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Getting a building up to CMHC standards

Feb 7, 2017

First National finances building renovation and taps partner network to assist with physical and financial reporting improvements.

Key idea: network, relationship, CMHC expertise, commitment
First National provides interim financing for building renovations and connects the client with professionals able to address the physical and financial reporting improvements needed to secure CMHC financing.

What was the client trying to achieve?
The client had a valuable, 120-unit rental project in that was in poor condition and located in a challenging neighbourhood in Toronto. The existing first mortgage was maturing in approximately 14 months. The client was looking to obtain sufficient enough second mortgage financing to improve the building. He also wanted to secure the rate advantages of CMHC-insured financing when both mortgages matured.

However, the building’s physical condition and financial reporting did not meet CMHC standards for mortgage insurance. The physical structure was in very poor condition, with improvements needed for key structural elements including new balcony slabs and railings, roof replacement and underground parking garage repairs. Financial reporting was also lacking - the statements were not prepared in an acceptable manner for a project of this size.

“When I assess deal quality, especially for CMHC funding, I look at the physical and financial condition of the building, as well as the financial condition of the borrower,” says Dru McAuley, Assistant VP, Commercial Financing. “CMHC has standards that borrowers and lenders are expected to satisfy and, in this case, none of those elements conformed to CMHC policies, guidelines and expectations.”

Putting the deal together
McAuley knew that he would have to structure the deal according to CMHC expectations in order to deliver on the client’s ultimate financing objective. He also knew that it was going to take some time and resourcefulness.

First, McAuley proposed that First National finance $1 million worth of improvements to the roof, balconies and garage. But his involvement would not end there. Tapping First National’s broad partner network, McAuley recommended an engineering firm to develop specs and budgets and helped the client manage that relationship.

In addition, McAuley connected the client with a CA to tackle the financial reporting issues. For the better part of a year, the CA worked with the client to put together financial statements that accurately reflected the building’s operations in a format that conformed to CMHC policy

“The client needed help, and I devised a plan of action to get the deal up to CMHC standards,” says McAuley. “Ultimately, the CMHC representatives were happy with the building quality and financial statements and approved the financing.”

Why First National?
For McAuley, partnership is paramount. In this case, partnership meant guidance, negotiation, consultation and expertise that the client couldn’t access on his own. But through his partnership with First National and McAuley, he was able to achieve his end game.

“In the end, the client got the deal that he always wanted by leveraging First National’s know how, contacts and expertise,” says McAuley. “He had a requirement that he didn’t know how to achieve himself, and I was able to step into his shoes and guide the experience to the desired outcome.”

McAuley also credits First National’s philosophy on taking the long view for the success of this deal. For many lenders, financing is a transaction business. They don’t want to invest the time and effort required to deliver a financing solution that will eventually deliver value.

“First National is not in the commodity business. I want to be the person that a client comes to for guidance, service and solutions. Very few lenders would have done the work that I did with a challenging building in a challenging neighbourhood, but I made the commitment to deliver and the client did well by the deal.”