend a million dollars on a property, you might as well, you know, get a report done for a couple grand. Know what you’re buying. And then other costs, you’re paying for two lawyers. You’re paying for your lawyer and the bank’s lawyer. So that gets, you know, about $5,000 and then fees. Every bank charges a fee. It could be as low as, you know, 0.1% all the way up to 1% of the loan amount. And then also, we, as brokers, we don’t get paid by the banks, and so we charge a fee, and that can be anywhere from 1-2% End of the loan amount?

Len 15:01
Yeah. And those are the things the environmentals, I think, have only seen one ever get the even stage two of gas station grassland in the middle of nowhere. So, and they did have a problem. I don’t know what they ever did with that one. Actually, I think the same guy may still own it at this point, but it’s it, that’s the part, I think that surprises more people when my first time, first, when they first come to me, I’m always clear about that, that you can expect be at least, you know, six to $7,000 easily into it before you ever actually get to a point where you’re you actually want the property even, right? So it’s…

Sam 15:38
Well that, and even, you know, people go, Can I get a pre-approval? We don’t have pre-approvals in commercial but what I do do for clients of lens is I’ll do a quick analysis for you and give you a rough idea of whether you qualify or not. So and that’s without spending any money. And so I kind of do what’s called a free evaluation. And to do that, what I need is, generally speaking, an MLS listing or Realtors brochure, property rent roll, and then, you know, revenue and expenses. If you’re buying just a business, I need the financial statements for the last two, three years. I can quickly, with my background, I can kind of really quickly look over financial statements and tell you where the holes are, where we can book it. And it’ll just save you time, effort. And then also how Len and I work together a lot. Is commercial, we, we care. We but we don’t really care where the money comes from for the down payment. So on commercial, you need a minimum 25% down. So if you don’t have that, we basically can’t help you, or we find other solutions. And how Len and I, we’ve done this a few times. I’ll have you call them up, and you might own, you know, your own personal house, or you might have other residential properties where Len and his team will be able to free up some capital for you, and you can use that towards the down payment of a commercial property or a business and, and it’s great, and we don’t need a gifted down letter. So down, gifted down payment letter, I guess, is called that. Yeah, so you can borrow money off friends and family, put that into your holding company, or what have your lawyers trust account, and off you go. But now, sorry, I should say, with anti money laundering rules that came in and anti terrorism rules, they do want to see a 60 or 90 day history of the money being in your bank account. This wasn’t there before, but that’s some of the rule changes that are coming.

Len 17:25
And I would assume, just like ours, anything that’s offshore money coming in that’s going to want to be documented highly from one end to the other as well, right? That’s always been an issue for us, but became even more so last October 11. So I know one of the most popular products out there right now has been the CMHC multifamily program. I’ve got a feeling that’s been I’ve seen your post, and that seems to be coming across your desk on a pretty regular basis, and in a lot of different sizes for one, right?

Sam 18:00
Yeahh, I can talk for hours on end about this. It is incredibly popular. We’ve done CMHC since I basically started in this business, so we have a lot of experience in it. And we used to be a direct lender correspondent for CMHC, which means we can take applications directly to them. And to be honest, since they’ve introduced the MLI program before then, I only did like two or three applications, because the numbers just didn’t make sense. The paying the insurance premium didn’t make sense. The longest amortization unit was 40 years. So we’d weigh the cost and benefit I do this for all applications, I’d weigh the cost and benefit of doing an apartment building on whether it makes sense to go conventional CMHC, and it did not make sense in the past, but now with the MLI program that was introduced about three years ago, it’s been a game changer. It’s been very, very popular, and so I’ll tell you some of the highlights of it. First of all, so for CMHC MLI, you can Google it and you’ll find some information there. Or if you want to send me an email or text, I can send you some documents. The minimum five units on a single lot is What qualifies for CMHC MLI. And they don’t care where they lend across Canada, because their mandate is three social outcomes which you want to achieve. One is energy efficiency. Two, and this is for the property one second one is accessibility, and the third, which is the most popular, is affordability. The first two energy efficiency and accessibility. They only make sense on new construction, so they don’t make sense on existing buildings, just too expensive to retrofit a building. But affordability works for both new and existing and the highlight on the program, which you’ll see on the brochure and people that you talk to about this program, it’s up to 95% financing and up to a 50 year amortization, lower insurance premiums and cheaper rates. And so those are kind of the four highlights of it, the program to qualify for 95% financing works really well in the prairies. It works well in northern BC. I don’t do work in Quebec, apparently, it works well in Quebec. It doesn’t work well in Vancouver, where I’m based and it doesn’t work too well in Vancouver, Island and Toronto doesn’t work. And the reason it doesn’t work in these cities is because our land costs are too high and rents are too low. It’s better than a conventional loan because you get a longer amortization and the rates are cheaper, but you don’t get to 95%. But whereas in the prairies, I don’t get through all the time. How they calculate affordable rent is based on the median rental income of the area, and in the prairies, you folks make good money there, so compared to us in Metro Vancouver. And so that’s how they calculate it. And so it’s, you know, we look at it from both construction and existing buildings. I do a lot of them. I get probably three or four calls. I actually turned down a lot of applications as well. I should say, turn down and give people strategies and ideas, and they’ll call me back. You know, three months, six months later. Had a call yesterday from a guy that I talked to about six months ago, and now he wants to go ahead with a 50 unit building. I had a call with the person this morning. Sometimes I forget when I speak to his people, but I spoke to him about two months ago, and he wants to go ahead and build eight units now in Edmonton, and so they usually take the information I give them, step back for a bit, do some brainstorming, get a team together and call me back after or they just completely, you know, disappear. So the qualification on it to qualify for this is two things we look for. First, we I look at the property analysis. What I’ll do, so again, rental, MLS listing and the revenue expenses for the property. And if it’s construction, I want a performa. A performa construction budget, performa rental, and I’ll do analysis from there and some drawings. To qualify, you got to have a net worth equal to 25% of the loan amount. And so if you’re qualifying for a loan of a million dollars. Or if the property usually, I tell people, just simple, you know, back of the paper envelope, kind of math, you’re buying a property for 2 million bucks. I want to see a net worth equal to 500,000 and that can be in your principal residence. It can be in other rental properties that you own the and how we verify that is, we look at the mortgage statement that you have compared to the value of the property. Could be an appraisal, it could be a tax assessment, whatever you like. And then we look at your investment portfolio, which is stocks and bonds, that’s valued. And if you have RRSPs, we take half that value. If you have Bitcoin or any other kind of crypto, they’ve started to accept that as well. Oh, really. Again, we want to see a screenshot or value of it, and they’ll discount it to either 25% or 50% of it’s half the value quarter. It’s it’s very volatile, so they don’t know how to do it. And also, it’s interesting. I’ve had a couple of crypto people look at apartment buildings, but they find investing in an apartment building quite boring, so they don’t really go ahead. So that’s kind of how we look at things there.

