There are two sides to every coin, and there are two sides to Cooper Pacific. Cam Cooper answered a few of our most popular questions from borrowers and investors recently. This interview will provide insight into the MIC market and what Cam looks for in projects that make up some of the mortgage pools at Cooper Pacific.
First and foremost, I look at the developer. Especially now, I look for developers I’ve worked with in the past because I know their track record. Then I consider the location. Victoria as a market is a great location, but within the Greater Victoria area, there are various communities, and each operates differently within the real estate market. Fairfield and Oak Bay, for example, are relatively reliable real estate markets for the kind of new development we work with most frequently.
After that, I look at the loan size and the length of the project. We prefer loans to be about 12-18 months as this is safer for the fund. There are also things we must adhere to per our lending policies contained in our offering memorandums, such as the loan-to-value ratio.
On first mortgages, the maximum we can lend up to is 75% of the total project value. On second mortgages, we can lend up to a maximum of 85% loan-to-value. Having that limit, though, does not mean that this is what we always lend up to. There are many criteria that we look at to determine risk. If those criteria are not fully met, then our loan-to-value decreases accordingly.
There is a lot that goes into this calculation because you have to consider the value of the land and the value of the project once construction is complete. For example, for a townhouse development with an end value of 5 million, we don’t lend that cost upfront. We would loan them their land advance first and then lend the rest in draws on a cost-to-complete basis. We require a report from a quantity surveyor monthly to ensure the project is in good standing, and we would advance the next portion based on this report.
Most of the projects we’re funding are with developers and contractors we have pre-existing long-term relationships with. I also have connections with brokers in Vancouver, although most of our projects that you’ll find in our funds are on Vancouver Island, specifically between Duncan and Victoria. I’d say around 80-85% of the real estate projects we approve are on Vancouver Island.
Abstract Developments have been a large developer we’ve worked with in the past. They’ve grown a lot in the last 20 years and have much larger projects now, so we don’t work with them as frequently. However, we’ve started working with them again as interest rates rise and the gap between institutions and us is smaller.
We also work with individuals and small family-operated contractors. We’ve started working with some newer development companies, such as White Wolf Homes and West Urban Developments, to name a few. We work with a wide range of borrowers, from small family teams to large 200+ employee developers.
Having a mix of different kinds of real estate investment types is important for diversification. For example, if a fund is 10 million dollars, we try not to have more than 15% of that invested in one borrower.
Most of the stuff we’re invested in right now is pretty boring. However, ‘boring’ tends to be safe, less risky, and reliable. We have a lot of land loans in our funds right now. Land loans aren’t as exciting, but they’re great for mortgage pools. It means less risk because we’re not relying on construction or sales, and it’s backed by the value of the land, which won’t change much—particularly in Victoria, which is traditionally very strong. As well, the loan amount is smaller, which is easier to reinvest when the loan is paid off. The terms are also shorter for land loans which further reduces risk.
Victoria never seems to have the valleys that other places in Canada experience. I think Victoria is one of the safest real estate bets in Canada. There’s a lot of employment here, there’s a university, and it’s a desirable place to live, which draws a lot of people to invest.
In the early 2000’s we used to have a lineup of investors out the door. It was such a unique investment product, and you didn’t have as many investment options that were real estate related back then. The popularity of the “do-it-yourself” investor has grown because there is no reliance on a financial advisor. Having the freedom to do it yourself is desirable. If you look at successful pension funds, alternative investments and real estate are big portions of those funds. Investors are looking for ways to be able to diversify their portfolios in a way that isn’t tied to the public market and is a smaller form of these big pension funds.
It’s going to be interesting for a few reasons. Interest rates are rising, and that impacts a variety of things.
MIC interest rates aren’t tied to prime as banks are, but we are impacted by rising rates in two key ways. Firstly, as rates rise, the interest someone could make on other investments could rise. Take GICs, for example. The conventional 1% interest is growing closer to 3-4%. As a comparison, say we lend money out at 8%, investors could expect to make around 6%. Our rates are rising, but not as rapidly as some other options. However, that’s still 2-3% more than a GIC, and real estate investing through a MIC tempers risk a lot more than other alternative investment types making them desirable regardless of what GICs are doing.
Another thing to consider is how it’s impacting developers. Large developers like Abstract Developments are starting to come back to us for projects. As the spread between our interest rate and the banks reduces in size, larger developers will want to pay that minimal premium to deal more efficiently with us.
Over the past few years, we would see projects built and sold before construction had even been completed. I have a lot of people asking how a cooling real estate market might impact real estate investing, and so far, I haven’t seen too much of a decline. Historically, the real estate market hasn’t been as hot as we’ve seen in the past years. What this means for us is that we’re just going to be careful with who we work with. We want to work with developers who have already gone through the peaks and valleys of the real estate market and know how to navigate accordingly.
This is why land loans are more attractive to us right now. The shorter terms are ideal, and there aren’t the same risks associated with a land loan as there are with construction. There can be cost overruns as well as labour and supply shortages which can tie up the money for 36-50 months.
Do you still have questions about mortgage investments and what’s involved in a Cooper Pacific-managed fund? Contact Jordan on our team today.