Sale Leasebacks

Sale Leasebacks have been a mainstay tool of commercial real estate financing for over 30 years throughout North America.   Typically, it has been most often used for large industrial and commercial properties, where property owners want to access the equity in these buildings and put it to use elsewhere in their operations.

The owners do not however wish to sell the properties outright because they want to continue to hold an interest over the future years.

The sale leaseback is an opportunity for an investor to gain an equity interest in the property with the original owner (now the Lessee) continuing to manage the operations and occupancy.

Typically, at the end of the lease the Lessee has an option to reacquire the property from the investor based on pre-agreed upon terms.

A sale leaseback is a tool that can easily be customized to work for smaller and mid-sized property owners and investors alike, subject to the building, its revenues and its operations.

Using the sale leaseback the property owner can access equity in an older property for use for current acquisitions.

The investor gains income streams and tax advantages during the period they hold the building with the potential for market value gains from property increases.

Structuring a sale leaseback is not straight forward but we here at NorthBrook have both the skills and experience to help you through it.

If you see a sale leaseback as an opportunity for you to free equity to grow your portfolio simply reach out to us below.

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Mezzanine Debt

Should it be part of your Unconventional Equity Strategy?

As higher interest rates start impacting your ability to meet debt servicing requirements, we are asking the question “Should Mezzanine Debt play a part in your financing strategies?”  For some time now we have been suggesting that investors bring unconventional equity into their overall financing approaches.  Current high market prices and growing competition have effectively rendered traditional 65% to 75% bank debt / 25% to 35% equity funding options almost obsolete.  Now higher interest rates are compounding the problems by their negative impact on debt servicing requirements.

For so time now we here at NorthBrook have been suggesting investors get more creative with their financings and bringing in various forms of Unconventional Debt to achieve their long term goals. (see http://northbrookcapital.com/unconventional-equity/ ).  Continuing with those ideas we turn our attention to Mezzanine Debt to add to what we hope are your growing list of options for getting your properties financed and to grow your portfolios.

Mezzanine Debt is often a misunderstood and as a result little used for of financing.  This is primarily because Mezzanine Debt is a financing instrument that can have many different terms and conditions attached to it.

In its base form Mezzanine Debt is funding that sits between traditional senior debt (typically your 1st charge bank debt) and your equity. But depending on what terms and conditions that get attached to the Mezzanine Debt that can be positioned a lot of places on your balance sheet.

  • It can come after your second mortgage
  • It can come before or after your preferred equity shares depending
  • It can carry a low current pay interest rate or be all accrued interest
  • It can be short term (1 to 2 years) or very long term (8 years (+)
  • It can participate with you in the long term profits from the property
  • It can have the right to take everything in the event of a default

Mezzanine Debt in its most common form is high risk debt, commanding rates between 12% to 20% per annum.  However, like Unconventional Equity, Mezzanine Debt can be structured with legal options that can significantly reduce the associated risk and therefore bring the rate down.

The security supporting the debt can also be customized depending on the property, the returns you expect from that property and the preferences of those providing the debt.

As an example, if the target property has a very stable rental base, or a portion of the tenant base is stable, attaching a security interest to that rental flow, post-DSCR requirements, could create a risk-mitigant that results in a reduce interest rate on the debt. Alternatively, depending on the property’s overall cash flows, that portion of the rents could act as a replacement for a monthly interest payment.

In these competitive times investors can no longer rely of past practices to grow their holding. Investors must create new partnerships with new approaches and innovative thinking to meet their objectives.

Open For Business

NorthBrook’s advisory services have the potential to make a material change to your acquisition & funding strategies and add to your long-term profitability. They are available now for all who wish to take advantage of them.

Would you like more information on how Mezzanine Debt can help you build your portfolio?

Unconventional Equity

Unlocking the full potential of a real estate transactions often requires a flexible approach—one that conventional funding may struggle to provide. That’s where unconventional equity (UE) comes into play.

