When it comes to leverage, people tend to think that the big chartered banks heavily outweigh their customers at negotiating. While this is often true, it’s quite the contrary when it comes to negotiating owner-user loans.

First let’s distinguish the difference between owner occupied real estate and investor owned real estate loans.

Any real estate loan advanced where the source of repayment is either passive rental income or the sale of a constructed asset, is classified as investor owned real estate. This includes loans advanced for the development of single-family housing, multi-story towers and multi unit condos/townhouse complexes. Further, this includes any loans secured by land held for the purpose of future development and any property leased to third party tenants – like shopping malls, industrial complexes, strip malls, office towers and even multi-unit residential complexes.

Contrarily, any loan advanced where the tenant of the property owns the asset directly, or indirectly through a holding company with common ownership, is classified as owner occupied real estate.

It is important to understand the distinction between the two because the two classifications of real estate loans are categorized separately on the bank’s balance sheets. Investor owned real estate belongs to its own category under assets on the balance sheet, while owner occupied real estate, working capital loans, and equipment loans are categorized separately (residential mortgages are as well, but they too, are in an altogether different category).

The categorization of loans is important because the Canadian regulators monitor and regulate the total amount of loans advanced by each bank in each category to prevent overexposure in any single area. The allowable advance amount is calculated as a percentage of the bank’s entire loan book.

In recent years, the staggering real estate prices in Canada’s major markets and the ever-increasing demand for new housing and commercial space has increased the demand for investor owned real estate loans. Developers are popping up on every scene looking to get a piece of the action and approaching the banks to help them do so. The increased demand and larger amounts have made it easy for the banks to hit their investor’s targets by lending out money against investor owned property.

The problem is, they forgot to grow their book in the other categories, so the rest of their balance sheet hasn’t been growing anywhere near as fast, and in some cases, they’re not growing at all. With the total percentage of allowable loans being fixed by regulators, not growing the owner-use category limits the amount of capital they have to lend against investor owned real estate. Given these conditions, you may have heard in the market that your bank is “up against its cap” or “they have no more money to lend on real estate.”

In many cases, when the rest of the bank’s balance sheet hasn’t grown year over year, the banks are limited to lending out only the principal that was repaid in the previous year. As a result, the majority of the bank’s capital for investor owned real estate is already spoken for within the first few weeks of the year by the major developers in each city.

When it comes to lending money, the banks typically want two things: a good return for their shareholders and sufficient security behind their loans in case something goes wrong. A good return is tough to accomplish in today’s low interest rate environment. Therefore, the majority of their return is derived from fees.

As a result, the banks are now looking to fill a third criterion when lending money: get their money back as soon as possible so they can lend it out again and charge more fees. With the large development projects in the major cities, the large, well-known, developers are the most suitable clients for the bank. They’ll build the project and sell enough units to repay the loan within 18 months, enabling the bank to lend that money out again and collect more fees.

As a result, the majority of the bank’s capital is reserved in the first few weeks of the year for all the large developer’s projects throughout the year.

So what does this all mean for those looking to borrow money for their operating business? It means the banks will fight each other for your business. The banks need owner-occupied real estate, equipment and working capital loans to offset the investor owned real estate on their balance sheet so they can continue filling the demand from the developers.

Enter Ashdown Capital. We know what each bank is looking for in terms of size, return, security, etc., and we request a proposal from each lender that we feel is suitable for your situation, and they know we are reaching out to multiple lenders. More importantly, they know who we are, and they know that we have knowledge of how their pricing works, what security they actually need, and what structure is suitable for their risk appetite, as a result they put their best offer forward based on our requests.

If you are looking to stop leasing and get into the market by buying your own space, or looking to grow your business but need more working capital or equipment to make that happen, start the conversation with Ashdown Capital and let us be your advocate with the banks.