Risk, its existence and its management in Commercial Lending preoccupies the minds of both Lenders and Borrowers.  Both are risk averse.  However, each group sees risk through a different lens, or more appropriately different sides of the same coin.  Banking has become a process of employing polices and procedures to manage risk in a complex financial marketplace.  Banks manage liquidity, credit and exchange rate risks. Borrowers (Corporations) can see risk as an obstacle, real or imagined, to obtaining the funding they need to acquire a business asset and earn business cash flows; or refinance a corporate asset in order to liquidate equity for investment or the retirement of a high interest debt.  In this series of articles on risk I am going to discuss the four major areas of risk that must be identified, investigated and explained to all parties during the mortgage origination process.  This first article is dedicated to the “The Corporate Structure and Share Capital”.

It is the responsibility of the Commercial Mortgage Broker to support both the lender and the borrower by clearly telling the story of the risk associated with the mortgage application.  The mortgage origination process is the tool a mortgage broker uses to identify, investigate and explain the existing risk factors.  The process does not remove the risk – but once identified – it does eliminate the negative effect of undisclosed risk on the closing of the mortgage. The skeleton of the Corporation consists of the following:

• Corporate Profile and the Articles of Incorporation
• Shareholder’s Agreement
• Corporate / Business Timeline

The corporate profile and the Articles of Incorporation are documents that defines:

• the type of legal entity, it’s date of incorporation
• registered office
• Directors and Officers
• Share Structure, Types (Classes) and Characteristics
• and, Filing History

These documents define the share capital system of the corporation.  The corporation’s share capital is generally made up of shares (units).  These shares may be organized into groups or classes.  Within a class, each share is equal to every other share; the number of shares determines the owners interest in the company.  Each share has certain rights and privileges as outlined in the Articles of Incorporation.  Common shares represent residual ownership and Preferred shares have preferential rights such as a claim on earnings and assets (upon dissolution of the company).  The important point here is that common shareholders control the corporation management through voting rights attached to the common shares, and are the folks “in play” during the financing process.

When it comes to a mortgage origination this is important stuff.  The broker will review these documents  and determine if the company can legally enter into a lending agreement with the lender.  A company that does not have a current filing with ISC is not a registered entity does not have authority to do so.  Additionally, the broker will review the share structure.  This review will identify those shareholders that have residual ownership (common shares), define who must sign a proportional guarantee and be identified under Canadian Anti-Money Laundering Law.

THIS IS WHERE THE RISK MAY PRESENT for the borrower (Corporation), as all shareholders may not agree to sign a proportional guarantee.  It is important to note that there are a lot of good reasons for a shareholder not to do so; and each shareholder should be advised to seek quality, independent legal advice in these matters.  If a broker is aware that there are objections in this group the matter must be referred back to the Board of Directors and the Corporation’s Management for resolution.

Just one part of the story in the mortgage origination process!

My next article in this series will focus on Informed Consent and Commercial Mortgage Origination.

Randell Toporowski is an Accountant in private practice and an Associate Mortgage Broker with DLC Powerhouse Mortgages in Regina, SK.  He can be contacted at 306-541-5438.

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From time to time businesses need capital to fund the development and acquisition of assets, purchase businesses, and refinance properties.  The capital budgeting process is used to determine the cost of the capital that is needed and is a fundamental process to the borrowing procedure.  Interest rates, loan term, amortization period, administration fees, early payout penalties, corporate taxation rates, leasing alternatives, corporate tax and capital cost allowance all factor into the formula that is used in determining the cost of that capital.  These are the quantitative aspects of the loan process.

In addition to this there are the qualitative aspects of the lending process. They include:

• Corporate Structure
• Shareholders and Corporate Share Structure
• Corporate bylaws and authorizations
• Guarantees
• Qualification of lender
• Financial and Pro-forma financials
• Municipal Tax Status
• Appraisals
• Anti-money laundering laws
• Legal Documentation and procedures

Your mortgage broker reviews and analyzes the quantitative and qualitative components of your loan application for suitability and completeness.  As well, commercial mortgage brokers play an instrumental role in guiding the entire funding process from lender through to lawyer to ensure that those applications that are approved pass through the system in a timely manner.  It is a matter of fact, that a good commercial broker that is well prepared and efficient will outperform the people and the processes of the commercial lending/credit departments of banks, trust companies and credit unions that offer commercial lending services to the Canadian business community as a walk in or existing client.  Commercial mortgage brokers add value to the capital supply chain for your company and its growth and financing needs.  The broker allows you to go on with managing your business operations and not managing your loan officer’s day!  At Dominion Lending Centres Powerhouse Mortgages we recognize this and employ sound processes so that you as the Owner, Vice-president of Operations or Chief Financial Officer can maintain your focus on your business operations as your loan application passes through the triage and approval process of the lender.