UE is an innovative funding approach that offers tailored solutions to meet the precise requirements of borrowers and their funders. Whether through specialized share classes for incorporated holdcos or separate partnership units for limited partnerships, UE empowers both borrowers and investors with unprecedented flexibility.

What sets UE apart is its ability to incorporate a wide range of customizable conditions, including:

  • Special dividends or distributions mirroring interest payments
  • Share features like redemptions or retractions, akin to loan terms
  • Priority terms on sale proceeds, optimizing project

Furthermore, UE can deliver mixed returns of monthly payments, accretion payouts or first priority returns at time of redemption allowing investors to better match their own preferred investment earnings.

Too often, borrowers find themselves grappling with the challenge of securing the full funding they require. While there are numerous options for sub-debt or mezzanine debt, these secondary debt options can burden a project with excessive leverage, leading to higher demands for debt service. This imbalance often leaves borrowers unable to reach the right levels of conventional A debt, which should ideally form the backbone of any project’s funding strategy.

UE offers a distinct advantage by sidestepping the pitfalls of excessive debt. Unlike traditional loans, UE doesn’t weigh down debt/equity ratios or burden investors with hefty servicing calculations. With standard shareholder postponement agreements in place, UE stands as a new solution in a financing mix.


Embrace the potential of unconventional equity and elevate your real estate investment strategy to new heights. Partner with us to explore the boundless opportunities UE can unlock for your next venture.

Open For Business

NorthBrook’s advisory services have the potential to make a material change to your acquisition & funding strategies and add to your long-term profitability. They are available now for all who wish to take advantage of them.

Would you like to learn more about Unconventional Equity and how it can become part of your funding strategies?

Portfolio Funding

Multiple Residential Properties – One Loan

For many residential property investors the most frustrating part of their investing activities is finding new funding for each new property after they have reached the “5 door” limit rule with their lender.  Having solid performing assets, but the inability to leverage those assets to continue to grow their business.  Portfolio funding is the ability to bring multiple properties under one property collateral loan so you can better manage those investment portfolios.

Under a well-structured portfolio funding facility the investor gains any number of advantages. 

  • No limitation on the number of properties you have.
  • No limit to the number of properties you want to add.
  • No more “5 door limits”.
  • Significantly improves vacancy management terms.
  • Can improve access to renovation funds when needed.
  • Improves your own internal portfolio management.

By moving to these more sophisticated forms of commercial loans, the investor can often find terms that allows them to borrow additional funds anytime they bring on another qualifying property.

With pre-qualified conditions the investor saves time and effort by being able to focus on the right properties they know ahead of time will move effortlessly into their existing portfolio loan.

Commercial portfolio funding can also be built with flexibility so the mix of property types doesn’t matter – single family homes, triplexes, condos, etc.

Eligibility Conditions

While each portfolio will have its own merits, general acceptance criteria include:

  1. min of 7 to 10 properties,
  2. overall portfolio market values of $2.75 million or higher,
  3. minimum aggregate portfolio debt servicing of 1.25,
  4. geographic proximity – for certain all in one province,
  5. proven property management history.

We can help you pull together the profiles needed.

First Step to Expanding Investment Activities

Portfolio funding is often the logical first step for residential investors looking to expand their activities into multifamily apartments or other forms of commercial properties.  Moving into commercial financing can seem complex at times.  It requires different reporting, different eligibility requirements.  But commercial lending also is so much more flexible for the borrower.  With so many forms of senior and subordinated lending, and so many forms to ownership, multi-investor options and asset coverage, borrowers can often put together financing structures that are really customized to their needs.

Would you like to explore the advantages of Portfolio Funding and how it can improve your leverage?

A Simple but Essential Check on Investment Property Pricing

“Price Check on Property 6 Please”  ….  Taking 10 to 20 minutes to complete an easy pricing validation test can save an investor hours of time and effort.

I’m continuously surprised at how many buyers of commercial properties, even those considered experienced investors, get so deep into the purchase of a new property without having taken the 20 minutes needed to see if the price being asked fits the building. 

