This post is all about getting approved financing to purchase our new Bush Order Provisions property in Kam Lake. The period of time between accepted offer-to-purchase and possession date.
We hope these posts might serve as a guide for someone to learn from our experiences.
So to start where we left off, it was the middle of May 2020 when we had approval-in-principal for financing and had an accepted offer-to-purchase in hand.
It was suggested to us that it would only take 6-weeks to get final approval from both our lenders, so we set the condition removal date accordingly. We were mistaken.
We will try to keep this short so as to not bore you.
Firstly we should reiterate that in order to purchase the property and get a loan for the startup costs estimated, we worked with a traditional bank and a business development and investment corporation (BDIC).
The BDIC by all accounts was fairly easy to work with once they had given us approval-in-principle. They just needed the accepted offer-to-purchase and confirmation of the other loan. They were able to give us an approval within our 6-week timeframe.
The traditional bank was a different process. Let’s go over those hurdles.
We Changed Properties
When we sought approval-in-principal we were still considering the first property we put an offer in, which was rejected. The bank had run their simulation as if that were the property they were going to fund. When we showed up again two months later with an accepted offer on a different property, they had to run the simulation all over again.
We thought that we had approval-in-principal for a certain dollar figure purely based on our business plan and financial projections. This was mostly incorrect.
So through the simulation we went again.
Percentage of Rental Income Changes Loan Type
When considering properties and knowing we’d be without revenue during our startup phase we looked at how to generate rental income in the short term. Either through outdoor storage or through rental space in a building.
What we learned in the application process of this loan was that if more than 50% of the space in the buildings on the property are rented out it changes how the bank looks at our application.
If we as the owners use more than 50% of the space for our new business, with only a small amount of rental income, the bank would assess us on our business plan, financial projects and that small amount of rental income.
If more than 50% of the space in the buildings is rented the property is considered an investment property and therefore our application would only be assessed on that income alone. That income was not enough to make the purchase viable if we were still to use a portion of the buildings.
So while we thought we were being clever, we had to reign it back in and readjust our plan. Which added more time to the whole process.
Ask About an Appraisal Right Away
This was an annoying hurdle to overcome because so much was out of our control.
If you are trying to get a loan from a traditional bank for a residential or commercial property, ask them right away if you need an appraisal and get those wheels turning, especially in Yellowknife.
We didn’t know or think we would need an appraisal for the property we were trying to purchase. The building had been completed at the end of 2017 and there was an appraisal done at that time. We thought this was recent enough and wouldn’t require another one.
It wasn’t until about 8 weeks after our offer-to-purchase was accepted (2 weeks after our condition removal date BTW) that the bank informed us they would need to have an appraisal done before they would approve anything. Oh, and we had to pay $2,500 for it.
There is only one appraisal firm in Yellowknife and they service the entire territory, so it took a total of 4 weeks to get an appraisal report finalized.
It took two weeks just to get the appraisal scheduled. The request went from the Yellowknife bank branch to the head office, who then sent it to the appraiser for a quote. The quote then went back to the head office, then back to us for approval. Then our approval had to go back to the head office and then to the appraiser, who then scheduled the appraisal with us.
Did we mention there is only one appraiser in Yellowknife and we even knew the guy! A lot of time could have been saved here.
The two weeks it took to get the final appraisal back was because, again, there is only one appraisal firm and in the summer they are busy. The appraisal itself was easy to do because there was such a recent one on file, but we still had to wait.
We were now in the middle of August 2020.
General Security and Working With Two Lenders
One hurdle that we worked through throughout the entire loan application process was mediating the needs of each lender.
We often found ourselves in a situation where each lender wanted confirmation from the other lender before they would proceed with something.
During our initial application process when we were still only seeking approval-in-principal we frequently had to field calls and emails ensuring one lender that the other was still onboard.
Once we did have a property selected and loans were approved-in-principle, again, one stipulation was that the traditional bank was to be first in line for the General Security Agreement. This meant, if we went bankrupt they would be first in line to recover their investment, specifically through the sale of our property.
Through several back-and-forth emails, we had to get written confirmation that the second lender, the BDIC, was acceptable on these terms. It then had to be written into each loan agreement that the traditional bank was primary and the BDIC was secondary.
All this wasn’t so much a hurdle as it was a time commitment. If we hadn’t been available during business hours to quickly answer the questions and provide reassurances the whole process would have taken even longer. Prepare for this if you are considering stacking loans.
Other Hurdle and Fees
There were other hurdles along the way that didn’t hold up our application process but were lessons in expecting the unknown.
We did encounter a small hurdle with the BDIC that was not very well communicated to us at the start of the process. It was having to pay for their lawyer to draw up the loan agreement and security documents. This was only an issue for us because we only factored our lawyer fees into our business plan, not theirs as well.
The only other hurdle we faced was when the appraisal report came back. The traditional bank ended up using the Direct Approach value of the property, which was $20,000 less than our purchase price, to assess our application. We didn’t think there would be an issue because the Cost Approach value was higher than our purchase price. The bank ended up reducing our loan by a marginal amount, which we were able to move to the BDIC loan. This wasn’t a big issue other than the extra week it took to arrange and the higher interest rate we are paying on that loan.
To Wrap It All Up
What was supposed to take 6-weeks took us almost 4 months. Some factors we controlled, others we did not. We hope that recounting our experiences here might help someone in the future avoid the same hurdles or be prepared and manage them more efficiently than we did.
We were also very fortunate that the vendor of the property was flexible with us as we worked towards getting our financing in order.
Read More of this Series
Part 1: We Decided to Buy Land. Not Rent.
Part 2: Financing the Bush Order Provisions Business Plan
Part 3: Finding the right property for Bush Order Provisions
Part 4: Hurdles of getting Financing Approved