#3: Bin Han Talks About Montreal Commercial Real Estate Lending

Real Talk with CHIA #3: This week, we channel our perspective in the mind of a commercial real estate lender. Bin HAN, General Director at CFO Capital, will share with us his expertise and thought-through process of capital when it comes to any major real estate investment opportunities. 

This episode is also available in Mandarin Chinese, please watch it from our YouTube channel. 此集节目也有英文版本,请至董家宜快乐地产团队YouTube频道观看。

This episode aired on November 15, 2021 and is rebroadcasted on our Youtube channel, here is the english transcription:

HelloI'm Chia, your happy broker. I'm also your Multilingual host for real talk with Jeff. Today at our third episode. I'm very pleased to welcome Bin Han at our show. Bin Han is the managing director in Quebec province for CFO Capital. CFO capital is a leading across Canada mortgage commercial market firm and Bin will talk about commercial real estate financing with us today. Thanks for having me.

Actually, we know each other, like so many, many years right? You are from Shanghai. I'm from Taipei. We both have chose Montreal. To expand, establish our own families and our careers as well. I remember I first time met with you. You are at a TD Bank. And after that you went to serve, as is Desjardins commercial director for Asian markets. I also know that you are very elegant, you have a beautiful family, beautiful wife and very very nice kids. I know that you have a lot of achievements, and I'm very pleased actually to welcome you today at my show . And first question, it will be very interesting, interesting. I think for our banking contacts, we have many, many banking contacts, right, lots of bankers. So actually from, you know, many parents, and especially from Asian parents. Their expectations for the kids is, to, you know, work at a super large organization like a banker, so they wish accountants, lawyers, bankers, right? So my question is what drove you to make such a decision from a very, very stable and a comfortable role at a big bank and to join a market case team as a private firm.


It's not an easy decision, but you know, there's two sides of it. The rational side is, of course, that, you know, after being 16, 17 years in the banking industry, most of the last 12 years in commercial banking industry, from TD and Desjardins today. You've learned a lot, it is really good school, you know, you know, established contacts throughout the years with the institution, and you learned, you learned the system as well, you'll learn the product, and everything which is great, everything is great, but you know, if you are moving forward, if I'm looking myself into the mirror and say, what do I want? What do I want in the next 5 years? Am I going to be still, you know,  if covid still continues, am I going to still be working in my basement in the next 5 years, doing the same thing? The answer is probably not. So I did a lot of reflection in my basement during covid. I was working at the same time, enjoying the break and I was thinking, where would I want, what I want to be, and what do i want to do so first answer is yes, I love credit, so I love doing commercial credits is something that not only numbers, but also the structure that complexities, and also when you when you are able to put the missing puzzles together, and then to structure your deal from stretch is not only you, no good for the clients is a sense of achievements for yourself as well, you know, depends on the complexity of the file so that I really love it and enjoy doing it, so that's also when I, When I speaking about Mark and CFO capital again it's where's Mark? It is a nationwide commercial mortgage brokerage firm and they opened the first office in Calgary and after that slowly enter into Vancouver BC market 3 years ago now in Quebec, but actually they were in Quebec for already a couple of years, I was bidding on their transactions. When I was in my last round, and with the time I started starting to know how the structure works with them, and it took Mark about almost half a year to a year, to convince me one of the story that he told me that actually really convinced me, it was one day we were having a quick chat after dinner. He was like, saying, so, how's your family look like, you know, you have young kids like you, said young kids, young family and your wife is not working. How are you holding up to say, okay, well, it's like everybody I like let have somebody, I wish I had somebody to help my wife too, you know, to take her some tasks from her shorter to do some house-work and we already have some part-time. But you know, it's not enough for her, especially with the 2 kids, and homeschooling, anyway, and his like Mark, like, what are you thinking of getting a full- time maid you, of course, he is like, you know, join us CFO, and you have a full time maid.

So that's what's the decision turning point, so that's the emotional part actually made me make the move. The rational part was already there being there being there for a couple of years, you know, and a couple of months and a year already.

 What a great story! That's awesome. So you mentioned about, you know, you love the challenge, and you have like so many years of experience in commercial financing. So my next question would be what's the most complex file that you have worked, and it didn't went through? What can we learn from it?