For anyone looking to acquire a commercial property, the rule is the property must pay for itself. This is true whether it is a multifamily rental, a mixed-use property, a light industrial building or even a land purchase they will later develop. This means that the revenues and net operating income, or NOI, must be sufficient to cover the financing payments by a factor of 1.2 to 1.4 times.  I’m referring here to the debt servicing calculation.

For someone in the early stages of looking at a property, it’s a pretty straightforward exercise to reverse the debt servicing calculation to determine what an expected price for the property should be.

Once calculated, if that price check is materially lower than the seller’s asking price, the potential buyer has to ask themselves if this is really the strong investment they’re looking for.

Let me give you a quick example of how this works.

Start with a simple calculation of the net operating income from the property.  If its an existing building, use the existing revenues, not what they can be built into later on.   The extra comes from your work and shouldn’t be paid to the current owner.

The only time you should use projected revenues and net operating results is for land or construction projects.

If you don’t have the actual operating expenses, use a factor of 20% to 40% of the gross rental revenues, depending on the type of building.   Ultimately you need to obtain those true costs, but for this early exercise, the 20% to 40% estimate can give you the indicator you need.

Now divide the NOI results by the 1.2 to 1.4 debt servicing factor to arrive at the mortgage payment amount.

Then do a present value calculation using that calculated mortgage payment amount to determine what a lender will advance against your project. When making this calculation, use a reasonable LTV factor of 65% to 75% depending on the building.

Once you know the potential mortgage you can expect to secure for the building subtract that from the proposed asking price to see how much equity or sub-debt is needed.

Is that amount reasonable and is it an amount you are prepared to come up with for this property?

If it is, the price check tells you this acquisition project is likely worth the time and effort you need to go through to win the deal.

If it’s not perhaps your time is better spent looking for another investment property.

Acquiring a new property takes time and money.  You can save yourself aggravation and avoid larger out of pocket expenses by undertaking certain simple, less costly due diligence steps up front.

Don’t be hesitant to put up a small amount for fees to cover early-stage tests like this one, if it means identifying do-able deals with real long term profits sooner.

Open For Business

NorthBrook’s advisory services have the potential to make a material change to your acquisition & funding strategies. They are available now for all who wish to take advantage of them.

To get started, or to simply get more information on our services, please go to http://northbrookcapital.com/contact/,  provide the initial information, and we will connect with you as quickly as possible.

What Makes a First Class Commercial Mortgage Submissions

For many borrowers who do not have a lot of experience sourcing financing for their commercial properties, they are often surprised at what is asked of them.

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Unfortunately, all too frequently, there is someone out there who assures them its not all that hard, and the borrower can get their money with far less effort.

When that happens, one of three things can happen:

  • The borrower ends up with a loan carrying expensive and/or difficult loan conditions that don’t fit the property or what the borrower is trying to achieve.
  • After a few short efforts this advisor can’t find a lender and gives up, leaving the borrower with no funding to complete their plan.
  • The advisor finds an interested lender who the advisor then turns the borrower over to leaving the heavy lifting to the lender and borrower. The lender then starts what turns out to be a difficult application process because the borrower doesn’t have an experienced advisor to help them.  The loan, if it gets done, starts an uneasy relationship neither the lender nor the borrower are particularly happy with.

Today we are going to set out the key areas needed to complete a successful commercial funding request. One that carries the right terms to meet the borrower/owner’s objectives, achieves the right pricing for the loan, and launches a favorable relationship with the lender the borrower can build on in the future.

To get started there are some fundamental truths you should know about commercial mortgage applications.

  1. There are significant differences between a commercial mortgage application and a residential application. The reality is a house is easier to sell than a warehouse or small retail plaza.  That makes residential properties less risky and therefore the lender can extend their loans with less documentation and a less stringent review.
  • Commercial mortgages rely almost entirely on the property’s ability to generate sufficient funds to pay for the loan and on-going property maintenance.  If you are relying on outside funds to make these payments the loan will be extremely difficult to place, which is often the case with residential properties where the borrower is generally the only source of for debt repayment.
  • Commercial mortgage applications require far more documentation and expertise than an application for a residential property.

