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REAL ESTATE Finding funds BY K E V IN MARRON "H ave patience and reduce your expectations." That's what Norman Kahn advises clients seeking to borrow money for commer- cial real estate developments in today's uncertain market. It's depressing and confusing for borrowers, says Kahn, a Toronto-based partner at Aird & Berlis LLP, because they may well believe the value of their property has not gone down, the fundamentals are still sound and prime lending rates are low. Yet loans for commercial real estate are now typically harder to obtain, more difficult to negotiate, more restrictive in their terms, and more expensive. Furthermore, today's commercial real estate loans are generally calculated on the basis of far lower loan-to-value ratios than those negotiated prior to the recession — so the loans are smaller and developers are often left scrambling to raise more money to complete their projects. "We're not seeing a large number of transactions compared to a year and a half ago and such transactions as we are seeing are more difficult to get over the goal line," says Chris Huband, a Toronto partner at Blake Cassels & Graydon LLP. "There are still lenders out there, but the cost has increased and the amount of financing you can get has been reduced," says David Mydske, a senior partner in Borden Ladner Gervais LLP's Vancouver office. He notes that the commercial in a tight market Creativity is the key to commercial real estate deals these days. real estate financing market has shrunk dramatically because of the disappear- ance of the conduit lenders — the peo- ple who offered relatively cheap and easy credit derived from commercial mortgage-backed securities, a pooled investment vehicle that accounted for 25 per cent of all commercial real estate loans in Canada in 2006, but fell out of favour when credit markets crashed. Many insurance companies and other big lenders are also staying out of the market, either because they don't have the credit available or because they're nervous about commercial property val- ues, he adds. The good news is banks are lending again. But, with limited funds available, they tend to favour borrowers with whom they already have long-standing relationships. Their loan-to-value ratios are typically 60 to 65 per cent, com- pared to 80 to 85 per cent that used to be advanced by the conduit lenders. Banks also generally require more due diligence and more documentation, all of which adds to the legal work and the professional fees the borrower has to pay, according to John Sullivan, a Montreal-based partner with BLG, who says these costs tend to escalate because it is customary for borrowers to assume the lenders' legal fees. Even though financial markets may www. C ANADIAN Law ye rmag.com NO VEMBER / DECEMBER 2009 21 JEFF SZUC