In this business, you truly learn something new every day.
And last week, I encountered a situation that I had never seen before, with a building that is now in major financial peril, and where the sale of existing units has massive hurdles.
I love this building, and I’ve been pumping up this area for quite some time, but if 201 Carlaw Ave is now on the “don’t insure” list by the three major Canadian mortgage insurers, it means buyers have no choice but to stay away…
I’ve only ever had two deals fall through on the solicitor’s review of a condominium’s Status Certificate, and unfortunately, that second one took place last week.
I would probably give the first one an asterisk, since the deal falling through had nothing to do with the building’s finances.
Stop me if you’ve heard this story, but two summers ago, I met a would-be condo-buyer who had just inherited a large sum of money from her mother. The catch? The mother left ALL of her money to this lady, and NONE of it to the lady’s brother.
She purchased a unit at 33 Mill Street, and all the while, the brother was discouraging her not to. We got the Status Certificate, and her lawyer – who was her brother’s best pal told her there were “major, major issues” in the building, and not to proceed with the purchase.
I think, in fact – I’m almost certain, that the brother just didn’t want his sister to blow the dead mother’s money on a condo, and instead, he wanted her to keep it in cash so he could get at it. The fact that he had his friend review the Status Certificate and claim there were issues in a building where units routinely sell every day, only confirms my theory. The unit sold to somebody else a week later, and that buyer firmed up the deal in two days.
So that deal falling through on the review of a Status Certificate doesn’t really count.
My latest sale at 201 Carlaw Avenue does…
201 Carlaw Avenue, or “The Printing Factory Lofts,” is a three or four year old building, with a hard loft conversion on the first two levels, and 5-storey soft loft addition above.
It’s the southern-most condominium on Carlaw Avenue, and is literally steps to Queen Street, and it’s always been one of my favourites in Leslieville – even though I’ve never sold in there.
I’ve shown a dozen or so units in the building, but as luck would have it, nobody has ever pulled the trigger.
A couple weeks ago, a young buyer-client fell in love with a $300K, 1-bed, 1-bath unit in the building that was exactly what she was looking for. The unit had 10-foot ceilings, polished concrete floors, a large balcony with a gas-BBQ line, and tons of storage for a 560 square foot unit!
Some buyers just “know” when they see it, and my client was ready to move on the unit.
We reached a deal the next day, and I gave her my speech about how the Status Certificate review is often a “rubber stamp,” and that it was nothing to worry about.
After all – I had never had a deal fall through (legitimately) on a review of a Status.
I told her that when a lawyer reviews a Status, he’s looking for major red flags, some of which pertain to the unit, and some of which pertain to the building.
In the unit, you want to know if there are any outstanding maintenance fees, if the taxes are paid up, if any rules or regulations have been broken, if any renovations have been done without consent, etc.
In the building, you want to know if there are any claims or judgements against the condominium corporation, if the condominium corporation is party to any lawsuit (whether they are suing, or being sued), if maintenance fees are scheduled to increase, if there are any special assessments, and if the reserve fund is healthy and adequate.
As I said – I’ve never had a deal fall through because of some glaring red flag, but despite that, we still ALWAYS do a review of the Status Certificate, just in case.
Before my client even obtained the Status Certificate, however, I received a phone call from my mortgage broker, Joe Sammut, to whom I refer all my buyer clients for their mortgage needs.
My client had done a pre-approval with Joe, and we were in the process of getting her a firm mortgage committment from a lender.
Joe called me, and simply said, “The deal on Carlaw is dead.”
Now I know Joe to be the best mortgage broker in the business, and by that I don’t mean that he can beat anybody’s rate by 0.01%. Those of you that are solely motivated by rate are often missing the point. Knowledge, experience, contacts – these things count, and Joe can get the higher-ups of any lending institution on the phone at the snap of a finger, which is often a tremendous asset.
Joe’s experience and knowledge is unsurpassed, and thus when he tells me, “The deal on Carlaw is dead,” instead of responding with a knee-jerk reaction like most people would, and saying, “What? Why? What can we do? How do we handle this? Where do we go from here?” I immediately knew that the pig was pooched.
“That’s too bad, I hear ya,” I said. “Now give me the story.”
For those of you that are familiar with the ins and outs of mortgage insurance, you can skip this section. But for the rest of you, remember that any mortgage in Canada that is greater than 80% loan-to-value ratio has to be insured. That means that people making down-payments of 5%, 10%, or 15% have to get mortgage insurance on the balance.
Most people only know CMHC as the mortgage insurer, but there are actually two other insurers: Genworth and Canada Guaranty.
Sure, CMHC probably has an 80% market share, or more, but Genworth and Canada Guaranty are other options as well; they just don’t happen to be crown corporations like CMHC…
My client was making a down-payment of less than 20% – call it 15% or 10% or 5% – it doesn’t matter. This means that the rest of the mortgage had to be insured, and that’s where the problems started.
Joe was surprised to find through his lenders that CMHC would not approve the mortgage for the property at 201 Carlaw Avenue. The lenders were eager to lend (Scotia, TD, and BMO were fighting over the business), but it was all a moot point.
Joe then called his contacts at Genworth and CG, and both of them turned down the deal as well.
Mortgage insurers have a proverbial “Sh!t List,” for lack of a better term (although if this is indeed what they call it, then why not tell it like it is!), that consists of condominiums that they simply will not provide mortgage insurance for.
201 Carlaw Avenue happens to be on these dirty lists for all three of CMHC, Genworth, and CG.
What that means, in case I’m not making it abundantly clear, is that no unit at 201 Carlaw Avenue can sell unless the buyer has a 20% down payment.
And that spells major, major trouble for this building.
By now, you’re probably all wondering WHY this is, and let me address that.
The mortgage insurers already knew what we were about to find out by reviewing the condominium’s Status Certificate, and that is the following…
The 2011 Reserve Fund Study showed significant budget shortfalls, and it was suggested that contributions to the reserve fund increase significantly, with a whopping 43% increase slated for 2013.
On November 28th, 2012, the condominium corporation at 201 Carlaw Avenue enacted a by-law that allowed them to borrow $2,000,000 in cash, without further approval of the unit owners.
On April 13th, 2013, a letter was sent to all unit owners that detailed the following:
“The Corporation took out a $2 Million loan from Laurentian Bank which was meant to top the Reserve Fund and help pay for various repairs, many of which the Corporation believes result from original construction deficiencies. As a result, the Board of directors considers that the Reserve Fund is now adequate, and has decided not to follow the Reserve Fund Study circulated to all owners in 2011.”
They also noted:
“Legal fees have increased in order to fund the legal action the corporation has commenced against the developer, the architects, and the City of Toronto.”
It is not uncommon for condominium corporations to sue the developer of the building – this happens all the time. It’s not the litigation that concerns me, or the lawyers.
It’s the fact that the condo corporation took out a $2,000,000 loan, with interest, I might add.
But it gets worse.
There’s $1.6M due in a balloon payment in 2018 when the loan expires.
What does the condominium corporation hope to get out of this?
Are they taking that $2M, at 4.97% interest, and putting it all on Black-22 at the roulette wheel?
They’re going to use this money for repairs – I get it. But where do they get the $1.6M in 2018?
In the end, it doesn’t matter to me. Or to any of you really.
It’s such a shame, because this is a gorgeous building, in an area that has truly taken off in the last few years, but if a mortgage insurer won’t provide insurance, then units really can’t be bought and sold with the ease we’re accustomed to in Toronto.
I mean, sure, you could buy a unit here if you had 20% down.
But would your lawyer approve this mess?