With these key points in mind let’s look at what is needed to get your loan request funded.

Purpose Plan

The purpose plan is simply setting out a logical plan for what the loan proceeds will be used for and what the operating plans are going forward.  This is a perfect example of the difference between a residential application and a commercial application.  For the residential property the plan is straight forward – someone (you or a renter) is using the house to live in. No purpose plan is really needed.

For a commercial property there are many alternatives.  Yes, you are requesting a mortgage, but what specifically are you going to do with the funds? Are you using the money to:

  • purchase the property,
  • take money out to acquire new properties,
  • will you be renovating –
    • will the renovations be major or minor,
    • will the renovations be used to change the use of the building,
    • will the renovations be used to attract or keep tenants,
    • will the renovations be used to prep the property for sale.

Each option above will impact how a potential lender will assess the funding submission.  Your advisor should know the key issues of each different assessment point and provide you with a specific plan as to how best present them to maximize the benefits coming out of that lender’s financing offer.

A poorly presented purpose plan can cost you money either in terms of rate, maximum funds accessible or restrictive loan covenants.   Worst case is your lender looks at the plan and early in their assessment rejects an otherwise good submission outright.    

Leases and Rent Rolls

Leases are the most common documentation for commercial properties.  You should have a valid and enforceable lease with clear terms and conditions for every tenant in the building.  Even if you are using the property for your own use, but own it through a separate holdco, you need a lease between you and the holdco.

You must also have a valid rent roll.   A rent roll is a summary document that sets out all current leases detailing the rental amounts, any additional rents such as parking, sq. footage per unit, start date of lease, end date, and number of renewals if applicable.

Coming out of COVID the rent rolls should reflect all rental deferrals or rental exemptions granted during the lockdown periods.

The rent roll must reconcile back to the individual leases, the property operating statements, and the future cash flow analysis.   One of the most common errors that we see in failed applications is having discrepancies between the rent roll and one or more of the other items mentioned.

Discrepancies here are easy to identify and fix.  Your advisor should have no trouble helping you get these key documents in line.

3rd party Assessments

Third party assessments typically refer to appraisals and Phase 1 Environmental assessments.  Both are documents you will be required to get. However, we strongly recommend not ordering those assessments until you are in direct negotiations with a lender.  Most lenders have their own list of approved assessors and its best to use one of those.

What we do recommend is, if you have a previous environmental assessment from when you originally purchased the property, use that in the initial submission.  If you are purchasing the property, see if the seller has their old copies.

For purchases, the Agreement of Purchase and Sale can act as a temporary stand in for the appraisal.  

For refinancing an existing building, a market valuation from a reputable realtor or automated valuation service is a cheaper alternative that can be used as a temporary stand in.

Preparing an acceptable funding submission that includes upfront costs such as property assessments and advisory fees cannot be avoided.  Trying to push them off makes you look like something less than a serious borrower in the lenders’ eyes.

There are many other potential assessments you may have to get depending on the building and the surrounding circumstances.  The one I do want to mention is a cost consultant’s report.   If you are building new or doing any sort of material renovation work, these reports are becoming mandatory in the industry.

While you may not be familiar with cost consultant reports now, you will be asked to get them.  

Operating Statements

Operating statements are not your normal company financial statements (which you will need as well).   Operating statements just report the revenues and operating costs of each individual building.

They are the statements we referred to earlier that need to reconcile back to the rent roll(s).

You will need separate operating statements for each property you are financing or offering as additional collateral.

To the extent you have quarterly operating statements, all the better.   However, you must have at least the last 1 or 2 year annual statements.

If you don’t have up to date operating statements, an experienced advisor can help you and/or your accountant put them together quickly and for less cost.

Cash Flow Analysis

A cash flow analysis is another critical component of your overall submission.  We honestly believe no application is worth submitting if this analysis is not included.

The cash flow analysis includes revenue and cost projections as well as a loan repayment schedule.  It ties your rent roll information, your operating costs and any renovation costs together and is the key backup support for your Purpose Plans.