The goal of the commercial mortgage broker is to gather and review the relevant information.  The first step employs gathering documents that identify the type of company, it’s structure and detailed rules for it’s operation.  Secondly, documents must be collected that will produce accurate and complete information about the company’s historical, current and future performance.  Thirdly, documents are gathered that support the purpose of the loan request.  Once these documents have been gathered they are then analyzed by the broker to determine if the company is a good candidate for the borrowing that is requested, and if so, proposals are then submitted to various lenders based upon how well the proposal fits the lenders guidelines.  These four steps are generally completed in 3 to 6 weeks following the granting of consent by the borrower.

The documentation required to process a commercial mortgage application is a heterogeneous group of items.  Your broker will require copies of these documents and others that may be relevant to the loan application process.  These types of documents fall into five general groups:

1. Consent and Fee agreements
2. Legal, business, corporate structure and registration documents
3. Business financial statements and pro-forma financial statements
4. Tax status and compliance position of the business (Canada Revenue Agency, Saskatchewan Finance and Municipality)
5. Asset Purchase / Refinance documentation / Asset Existence documents

If you are a client looking for loan or if you are a broker wanting to refer a client to my office what do you need to do to get the process moving forward?  It’s simple, call me! Over the phone we will begin the consultation process with you and we will begin the procedures for creating your mortgage/loan application.

When applying for a mortgage you are going to hear a lot about this topic.  I mean this!  You are going to hear more than you ever thought you wanted or needed to know about it!  The advice is going to come from everyone.  This includes family, friends, neighbors, real estate agents and maybe you local butcher too!  They all mean well, but the myriads of unconnected information may even leave the bold at heart quite weary.  So, here is a road map to guide you through the terrain.

Credit History:     When you apply for a mortgage one of the items the mortgage broker is going to do is review your credit report.  At the onset of working with you, you mortgage broker is going to ask for consent to acquire and review your credit report.  This report is a listing of past and present credit activity.  It includes transactions from all public records and trade information that report to that credit agency.  This public information includes payment history, amounts owed, length of history, new credit and types of credit used.  It also includes any history of bankruptcy, slow payments, collections, judgments and foreclosures.  When it is reviewed with you, your mortgage broker will ask questions about it to ensure that the report is accurate, and that it does not contain any errors.  Also, the mortgage broker will ask questions for the purpose of explaining areas of the credit report to the underwriter that may need some clarification.  Basically, it is a story, your story, of your repayment history.

Ability to Repay the Loan:     The capacity and the ability to repay the loan is an essential consideration.  Though complex it boils down cash flows in your life.  Cash flows are like water through a pipe, how much money is coming in at one end of the pipe and how much money is going out at the other end.  So, it is easy to understand that you need an income that is consistent, verifiable and stable.  Once the income is verified a couple of tests are applied to it.  The first test, Gross Debt Servicing Ratio (GDS).  With respect to the home that is to be purchased, in general terms, a borrower can only spend 32% if their gross income on the following: 1) mortgage principal and interest payment, 2) property taxes, 3) heating payments; and if it is a condo 4) 1/2 of the condo fees.  The second test, Total Debt Servicing Ratio (TDS).  With respect to the home that is being purchased, in general terms, a borrower can only spend 40% of their gross income on everything included in the GDS calculation (principal, interest, property taxes, heating payments (& 1/2 condo fees) plus all other debt.  This other debt includes: bank and other loans, car payments, personal loans, credit card payments, court ordered alimony and child support.

Loan to Value:     This is the ratio of the loan to the fair market value of the property you wish to purchase.