Len 23:02
They prefer to have us shares in something that is fluctuated by almost $20,000 over the last six months.

Sam 23:10
Yeah, they love the wealth there. This is, you know, buying an apartment building is it’s great passive income. What I say it does is this some restrictions for CMHC, which people need to know about, is that you got to put the loan. It’s closed mortgages, so they’re not open mortgages. You got to lock them up for five years, seven years, 10 years. I have one lender that offers 15 year lock terms, so it’s up to a 50 year amortization, but you got locked mortgages. So if you decide in three years from now, this is, this is not for me, you gotta pay the full remaining interest. So it’s not three months penalty, it’s not interest differential, it’s the full two years remaining interest. So if Len owns a building, and he now he decided he wants to sell it to me, and it’s year three, he’s got to pay the full two years remaining interest. Or what, what he can do is he can assume, I can assume the mortgage from him for the remaining debt on it, but I now have to qualify for CMHC financing, and generally what they look for is I have to be equal to or greater than Len, otherwise Lens guarantee stays on the loan. So why would you sell the building to me and keep the guarantee on the loan? Anyway, so we run into this quite often. You’ll see Realtors listings, and just scan down for an apartment building and see if it says, assume mobile mortgage or not. I can still run the analysis for you, but oftentimes people don’t go for an assumed mobile mortgage.

Len 24:30
Yeah, and assumable, even in the in the residential world, is, is, is a tough thing to do, because basically, you have to qualify you anyway. You might as well almost look at a at a different term altogether, right? So, yeah, well, that’s interesting. So your office is MLI direct to CMHC still?

Sam 24:49
No. They change the rules, and they change the rules in September. And so what happened is they said, no, no longer can brokers submit to CMHC directly. We have to go through an approved bank. Again, the list of approved banks is on the CMHC website, and most of the major banks are there. The funny thing is, about a lot of the major banks is they won’t do CMHC applications because they just don’t have the resources for it. And a couple of them being very honest with me, and they’ve just said, we don’t make enough money at it, and so, yeah.

Len 25:20
Well, that is what they do, right?

Sam 25:24
So, but you know, you can go to bankruptcy or happy to work with you and and we know how to put the complete package together. Actually, just got two approvals yesterday on a couple of applications where I submitted through a credit union and the credit union I did all basically, they took our application, said, Sam, what do we do? And I said, well, why don’t you just put a cover letter on my stuff and just say I’ve reviewed everything, and we approved this application. That’s what they did. And got approved in CMHC was they got approved in two weeks, which is my last three applications, CMHC have been approved in less than three weeks. They were out to about three months is how far back behind they were. So hopefully they’ve, they’re doing a lot better now. They staffed up. They’ve increased resources there, and they like applications. Not bragging a bit, but I guess I will toot my own horn a bit. I kind of know what, how to submit to them and how to prepare a proper, complete loan package, and I and we’ve only in our office, the six of us, I think we’ve only had two loan rejections, one for sure, and the second one, I’m not too sure, but, but before we submit to CMHC, we take a lot of pride in making sure that your application has a chance of success, because it’s not fair to you if I waste two months of your time and also two months of mine.

Len 26:42
Well, and that is one of the beauties of working with you, is that, because of your experience, when we send a client to you, or there’s, you know, talking about a potential deal that we know pretty quick, or better yet, you know pretty quick whether or not there’s actually a deal to be had there, right? So that’s definitely one of the beauties of working with you. I can guess I can get close, but there’s always those fine details that you’ll pick out that can make the deal go quicker and faster for the client as well, right? So.

Sam 27:13
Yeah, and I like to brainstorm ideas, bring it in, and we work with the team.

Len 27:19
Yeah, and it works out good. So, and I know like you say, you’re a busy guy, so we’re going to thank you for your time.

Sam 27:26
Thanks Len. All the best everyone. Take care.

Len 27:29
Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokersforlife.ca/associates. Have a great day.