It should show how you will stay within your loan covenants and will include analysis of future costs and cashflow available for debt servicing.

The analysis should go out until the end of the requested mortgage term

It shows you are a serious property owner who is thinking well past the day after you get your funding.

All serious commercial advisors should have the skills and be willing to prepare the cash flow analysis as part of their submission preparation work.

Debt Servicing

As stated at the beginning of this presentation, commercial mortgages rely almost entirely on the property’s ability to generate sufficient funds to pay for the loan and its own maintenance.  That means it must deliver positive debt service.  To secure your loan the property must debt service at the minimum levels plus a cushion mandated by the prospective lender(s).

As debt service is a must, if you are going to successfully attract your funding, all submissions should demonstrate the property debt services at acceptable levels.  The submission should also detail, not only how the property debt services today, but also, using the cash flow analysis, how it will for the duration of the loan term.

We believe it is important enough that we also like to include a short written subsection on how the Purpose Plan and tenant strategies support the debt service throughout the term of the loan.

Addressing Outstanding Issues

No property and/or borrower is perfect.  Somewhere within the submission there should be an open discussion of problem areas and how they could, or are already being, addressed.

Hoping a lender will somehow miss these areas is wishful thinking.  These lenders are professionals.

Frankly we typically set aside a full standalone section within the submission to deal with any outstanding issues.  We find being upfront and visible on the issues provides the lender with some comfort they are dealing with professionals.

Exit Plan

Every approved loan application states in it how the loan will be repaid.

Even if the answer is simply “at end of term the borrower expects to renew with the lender at similar terms” this is sufficient and worth mentioning.   So long as the cash flow analysis supports this position the lender will typically accept it.

It is a simple but noteworthy way to end any submission.

Other Matters

Commercial loan requests are as unique and diverse as the many unique and diverse types of properties they support. Coming out of all these alternatives there can be requirements for a wide range of information requests and documentation ranging from building permits to considerations for special lease extensions.

An experienced advisor can help you work through all of these special requests and get them incorporated into your submissions in ways that only make your request stronger.

To put things in perspective, a professional submission could save you ½ of 1% on your rate which is $13,500 on a 3 year $900,000 mortgage and $105,000 on a $7 million mortgage.

Alternatively, it could increase your LTV. With a 5% increase you reduce your required down payment by $115,000 on a $900,000 mortgage and approximately $895,000 on the $7 million mortgage

Open For Business

These advisory services have the potential to make a material change to your acquisition strategies and are available now for all who wish to take advantage of them.

To get started, or to simply get more information on the services, please go to http://northbrookcapital.com/contact/,  provide the initial information, and we will connect with you as quickly as possible.

The right loans and the right lender relationships can change your investment strategies for years to come.

Financing for Retail Repurposing

There has been much discussion lately around what many believe is a permanent downturn in the retail sector.   There has also been much discussion around “repurposing” properties that once housed successful retail tenants that are now struggling or, worst yet, gone post pandemic. We can show you how all of this valuable real estate can be repurposed into investment properties in asset classes that are still thriving:

  • small apartment or other multi-residential properties,
  • much sought after warehousing and distribution centres,
  • professional centres.

NorthBrook and its funding partners are pleased to announce their new funding program targeted specifically at the retail repurposing projects.   This new program provides two key funding components; the renovation financing to repurpose the property as well as the conventional mortgage funding to allow property revenues to season.

Coming out of COVID there is much restructuring needed to bring the economy back to full force. We can take all that well situated property and turn it to address new demands in the post-COVID world, as is the case with distribution centres. Alternatively we can help redevelop your local shopping malls to meet the current demand for more multi-family rental space, perhaps restructuring some of the remaining retail space to meet the needs of the new tenants.

The ability to take these languishing properties and convert them to investments with superior returns is significant.

NorthBrook and its partners are proud to bring new solutions to that work.  With this retail repurposing program and others focused on meeting the current economic recovery needs, NorthBrook and key credit unions are providing specific funding solutions to areas others are just talking about.

To learn more about our Retail Repurposing program and other COVID recovery solutions please contact us so we can show you how we make these funding programs work for you.