A qualified and licensed mortgage broker will walk you through this jungle.  With my clients this is the first discussion that I have.  Even though the industry sets standards and limitations for these ratios, I always want to make sure that my clients are comfortable with the payments they have, and ultimately, it is important to determine if they have room given their cash flows to live comfortably.  A home should not be a financial burden.  It should be your refuge from the world.

When I was a kid I had a friend that hated brushing his teeth.  Every night before bed his Parents would struggle through the nightly ritual of having him scrub his molars, incisors and everything in between.  It caused stress and left the entire household in a state of agitation just when it was time for the opposite to occur.  His parents were trying to teach him the value of following through and benefit of this follow through was healthy gums and clean teeth.  One night I was at his house and as the evening progressed there was no tooth brushing before bed, no parent demands and no fuss.  Very Unusual!  Later I asked him why, what changed – had he conquered the parent-child hierarchy, was he now the king and could make decisions on his own; which included not brushing his teeth?  To my surprise he gave such a simple answer.  That night his mom had made brussel sprout casserole for supper.  How would it have been possible for his teeth to get dirty when the sprouts never touched his mouth.  NO FOLLOW UP NEEDED!

Canada Mortgage and Housing Corporation (CHMC) reported in their 2017 Mortgage Consumer Survey that Mortgage Brokers followed up with their clients 54% of the time after the mortgage transaction, where those customers using a Lender were contacted only 31% of the time after the mortgage transaction was complete.  Further to this, CMHC identified that mortgage clients using a mortgage broker sought more advice on interest rates, types of mortgages, financial difficulty strategies and what tools were available to manage their mortgage.

As your mortgage broker I believe that it is important to follow-up with my clients through the entire mortgage process, from pre-approval to home possession, and beyond.  I want to be available to make sure that the following processes are complete:

• Were financial conditions removed on time?
• Was the closing process at the Lawyers Office efficient, on time and complete?
• Were there any unexpected costs?
• Does the client need any support from a plumber, electrician or carpenter after the move?
• Did the first mortgage payment process properly and was it the correct amount?

Hopefully ensuring that the clients enjoy the process of purchasing a new home.

Lenders are like my friend with the brussel sprout experience.  NO FOLLOW UP NEEDED!

Don’t be left unsupported through the entire mortgage experience, let me, a licensed mortgage professional, support you all the way!

I hang my hat in Regina.  I am a mortgage broker and an accountant.  I have a great family! A loving wife that ignores the extra pounds I have added to my waistline, the aroma of garlic sausage that I bring to bed late at night (because this is my favorite snack) and my persistent misunderstanding that the dishwasher is where the dirty dishes go.  I have wonderful children, all of which have become accomplished in their field of study and contribute to society.  I am a proud father!  My wife and I made a series of choices to get to where we are today.  Of course my receding hairline was not one of them.  That was a bonus I received from the great wizard of life.

Making Choices!  Canada Mortgage and Housing Authority (CMHC) reported in their 2017 Mortgage Consumer Survey that 64% of First-Time Home Buyers indicated that they were renting before purchasing their first home.  Of this group wanting to buy their first home and feeling financially ready were the most important reasons for them to do so.  Therefore, if you rent before you buy, you are a part of the majority and when you buy you are making the transition from tenant to land owner.  Congratulations!  This is an important time in your life! CMHC also notes that 71% First-Time Home Buyers used their savings for their down payment and 18% received a gift from a family member.

The main Concerns of First-Time Home Buyers!  There are lots:

• Where and from whom do I get trusted information?
• What are the current mortgage rules?
• Down payments? Gifted Down payments? Registered Retirement Plan Withdrawals? How much?
• What is the process to buying a new home?
• What is default insurance?
• Unexpected Costs and Expenses?

Make your Experience a Positive One!  When you are ready to hang your hat in Regina and purchase a home you are going to interact with a wide variety of folks.  They include: Family, Friends, Real Estate Agents, Mortgage Lenders, Lawyers and Home Inspectors just to mention a few. Each professional has their place.  My job is to help and support you with your mortgage application process.  From pre-approval to lender commitment, I will guide you through the process, mortgage products, features, rates, mortgage protection plans and explain the purchase closing costs to ease your concerns.

I have added this link to the CMHC website where you can access some valuable information in preparing for your new home purchase https://www.cmhc-schl.gc.ca/en/co/buho/plmayomo/index.cfm