Toronto Under Construction – Episode 62 with Jeff Wagner from Marcus & Millichap Capital Corporation, Brian Dorr from Dorr Capital & RealAlt Investment and Devon Cranson from Cranson Capital
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Meet the guests joining us on episode 62 of the Toronto Under Construction podcast:
Jeff Wagner – Marcus & Millichap Capital Corporation (MMCC)
Jeff Wagner is a seasoned professional in the commercial real estate industry. In May 2023, he joined Marcus & Millichap Capital Corporation (MMCC) to spearhead the expansion of the company’s capital markets presence beyond the United States and into Canada. With an extensive career spanning over two decades, Jeff has accumulated a wealth of experience in various aspects of commercial real estate.
Throughout his career, Jeff has been involved in financing deals totaling over $2 billion in debt and equity originations across a wide range of property types and financing structures. His expertise encompasses fixed-rate debt, bridge and construction financing, mezzanine lending, and whole loan acquisitions. Notably, Jeff has a strong focus on facilitating cross-border transactions, representing Canadian investors looking to invest in the United States, as well as assisting US investors in finding opportunities in Canada.
Prior to joining MMCC, Jeff held the position of Vice President and Originator at Institutional Mortgage Capital, where he honed his skills and knowledge in the industry. He also holds a Bachelor of Commerce degree in finance from McGill University.
With his extensive background and expertise, Jeff Wagner is well-equipped to lead MMCC’s expansion efforts in Canada and enhance the company’s presence in the global capital markets.
Brian Dorr – Dorr Capital & RealAlt Investment
As founder of Dorr Capital and RealAlt® Investments, Brian sets the strategic vision for growth. With a unique long-term market perspective and an economic mindset, Brian has successfully grown the core business to over $2.2 Billion in loan volume.
Prior to creating Dorr Capital Corporation and RealAlt® investments, Mr. Dorr spent over 25 years, building his deep knowledge of real estate finance. He has worked for CMHC, Canada ICI, CDPQ, MCAP, Quest Capital, Infrastructure Ontario, and Cameron Stephens. His experience in underwriting, default management, and mortgage administration, along with a sophisticated network of relationships with lenders, investors, and borrowers has been a defining factor in the success of the 2 businesses.
He holds an MBA, is a Chartered Professional Accountant (CPA), maintains a Certified Property Management Designation (CPM), and is licensed by FSRA as a Mortgage Broker.
Devon Cranson – Cranson Capital
Devon Cranson is the founder and president of Cranson Capital, a boutique investment banking firm based in Toronto. He has deep expertise in all aspects of commercial financing, M&A and securities.
In 2006, Devon established Cranson Capital Solutions Inc., a corporate finance advisory firm that is focused on helping entrepreneurs with capital raising, M&A and debt advisory services. In 2011, Devon expanded the business by launching Cranson Capital Securities Inc., an Exempt Market Dealer focused on raising capital from accredited investors for private placements in real estate, financial services and growth companies.
Under Devon’s leadership, Cranson Capital is a 6-time winner of the PCMA’s Deal of the Year Award and has been ranked 49th on the Profit 500 fastest growing companies in Canada.
In addition to leading Cranson Capital, Devon acts as the General Partner for three Toronto condo developments, a Trustee of a multifamily residential REIT and a Trustee of three Land Development Funds. Devon also sits on the Boards of a TSX-listed real estate lending company and a senior’s housing company based in Western Canada.
Financing Toronto Real Estate: Condos & Purpose Built Rental
Episode 62 of the Toronto Under Construction podcast is focused on financing in the Toronto Real Estate Industry. Ben kicks off this episode reading a LinkedIn post that guest Jeff Wagner posted at the end of last year about his crystal ball predictions for 2024.