Can office sublets become a new entry point for the residential investor to enter into commercial property management.

Coming out of COVID lockdowns many companies are finding they will be downsizing their offices. These decisions are being made to allow many of their staff to continue working remotely. The result is a growing amount of space available for sublet, often at a substantial discount.

These sublets can actually create a unique opportunity for a residential investor to experience commercial property management with limited downside risk, given the “bite size” of the investment as well as the fact the investor can simply choose not to renew at the end of the term with no penalty.

How It Works

A sublet typically carries remaining terms from 3 to up to 8 years.

At $25.00 a sq ft, a 4,000 sq ft space will cost the investor $400,000 for the lease assuming a remaining term of 4 years. However, if the investor can take over the space at a discount from the original tenant at say $20.00 sq ft (a 20% sublet discount), the investor stands to realize a gross return of up to $60,000 on the property.  This presumes the investor is able to re-let the space at the original $25.00 price, based on the additional effort the investor puts in to find a new tenant.

The investor may be able to further enhance their profits if they take on the responsibility to complete any redesign and/or refurbishment the space may require.  

Subject to the investor’s own financial position financing for a transaction like this can range anywhere from self funding to 100% financing, with numerous potential options in between.

What It Delivers to the Investor

This subletting program is a unique market opportunity coming out of the COVID upheaval.  The

program can deliver numerous benefits to the investor including:

  • Controlled entry into commercial property investments,
  • Flexible financing options
  • Easy access to professional property support, if desired
  • Dependable monthly cashflow

Open For Business

This program has the potential to make a material change to your property portfolio strategies and its available now for all who wish to take advantage of it.

To get started, or to simply get more information on the program, please contact us at http://northbrookcapital.com/contact/ .

NorthBrook Brings Vendor Finance to Commercial Real Estate Financing

NorthBrook is pleased to announce it has entered into an agreement with an international designer and builder of modular multi-residential housing units. Under this new partnership NorthBrook will provide dedicated financing solutions for all of the builder’s commercial clients.

Financing for larger multi-unit prefabricated construction projects, brings with it its own distinctive elements, particularly when applying them into traditional conventional construction funding. To address this NorthBrook has brought in elements of traditional vendor financing into its innovative financing solutions to ensure properly matched cash flows for all the parties involved in these projects.

Between these new financing solutions and the prominent “Green” elements delivered through manufactured modular units, developers have new competitive options they can bring to their building projects.

We look forward to helping other bring these new building options to the forefront of the industry.

Is It Time to Move Up

Residential Rentals to Apartment

Residential rental properties have long been a haven for investors to buy, operate and secure solid returns. However, that was when we had a less volatile housing market. With the recent escalation of housing prices, but no corresponding increases in rental rates, properties that once cash flowed to a positive annual return no longer deliver positive returns to the investors.

Yes, your current properties have certainly escalated in price, but where will you invest your profits when the next rental property opportunity is not available.

An alternative can be moving up to small apartment buildings or small residential complexes. Residential investors collectively represent an enormous amount of equity, which, when brought together in groups of 3 to 8, can be used to secure smaller complexes, as your introduction to this new-for-you housing class.

Historically apartment investments have done extremely well.  Even through the challenges of COVID most multi-family properties provided to be far more resilient than the experts predicted.

For some, apartment investments can be a much longer-term investment within their portfolios.  They can create a diversification element for that investment pool that is your retirement.  

It’s important to remember, however, this jump does not come without its challenges.  The scope of property maintenance and tenant management multiples with each unit in the apartment or complex.  There are things the investors need to learn in order to achieve the past levels of success they had with individual properties.

In the last while we have seen new and interesting combinations of financing and property management that are delivering well thought-out structured solutions to help investors step up into this next-step asset class.  These multi part programs can provide everything a small collective of investors need to succeed in their initial years as multi-family property owners; from legal ownership structures, to funding, to tenant management.

If we can help you with you “Move Up” please let us know.  Simply leave your contact information in the section below and we will back to you as quickly as possible.