The lessons that that's normally where you learned most right that's from the failures, so actually we can talk about the one that we work together, of course, so it was was a good file, it was an interesting file. Five hundred and one hundred acquisition multi residential, not an easy file is a lot of people buy it for acquisition purpose. For the cash flow, but is one is more like what you, what you call a value added play where you want, want to rent, renovate all the units. Buy or turnover the leases and increase revenue, create value of the property and to make a profit either by refinancing or selling it to the market, so it is a great acquisition and great transaction. You learned a lot because there's a lot of elements that wrap around this whole transaction. You need to know, you know, the quality of the building, the potential development opportunities, obviously parking ratios and great ratios, and all kinds of that. You know, the age of the building, and what type of working there was to budget who's going to manage, who’s going to turn over the lease, and that's so many, many questions, exactly it's so many aspects you have to really understand, and you know it before you are making the decision to acquire top building, and that's something that an experienced investor really has to put it in their mind when they, when they dealing with those type of large transactions. That's a 20 million dollars over transaction, and after that, financing, taking apart right, so you need to know who's your partners in financing, and what type of leverage you can get. And you're able to sustain those interest payments, and you are able to wait until, you know, in this case, they'll be a CMC financing. That that kickstand in order to for you to get your payout, all kinds of those not only from the equity and capital point, but also from the dead point of you, so it's it's a nice transaction, it was a really good learning experience, very complex, we had an environmental project.

I remember we talked to each other like days and nights and nights and days and for summer months. 2,3 months, probably. I'm there and environmental problems, there are all kinds of all kinds of problems that you can never imagine for a multiplayer transaction.

We both learned a lot and thank you, thank you so much for your patience. I'm from there. Actually, I have another question, I think, is a very common question, but we still don't have, you know, a more specific answer, so actually, when we talk about a deal, like, what we have done for 100 and more units, and we also have many multifamily properties, investors, they're looking for duplex, triplex and six-plex, twenty-plex, etc, right? And the current challenge, since that covid from my experiences with the different investors, it’s actually the economy make a value and market value little match, so can you share some tips with us?

A lot of investments and properties in multiplex, which talk about cap rate right, so there's the going cap rate, which is how much you’re buying. And also that's easy, easy calculation, and also the bank’s perspective, the lender's perspective, which is the economic value. And there is a huge gap, there is a discrepancy, the reason is being, you know, the first of all, you know you better than I do, there's not enough supply in the market location is a key. Land price is increasing, and in order to be such a building in this piece of land, today, the cost of construction is rising dramatically, so you know, people are buying, they want to buy a stable property, they don't, they don't like to put into bank account for like one percent interest is specially it's still low interest. So even if it's a 3% percent of 4% return for multiplex investment is still better than putting to the bank, and I have a piece of rest where you can appreciate the values over your time, so that the drivers a lot, so you know people to go into the multiplex investment market, which is good for myself, also I love the market, but one thing you have to pay attention is your cash flow. This is when the banker will look at when you go to any bank for financing when you buy it so most often we see that the long-turn value is not that we expected and all of a sudden you don't have enough money to buy it or you bought it, but you are finding yourself your negative cash flow.

It happens more and more in current markets. It's very hard to find a cash positive investment properties in Montreal.

Absolutely, so, you know, the investors had really have to look all the aspects before they make that decision, and also, you know, I'm not saying that there's no good deals in the market. They still good deals in the market, but you have to, you have to really dig deep and at the same time., decide what strategy you want to go this all kinds of different strategies you want to buy older building that you can convert or older building that you can renovate and increase the rent, that's one strategy, or you buy a brand new building, this just being completed, and even the beauty will probably help you release it out right?

Many of my projects are currency. The sailors they like beauties and real-estate developers they sell for a cap rate security.

So that could be a very interesting project, because you don't have that much of maintenance. You don't know the building and minimum amount of management as well. Minimum amount of money to put in for the capital investment, so that's a strategy also for people that want a piece of mind, right? With a higher price tap, but you get what you pay for.

Maybe I think several investors that they don't know yet, but in Quebec earlier it also such a pleasure to work with. Especially for landlords. However, so when investors really look into what we called forward-sale projects, so the new building, new multifamily properties, the world of advantage in purchasing a large kind of a new building, so we said, the new leases, this is it's like, for the first 5 years.

You can increase whenever you want, and what have you want, that's the beauty, part of, absolutely, you don't have to deal with the headache. And when the grandfather list type of thing.

