Their Price, My Terms

A vendor will often give on terms long before they give on price, and a vendor take-back (VTB) is how you trade one for the other.

A VTB is the vendor lending you part of the purchase price, secured on the building behind the new first mortgage and any refinancing, and getting paid back later. I’ve done three deals where the vendor carried one. Each vendor was solving for the same few things: their number, the building off their books, and income they didn’t have to work for.

The first pattern is the building nobody could finance. It had vacancies, title issues, illegal occupancies and bylaw contraventions. The bank wouldn’t lend on it, so the vendor couldn’t sell to a buyer who needed traditional financing, and the private lenders were too expensive. We agreed on a two-year VTB that let me work the asset and stabilize it before seeking permanent financing. The vendor got it off their books, and I sent them two years of post-dated cheques in one batch. They were pretty happy with the mailbox money.

The second is the vendor who won’t move on price. It’s happened to me twice. We couldn’t come up and they wouldn’t come down, so we proposed a VTB at their number. That’s a sizeable ask, so the rest of the offer has to be clean. On one, a two-year VTB at a slightly below-market rate got us to a justifiable position. The two years give us time to work the asset, get the income up and refinance into permanent debt on the other side. The rate was similar to the cap rate, so for the vendor it was like a coupon clipper without the operational risk.

The other was stabilized but operationally mismanaged: physical upgrades to do, month-to-month tenants to move onto long-term leases, lots of deferred maintenance. More to fix meant more time, so we negotiated a three-year VTB to meet their price and make sense of the returns.

Both vendors hit their price, with a bit of tax saving for them too. When proceeds come in over time, a vendor can generally claim a capital gains reserve and spread the gain over up to five years.

Paper can’t rescue a price, though. On a deal that didn’t happen, the vendor called our offer too low to counter, even though they liked the VTB term.

What the paper is worth depends on what it replaces. On an unstabilized building the bank isn’t lending, so the comparison is private money, which on that kind of building prices in the high single to low double digits, plus a lender fee. A VTB priced around the cap rate sits hundreds of bps under it.

Take $5MM of paper over a two-year term. Private money at 9% with a 1‑point fee, against a VTB at ~5%: the 400 bps is $200k a year of interest, $400k over the term, plus $50k of fee. That’s ~$450k over two years.

Illustrative example: interest-only, simple interest, rounded. Not the rates or sizes on any of my deals.

None of this works unless the vendor has the equity to lend. On two of the three, there was no debt on the building. If there is a mortgage, the vendor’s lender is paid out on closing, and the vendor can only carry the equity left. A vendor with debt and no money elsewhere can’t give a VTB. So before rate comes up, I want to know what’s registered on title.

Then the balloon, the hard deadline. The take-out lender sizes on income in place, not on the plan, and wants stabilized cash flow and its full package well before funding, around 60 days. So the plan runs backwards from maturity: the lender’s process, the months of rent they’ll want to see, the leasing, the work. I set an outside date well ahead of maturity and track against it. On a building with hair, room in the term gets negotiated at signing.

If the building is still unstabilized at maturity, the take-out gets priced on the hair that’s left, which is why it gets lined up early.

I’ve been using VTBs for the past few years. In this market, buyers and sellers have to get creative for a deal to get done, and it takes two. A VTB is one more lever that lets a deal happen that otherwise might not, and it’s becoming a necessity.