Currently, real estate brokerage CB Richard Ellis has just four people nationwide acting as mortgage intermediaries, searching out and helping negotiate mortgages and construction financing for clients. Next year at this time, Blake Hutcheson, Canadian president for the company, plans on having 14.
His plan reflects a trend in the industry.
A decade ago mortgage brokers handled only 10 to 15 per cent of all mortgages placed, says Blake Cassidy, vice-president of business development at Romspen Investment Corp., which has a commercial mortgage portfolio in the $250-million range. "Today they represent closer to 30 per cent to 40 per cent and that share is growing," he says.
The commercial and industrial mortgage industry is changing rapidly, Mr. Hutcheson says. It has become increasingly sophisticated. Types of financing unheard of a decade ago are prevalent today. To top it off there has been an enormous inflow of money into the mortgage market. Potential lenders far outnumber potential borrowers.
He can see a whole new business for the company's Canadian operation -- earnings fees for helping structure real estate financing.
"In the United States, CB Richard Ellis Capital Markets has become the second-largest mortgage broker in the county," he says. "Last year alone it handled a third of all commercial and industrial mortgages placed.
"In Canada we have not yet seen the same movement toward intermediaries but I believe it is coming. Brokers are becoming better educated, more professional and have begun to include value-added services. The seminal moment for this sea change came in the early 1990s when Canada's chartered banks, which once dominated the mortgage industry, virtually abandoned commercial and industrial lending, says Wesley Roitman, chief financial officer at Romspen.
"When the banks decided to cut back on lending in 1992 it created an enormous opportunity for entrepreneurs," he says. "In the decade since then, those entrepreneurs have grown their business. Today many have become near institutions themselves."
Romspen is an example. The company's lending operations started 40 years ago with a pair of lawyers finding mortgage investments for high-net-worth clients. When the banks cut back on mortgage lending they were able to take advantage of high demand for loans. Mortgage financing took over as their prime business.
Today the company is in the midst of taking another step toward institutional status. In the past, Romspen syndicated mortgages. When approached by a borrower, it would go to past investors and offer participation. Romspen lends in the $1.5-million to $15-million range and mortgages could have anywhere from one to 25 investors.
It would charge the borrower 2 per cent of the face value as a fee and charge the lenders 7.5 per cent a year on the interest it collected. The partners would frequently invest their own money as well.
This year, Romspen took a different tack. Instead of continuing to syndicate individual mortgages it has lumped a variety of them into a single fund. Investors now buy $10 units in the fund with a minimum $1,000 investment. It closed the sale of its initial $175-million fund in January. Returns are expected to be in the 10-per-cent range.
"The goal is to reduce risk and give greater liquidity to investors," Mr. Roitman says. "Instead of investing in a single mortgage, investors now have an interest in a broad basket of mortgages and can sell their units at any time."
Romspen has also decided to slowly venture outside of its traditional Ontario trading area and is looking at deals in the Atlantic Provinces.
"It is a natural organic progression," says George Carras, president of RealNet Canada Inc., a real estate research firm. "Entrepreneurs spot opportunities and fill in the gaps. Right now Canada is distinguished by lots of niche markets but you can see the slow move to the creation of truly national brokers and intermediaries."
Roynat Capital Inc. occupies one of those niches but it is a national one. It lends only to owner operators of businesses and often bases those loans not just on the value of the building's mortgage but on the business as well.
"It is not unheard of for us to lend 110 per cent of the appraised value of a property," says Earl Lande, senior vice-president and head of Canadian operations. "We might make a loan to cover not just a property but also the cost of acquiring new equipment and working capital as well."
The cost of that money can be as low as the chartered bank prime rate (currently 5.5 per cent) plus one percentage point for a floating-rate loan or prime plus two or three points for a fixed-rate mortgage.
"Who you go to for mortgage money depends on the nature of the business, the nature and the quality of tenants, the size of the loan, the market and the location of the property," he says.
Foremost Financial Corp. has cut out its own niche in the Greater Toronto Area, says president Ivan Stone. It syndicates and administers a $50-million portfolio. It charges between 1.5 and 2 per cent to arrange a mortgage plus 0.75 points, payable by the lender on the face value to administer it. Interest rates are between three and four percentage points above prime.
"The difficulty now is not finding money but finding the deals themselves," Mr. Stone says. "There is fierce competition among lenders. I would guess there are 10 lenders competing for every deal."
MCAP Commercial LP is one of the few mortgage broking operations to reach national status and has become a symbol of the goal others are shooting at. It, too, started with a pair of Toronto lawyers arranging mortgages but then grew into a trust company, expanded into a mortgage investment corporation and finally into a national near-institution.
MCAP partnered with the Caisse de dépôt et placement du Québec in 2002 and now has a portfolio of $12.2-billion in commercial and industrial mortgages and construction loans ranging from $2-million to $385-million across Canada.
"What we were able to do was fill the void when trust companies, small insurance companies and other lenders disappeared," says Derek Norton, MCAP president.
Currently, the profusion of mortgage money means MCAP has to take greater risk and accept lower returns to land deals, he says. Its advantage, however, is that it does not face the burden of regulation the insurance companies and other institutions it competes against face.
"As a result, we can structure deals more easily," he says. "They are also more risk adverse than we are." To manage that risk, MCAP devotes more time to due diligence and understanding the deal as well as the borrower's business, he adds.
Like other mortgage intermediaries, Mr. Norton sees the future holding increased professionalism, a move toward concentration of ownership, the emergence of more national mortgage intermediaries and syndicators and the creation of new financing products.
"Value-added services in structuring loans, syndications and in creating and managing portfolios is where the real profit is," he says. Rapid growth
Growth rates for segments in the commercial mortgage sector from 2001 to 2005, according to Statistics Canada:
Charted Banks: 19%
Credit unions: 37%
Life insurance companies: 13%
Trusts and mortgage loan companies: 84%
SOURCE: ROMSPEN INVESTMENT CORP.
© The Globe and Mail
