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Queen Street West in Toronto, March 26, 2022. Willow charged $36.06 to buy one unit of a retail and residential property in a popular shopping area on Queen Street West in Toronto in 2022.IAN WILLMS/The New York Times News Service

A commercial property-sharing startup aimed at retail investors is the latest real estate venture to face trouble amid higher borrowing costs.

Willow LP, which was acquired by an online rental-services company in late 2023, was part of a new wave of property investing called “fractional investing or prop sharing” that became popular when the pandemic’s spike in property prices enticed more Canadians to invest in real estate.

Unlike real estate investment trusts, in which investors purchase units in an entity that owns a large portfolio of properties, fractional-investing companies give individual investors a chance to own a piece of a commercial property, such as a retail building or office tower. Fractional investing became especially attractive for younger investors.

Willow charged $36.06 to buy one unit of a retail and residential property in a popular shopping area on Queen St. West in Toronto in 2022, according to legal documents it provided to investors.

But now with higher interest rates, hundreds of small investors have seen the value of their investment decline between 50 and 60 per cent, according to a December e-mail sent to Willow investors from the company’s new owner, Montreal-based Solutions Guiker Inc.

When Canada’s central bank raised interest rates by 4.75 percentage points from March, 2022, through July, 2023, the real estate industry was sideswiped by soaring debt payments, a slowdown in property sales and waning investor demand.

Willow’s model of fractional investing was particularly susceptible to higher mortgage costs, as the risk was not spread out across a large number of properties.

“You’re investing in one building, purchased at a particular point in time,” said Doug Sarro, a securities law professor at University of Ottawa. “What if the management firm bought at the top of the market, or couldn’t get a mortgage on favourable terms? What if the building ends up needing major repairs, or key tenants leave? Investors will feel the full force of these risks,” he said.

That appears to be what happened to Willow’s investors.

Willow launched in early 2022 and bought two commercial properties just before the Bank of Canada embarked on its aggressive plan to slow inflation with interest rate increases. The company got a variable-rate mortgage from subprime lender Timbercreek Capital because it did not raise enough equity to qualify for a conventional loan, according to a presentation that Solutions Guiker made to Willow investors last year.

The mortgage on Willow’s two properties amounts to $8.325-million, with an annual interest cost of $853,312, according to the presentation. That interest cost is up nearly 80 per cent from $478,688 in early 2022.

The loans Willow secured from Timbercreek Capital TF-T have an interest rate of 3.05 percentage points above the prime lending rate, according to the presentation. Today, the prime rate is 7.2 per cent, making the interest rate on the loan 10.25 per cent. When Willow took out the loans in April, 2022, the prime rate was 2.7 per cent and Willow was paying 5.75 per cent interest on its mortgage.

“We can no longer sit on these two properties while it’s losing money without [making] any decision,” Solutions Guiker chief executive Nan Hao said in the presentation.

The net asset value or shareholders’ equity value of the Toronto property is down 52 per cent to $1,153,850, according to an e-mail Solutions Guiker sent to Willow investors. The equity value of the second property – a retail building in Ottawa – is down 62 per cent to $331,084.

The near doubling of borrowing costs is consuming an increasing amount of the properties’ rental revenue. As well, the value of the real estate dropped significantly as rates rose, according to valuations by commercial real estate firms.

In an interview with The Globe, Mr. Hao said he plans to sell the Ottawa property, which Mr. Hao said that was part of the plan to minimize Willow investor losses.

As for the Queen Street property, Mr. Hao said he is trying to raise enough equity so that he can get a conventional mortgage with an interest rate below 6 per cent.

He said the properties have good tenants but that Guiker can’t keep the properties without a cheaper mortgage.

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