The Importance of Flexibility: Financing and Dealing with Rejection

When I was 17 years old, I wrote the following:
"As a tiny green sprout, I grow stronger with each coming day,
Watered by my dreams and guided to grow by the light above.
Occasionally, I ask others how they plan to grow.
They show me their hand-drawn blueprints
Of little boxes and perfect trees.
Idealistic, proud and rigid.
How are they sure they will not sway?
How are they sure they will not bend?
And when time comes for them to bend, they will snap and fall.
Wind and rain stops for no one.
Every tree has to bend."

Back in December, I scheduled an appointment with a young man named Steven at  the Royal Bank of Canada. He looked about my age, maybe older by a year or two.

"I want to buy a commercial property," I said when I walked in. I looked disorganized and dishevelled, like I usually do when I go to the bank. "I'm here for more information."

He stared at me. I must have looked ridiculous.

For the past few years, I've been shipping stuff out of the basement of my parents' house. Fire and Steel started almost like a joke that my parents both humoured. As time passed though, swords, axes and other pointy things began spilling out of one room, then two.

Over the years, the business grew and what began as a temporary storage solution became no longer feasible. That, and my parents probably had a difficult time explaining to their friends 1) why they cannot go to the basement (too many weapons) and 2) explain why swords are spilling into the hallways.

I can imagine them just trying to explain that their daughter is not an axe murderer.

So I stumbled upon a conundrum that most people will deal with once their business grows: Should I rent or buy a commercial space? How much will I expect to pay? What's the process involved?

I've learned there's positives and negatives associated with both.

I should probably back up for a second and mention that I looked into storage lockers at first. They were much cheaper than warehouses, but my inventory is just too big for a storage locker, even a big one, to reasonably accommodate. So I looked elsewhere.

With the help of a family friend in real estate, she helped me realize that a 1400 to 2200 sq ft warehouse space can cost about $1800 to $3000 CAD per month in the Greater Toronto Area, not including extras like maintenance fees and utilities (which can be an additional $500 or more). The exact cost of renting (leasing) fluctuates greatly depending on your location and what's included, but these were estimates based on the places I was looking.

When we realized a monthly mortgage payment would cost about the same as leasing, I became dead set on not renting. I was fairly rigid. I wanted to buy a space outright since my monthly payments would go towards owning the space eventually. A lot of the commercial warehouse properties I was looking at were worth between $250, 000 and $350, 000. If you know what residential properties cost in the Toronto area, this amount is cheap in comparison. I think the last estimate I saw for a detached house in Toronto priced them at $1.3 million on average.

You can probably draw parallels to the question of renting versus buying residential properties too. In my mind, I assumed the process would be the same. Piece of cake. I'll just get a commercial mortgage and be on my merry way, right?

Well, I wasn't quite right.

When I talked to Steven at RBC, he explained I needed to submit my business plan, financial statements and projections for approval.

I nodded, thinking, Okay, great. Where do I sign?

Then he started to explain unlike residential mortgages, commercial properties require a 35% downpayment, you need to be able to survive interests rates of prime plus 3% (which would be close to 6% right now), and 15-year amortization period. In comparison, for residential properties, you can do even a 5 to 10% down payment (with conditions of course that I don't have time to go into here), lower interest rates, and a 25 to 30 year amortization period.

If I haven't killed you with financial jargon yet, that means on average, for the warehouse properties I was looking at, I would be forced to do a down payment of over $100, 000 CAD. My monthly mortgage payments would be $1300 or more per month, which in itself isn't bad. However, when you realize interest rates are considered low right now, I would be vulnerable to rising interest rates in the future. Also, that monthly amount is still not factoring in utilities, maintenance fees and other miscellaneous monthly fees associated with ownership of a commercial space. Altogether, it would still probably cost me over $2200 per month.

Despite all this, I tried to aggressively make it all work. Steven tried to do some number crunching with me. In my heart I knew what the calculator would eventually tell us.

Things fell flat. The math just didn't work out.

By this point, owning the space became not optional to me. RBC was out the window, so I went to a broker instead. He essentially tried his best to work with me, but eventually had to back out as well. In summary, I was too risky to finance at this time. Try again in a year, he said.

All this time, I began to think about what I wrote about trees when I was 17.

My plan wasn't working. The universe was telling me no amount of interesting mathematics was going to make it work. The bank was telling me without explicitly telling me that I was going to leave myself extremely financially vulnerable if I actually purchased a commercial space outright. Oftentimes, we assume the bank is evil when they're actually just preventing us from certain accidental self-destruction.

The fact is, I don't have an unlimited bucket of money for me to just dump $100, 000+ into owning a warehouse space. Maybe one day far in the future, but not now. That money can be invested into other aspects of growing Fire and Steel.

I went in thinking I was going to buy and had blinders on, thinking no other options made sense. I came out realizing leasing actually works better for my current circumstances.

I'll be happily moving into my new warehouse space in a few days and I hope to make the most of my time there.

The lesson I learned from this experience is one that can be applied to other aspects of my life.

This business is like a tree I have to water. I was going by a plan, but I came out realizing I have to sometimes be flexible. It's important to adjust your plan to your current circumstances, and readjust again when the circumstances change. Sometimes it requires taking a step back to see the bigger picture.

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