Ben asks Jeff to expand on his thoughts around “borrowers, balance sheets and cycling capital”. Tune in at 4:32 for Jeff’s response where he discusses why cash is king and why it is crucial for developers to have the capital to support their projects if anything goes awry. While Jeff discusses his predictions, the conversation moves to 2023 launches. The guys discuss how only 5 out of the 32 projects that launched in 2023 sold over 65% of their units and were able to hit their construction financing, while 27 will be figuring out how to extend their land loan. The guys share some insights they are seeing in the market and continue their discussion on the importance of liquidity.
As the conversation continues, the group mentions the market shift to smaller buildings, stating that the inventor buyer is not as strong right now, due to the cost of holding a unit for rent. Because of this, the bigger buildings that are investor driven are the ones that are not hitting their pre-sales and so the focus for 2024 is on end-user product: low-rise, boutique buildings and townhomes.
The discussion moves to rental and how the government can incentivize builders to build more rental product. They mention how condo projects are obviously more lucrative, and the group discusses the different costs associated with rental vs condo. Devon brings up the point that the low construction starts in 2024 on new projects, mean that in 2027 there will be a low completion rate, likely skyrocketing rents. He says, if you’re forward thinking, now is actually a good time to invest in rental product. Ben says with only 13,000 condo sales in 2023, we’re only at half of the inventory needed in the marketplace. He reiterates that of those 13,000 units, in those 32 developments, only 5 got to 65% sold, which means a significant number of those 13,000 units won’t actually get built. He estimates about 6,000 of those units will actually start construction this year.
Affordable Housing
Switching to a discussion on affordable housing, the guys reiterate their points on the high costs of building, and the fact that there are no municipal incentives. They talk about some of the incentives that could be offered to entice builders to build more affordable units, as well as discuss the need for bigger units and co-living options.
Ben quotes an article reading, “The federal government is unlocking another $20 billion in low-cost financing for the construction of rental housing across Canada, Finance Minister Chrystia Freeland announced Tuesday.
The Canada Mortgage Bonds program, which raises funds for residential mortgage financing. The federal government says the new funding will boost rental construction by 30,000 units annually.
The program allows developers to access loans from financial institutions for multi-unit rental projects at an interest rate that is one to two percentage points lower than a conventional mortgage. The Liberals also introduced legislation last week to eliminate GST charges on rental developments as Ottawa ramps up efforts to increase the housing supply.”
Ben says to Devon, “in May of 2021, Cranson Capital raised and invested $8 million into the Pinemount Gorman Park Limited Partnership. The LP will enter a development management agreement with Pinemount Developments to build a purpose-built rental apartment in North York”. Ben asks him to walk through how he made the numbers work and share more about what the exit looks like for investors? Tune in at 30:21 to hear Devon’s response and how his plan for his purpose built rental projects is to hold as a cash flow stream. The guys continue with a discussion on the CMHC initiative and the ability to hedge when borrowing from an institution that has a money market. Tune in at 36:43 for the discussion.
Financing and Construction Costs
As Ben wrangles the discussion back in, he reads another headline, “Rising financing, construction costs could stifle housing supply growth: CMHC”. He reads, “Kevin Hughes, CMHC’s deputy chief, says that “In 2023, growth in construction costs has slowed to varying degrees across all major centres, but remains elevated in Toronto and Vancouver. “Right now, in the inflationary context it is really much more difficult for people to get their financing so we’re probably going to see some delays definitely in several projects,” Hughes said. “Financing is one of the issues but it is not the only one.”
He reads from another article, on Urbanized saying, “In a bulletin this week, based on a survey of developers, CMHC indicates over 90% of respondents to their poll of residential developers indicated traditional debt financing is no longer feasible for their rental projects, and two thirds mentioned that operating in the current financial market is increasingly challenging.This is, of course, due to the Bank of Canada’s heightened policy interest rates, which has sent borrowing costs soaring. All of this is coupled with a 50% increase in construction costs for equipment, labour, and materials, and growing development fees imposed by municipal governments.”
Ben asks Brian, given some of the challenges developers are facing moving their projects forward, how has your underwriting changed over the last 18-24 months? Tune in at 41:13 to hear him expand on his short answer, which is yes.