And from that angle, maybe we can switch from investors perspective into the builder's perspective, because that's what you are doing as well to help develop in your financing. So I would like to know what are different types of financing structures for developers. For instance, for land acquisition for the mezzanine loan. And for building construction loan itself.


It started by the land, right? When once you spot the land, and if there's gonna be some land financing that can be achieved depends on the time horizon of the land development, you know? How much if you want to change the zonage, if you want to change the destiny is the land clean or not, how many new units you want to build, if you're happy for lucky in Montreal that probably is going to take a lot to go through, CCU and change everything, all kinds of these things will come into play for land financing, but normally will looking at you can do a land financing anywhere around 50 to 65, sometimes 70 percent of the land purchase price and the value exactly, you know, a lot of land development experience, experienced groups, or investors, what they do is they bought the land, and they developed the land, and change to edge. They increase the square feet to buildable, let's say one to two, they doubled it, and then the length value will be lifted. It's no longer the same as the purchased it, and, you know, there's a bit of equity we can play in the land, and the lenders or banks will look at the market value of it. They will give you they'll recognize the value for you, so when you start to do the construction financing that will be part of your equity and that's that's really the land play, and then once the land is ready to be built, then you come, it comes to construction financing it's like you were mentioning, so the construction financing could be simply as just a senior financing with the bank or with a big company. Or a loan firm. For you traditional loan, exactly. It could be structured like you mentioned, mezzanine. So the traditional lenders could go as high as 75% to cost, and you can add a mezzanine financing on top of it which you can range from 8 to 10 to 12%, so total leverage will become like, instead of 75 or 70%, it will be almost 85-88% so that's will give a lot of a lot of freedom for the investors, the actual equity from their own pocket that's the senior piece and the mass piece. It could be a type of instruction, but that's in the construction and is less, but you can still structure something like being this senior in the B lender, that could work as well, and then once once the construction starts towards to the end depends on the project if it’s rental and your exit will be a long-term financing with traditional bank. Or if it's a condo, then you know you sell it and then recruit all your investment back and pay out the loans, so that basically, in a nutshell, the for construction financing, this is how you start from the land till the end.

So, talking about traditional long and mezzanine all that. Do you see like a trends like we have a more and more mezzanine instead of a traditional loan, because of the differences between the market value and the economic value?

Mezzanine loans in construction, people use it a lot, and also one thing I didn't mention is also once the property or even the property that was that's existing property is always with CMHC. It was topped up, you know, that according to CMC, you know the value, and but you know, with the years you have already done a lot of improvement, the rent has been ramping up and there is a way we can help the investors, the owners, is that to get the trapped equity from the CMC loan because you can't break to CMC, otherwise there is going to be heavy, heavy penalties so there is this mezzanine comes to play in this place, so we can do a second charge or just a mezzanine to get that equity out, to reach the potential 85 percent on the value according to the CMC, but CMC can't do this, then the mezzanine will come to play a role.

I recognize that the time flies, but I'm so enjoying my discussion with you, and it can goes, goes 4 hours. I would like to maybe ask the for the last question, since we are both that work internationally and with this, you know, cross cultural vision to help people move or diversify their investment worldwide. So what will be your you no takeaway advice for someone who is currently outside of Canada, and who wants to invest in Canada, what kind of specialist they need to know and what type of information resources they need to have before they even jump into the real estate transactions?

I think the first step is to get a broker like, like you, you have to have a trustworthy partner, so either a broker or a banker or an accountant or a lawyer and an advisor that you can work along side with you to. To advise you from the beginning of every investment that you're going to make. So it doesn't matter if it's, I was just joking, but a broker, probably, it's a better option, experienced broker, well, does help them in terms of not only the investment, you know, searching as well as you know, all the legal part of it or accounting part of it. I'm sure you're doing it, it already all the financing part of that, so I think that's the first step, then to give them the real picture of what does it look like, you have the real estate market here in Montreal, and also in another part of Canada and the you can compare different products in different market and let them give them the choice and then let them choose whatever they like. And also, you know, be realistic on the return, be realistic on the timeline as well, and sometimes it's not that easy, and the money has to be very patient.

I will say one of the first persons that investors need to know is a very strong and knowledgeable person like you.A real estate professional, it has to be a professional that can work alongside with the foreign investors, especially throwing your eyes here on the ground.

We're all like surround us with a very, very experienced professionals in a real-estate investment.

Bin, such a pleasure to have you today, thank you so much for your time, thank you, thank you, we will continue our collaboration.


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