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Vendor financing still important despite interest rate cut

Creative solutions needed as financing costs remain high
Vendor financing was critical to the sale of 2525 36 Street North, Lethbridge, a multi-tenant industrial asset that changed hands in January after two years on the market.

While some brokers expected their phones to explode with interest following the Bank of Canada’s interest rate announcement on June 5, response has been much more muted.

The first sign that interest rate pressures could be easing was a mere 25-basis point cut in the policy rate, paring it back to 4.75 per cent.

But after the sharpest, most prolonged boost to interest rates in a generation, coupled with the U.S. Federal Reserve’s decision June 12 to hold off on cuts until later this year, financing remains tight.

“Although the interest rate cut is a positive sign and a move in the right direction, it is only 25 basis points and not enough to bridge the gap, whether for developments to be profitable or for investments to cover debt,” said Chris MacCauley, executive vice-president with CBRE Ltd.

Banks remain cautious about undeveloped land, with deal momentum in a holding pattern.

According to year-end data from Altus Group, land transactions in Metro Vancouver last year totaled $3.3 billion, a 62 per cent decrease versus a year earlier, of which industrial and commercial land totalled $1.5 billion, down 55 per cent.

Altus noted that industrial deals themselves were largely steady, declining just 4 per cent last year to $2.6 billion “in response to elevated interest rates, inflationary pressures, labour shortages, higher rental rates, and increased construction and material costs.”

Ongoing constraints on the financing side as interest rates remain stubbornly high means parties will still need to consider alternatives to close deals, including vendor financing – an option available at 7985 Lickman Road in Chilliwack, a listing MacCauley has that’s seeing good interest.

Purchased three years ago by Denciti Development Corp. in partnership with Kadestone Capital Corp., the site quietly hit the market last December.

The eight-acre site is priced at $32.2 million, a premium to the original purchase price of $22.25 million (the price also included a four-acre parcel to the south that Denciti is redeveloping with commercial uses including a hotel). The property was slated for a 24-unit strata industrial development.

Vendor financing was critical to getting an industrial deal across the finish line in Lehtbridge.

The owners of 2525 36 Street North, a former dairy plant that a consortium of 11 investors repositioned as a multi-tenant property offering 43,966 square feet of space on 5.6 acres, originally listed the property in late 2021 before interest rates started to rise.

“We had interest in the sale from multiple groups over the last two years, but then it really came down to the interest rate environment,” said listing broker Josh Marti, a principal and senior associate with Avison Young in Lethbridge. “[It] literally killed the offers that we had in play. No one could make it cash flow.”

This forced the ownership group to take a closer look at the options that could make it work.

“While most investment sales were beginning to die off due to the interest rate environment, our sellers decided to participate in the sale by acting as the actual primary financing on the property,” Marti explained.

Confident in the potential of the property in a tight market where vacancies are currently running in the 4 per cent range, the owners agreed to a five-year financing arrangement at 86 per cent loan to value at a rate of 4.5 per cent versus the 6 per cent other lenders were charging.

“It didn’t sacrifice the cash flow for the buyer, and what it did for the vendor is it kept their price whole – they didn’t have to take a haircut on the purchase price,” Marti said.

The transaction closed in early January for just under $4.4 million. Brookstone Investment Corp. of Innisfail was the successful purchaser.

“In an environment where all the investment deals were non-existent or dying off left, right, and centre, we actually kept this one alive because the seller was actually participating in the sale as opposed to butting heads with the buyer,” Marti said, noting that by financing the deal the former owners are going to see an extra $500,000 in interest on top of the purchase price.