Ben asks Devon, how are you looking at deals right now? If you did identify a good deal, would you still have the investors that would be interested in funding them? Tune in at 47:19 to hear his response.
The next article Ben reads is “Something borrowed, something new – the rise of ALT Lenders. He reads some quotes from the Ontario Homebuilders magazine saying, “The tightening of traditional financing parameters has pushed some developers/builders into the alternative lending space for the first time, as they may require more flexibility in their deal structures,” says Michael Carragher, V.P., Mortgage Investments, at Firm Capital Corporation, a non- bank lender that has been providing real estate funding to small, medium and large builders and developers in Ontario for more than 35 years.
“Land financing is very tight in today’s marketplace,” concurs Riccardo Plati, executive V.P. of Dorr Capital. “Construction loans are getting tighter for less experienced builders.”
Dorr Capital operates in the private debt market and has placed $2.2 billion in loans with private and institutional investors over the past decade. Dorr Capital’s business has grown significantly since it was launched 13 years ago, with the average loan size nearly $19 million in 2021, with some deals close to $200 million.
Dorr’s underwriting process is stringent, as it wants to be assured that developers can get the necessary approvals. It does thorough market research on aspects such as location and demographics, using its own internal resources as well as third- party consultants. This involves budget review, in addition to timing, cost escalation and risk assessment to determine whether a developer or builder has the necessary experience to carry out a project and handle the scale.”
Ben has a two part question for Brian, asking has any of the above commentary changed over the past year, and with further rate hikes since that article was published, how are borrowers approaching cash-flow problems? Tune in at 52:56 and 1:02:29 as the guys unpack these questions.
The discussion moves on to zoning and the guys discuss “as of right” zoning, and the importance of city council having a plan for building across the city of Toronto.
Distress In The Real Estate Industry
Ben switches to another hot topic in Toronto Real Estate right now: distress in the marketplace. He reads an excerpt from a Storeys article Lender Seeks Receivership Yorkville Condo Development saying, “The primary lender on a luxury condo development built in a joint partnership between developer Sam Mizrahi and Edward Rogers is looking to have the project placed under receivership, alleging millions in unpaid loans.
In an application submitted to the Ontario Superior Court of Justice on January 19, Duca Financial Services Credit Union Ltd. alleges that the developers have been in default on a loan that was provided to build a luxury condo development in Toronto’s Yorkville neighbourhood, dubbed 128 Hazelton, since October 9, 2023 to the tune of $16M.
The owing amount is roughly half of the initial $35M loan provided by Duca in June 2017 for 128 Hazelton. Although Duca’s loan is first-ranking, two other junior lenders have provided funds to the developer: Constantine Enterprises Inc. for $21M and Aviva Insurance for $18.5M. The court filings do not specify how much is left outstanding on these two loans.
The condo project, which began construction in late 2017, is a 9-storey, 20-unit condo building with 2,003 sf of ground floor commercial space. It’s now substantially complete, and eight of the condo units are still in possession of the developers, according to court documents.”
Tune in at 1:13:38 to hear the guys discuss how “hilarious the way the media portrays this story” and why all the developer needs is a lender to give him an inventory loan. The guys discuss builder reputations, distressed sales, and how tricky it is to get an inventory loan right now.
Rapid Fire
As the episode concludes Ben asks the guys some Rapid Fire Questions like “In terms of commercial mortgages, what’s better, Fixed or Floating?”, “Developers that paid peak pricing for land, sell and cut your losses, or hold for as long as possible?”, “Who is your favourite architect?”, “If underwriting housing developments were a sport, which one would it be: chess, boxing, or synchronized swimming?” “Should we do away condominium interim occupancy fees, and just have purchasers close right away?” and “Who would be a good guest for a future Toronto Under Construction podcast?”
Tune in now to episode 62 of the Toronto Under Construction podcast.
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