commercial mortgages

CASE STUDY – Build a restaurant and they will come

I am just wrapping up a construction mortgage for a group of folks that are opening a second restaurant in Calgary, Alberta.  There are several things that make this transaction unique from other conventional commercial mortgages I broker and advise on – the cost of construction and the single use of the building. Back in August I provided the borrower with an advance (on behalf of a private lender) to help them close on the land.  The site required some remediation and most lenders would have either declined the deal or would have increased the interest rate because it was a land deal that had some environmental work to be done.  Since August, the borrower not only cleaned up the site but has been working with a general contractor to get a budget done and with the City to acquire the appropriate approvals and permits.

When viewing a construction mortgage, typically the cost of the construction is less than (or at least equal to) the value of the property.  In this case, the borrower is going to be spending more on the construction of the property than what market value would suggest it is worth.  The appraisal was prepared by Colliers International and was based on the working drawings and understandably is hard to appraise because there is no physical building, landscaping, finishing, etc. to really give someone a good sense of the property.  However once completed, the borrower believes that the property will in fact be worth more than the appraisal as it is an anchor property in a neighborhood that has not had any new development in more than 15 years and may result in additional development being undertaken in the immediate area.  The borrower has an option on some additional property that they hope to develop after the restaurant is complete.

There was a small construction budget item that required some work to sort out with the borrower and the lender.  Because the borrower has to realigned some curbs and add two light standards, the City request a Letter of Credit to be used as security until the work was completed and approved.  The challenge is that the work has to be paid for AND the same amount of money has to be posted to the City which means there is a double count of the same construction item.  Not a big deal but certainly was enough to result in several conversations about how to address the cost as the borrower only has so much equity to work with.

I can’t remember a deal like this that I have been involved with where an owner of a restaurant was building a single use property.  Single use by virtue of the fact that it will only function as a restaurant and another tenant or owner of the building would have to spend considerable money to make the property suitable for another use.  In this case, the borrower believes that not only will the building add to the overall neighborhood but now serves as something of a catalyst because the residents voted to approve it (there was one lady who objected) and they haven’t approved anything.  The alderman for the area stopped taking calls from developers years ago because the community residents have been so difficult to work with.  So notwithstanding that it is a single use building there is good reason to believe that the borrower may be sitting on a undervalued property given future developments in the area that are almost guaranteed to raise the profile and property values of the community.

Now that approvals are in place I was able to secure construction financing from a single private lender who not only understands the business (he owns other real estate that includes restaurants) but also likes the prospect of continuing to work with this borrower on future opportunities in the same neighborhood.  There is a good engineer involved who is managing the construction draws on behalf of the lender and all things being considered, this should turn out to be a good deal. I will assist the private lender with administrative tasks involved in ensuring the mortgage is funded as planned and hopefully can participate in future opportunities with both the borrower and the lender.

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