Deposits - Issues and Insights to Consider

Most offers on commercial transactions are accompanied by a 'good faith' deposit.

Typically they are viewed as ‘tangible consideration’ for the offer contract attached to it, thereby confirming the Buyer’s commitment to the transaction.  Upon receipt of it, the funds are normally held in a trust account – most often with the Listing Broker.

The amount of deposit varies from deal to deal, often times based on the parties involved or the type of market condition that exists.  There are no set standards, other than those as set by either the Buyer or Seller. But it is most important to note, that once the deal is struck (agreement signed) – the deposit belongs to the deal and jointly to the parties.

For the Buyer, issues to be considered may include:

i)                    Making the deposit sufficient, so as to appear as legitmate to the Seller

ii)                   In highly competitive markets, larger deposits can strengthen the offer

iii)                 Deposits are returned to the Buyer, if conditions are not met

iv)                 1^st & 2^nd deposit strategy ( 1^st - with offer, 2^nd  - @ condition  waiver)

v)                  Large Deposits can require placement in an ‘interest bearing’ account

For the Seller, issues to be considered may include:

i)                    Specify a requirement for deposits (ie. 5% - 10% of purchase price)

ii)                   Small deposits often indicate a less than serious commitment

iii)                 Term of sale can include a forfeiture of deposit in some cases

iv)                 Larger Deposits tend to create urgency with the Buyer to close on time

v)                  ‘Interest Bearing' can help the Seller negotiate the larger deposit

Upon a successful closing, the deposit simply forms part of the purchase price and is credited to the transaction.  However, if the deal does not close, the parties must agree

on the release of the deposit by written consent.  In the Province of Ontario, this is done through a Mutual Release document, and both parties must sign off on the deposit, which includes where it is to be directed/payable to.  Keep this in mind as you provide deposits, as any deposit will not be released to either party without a Mutual Release being signed by both parties.

As with every other term on a real estate transaction, deposits are something to be negotiated, to ensure that your interests are best served within the proposed deal . As always, consult an experienced commercial broker in your area to protect your interests in the area of deposits.

Special Guest Blog by Robert Iseppi: Intro to Commercial Property Inspections

Today we have another guest blog post.  Robert Iseppi, Civil Engineering Technologist and Certified Insepctor with Amerispec, servicing the Windsor, Chatham and Sarnia (Ontario) markets, will provide us with an intro to commercial property inspections:

Buyers and users of just about any commercial property can benefit from an inspection conducted by a qualified Inspection Company.  Even new construction can have physical deficiencies that could eventually require costly repairs.  Buildings targeted for renovation or reuse – such as office to residential or warehouse to retail—can also benefit from a review to determine if these facilities and systems function properly.

The goal of a Commercial Property Inspection is to identify and communicate observable, physical deficiencies of the material systems, components, and equipment within a commercial property.

A baseline commercial property inspection relies on a walk-through survey, to determine the property’s condition.  The report includes information about the property as well as opinions on probable cost for suggested remedies.

This information is valuable in helping owners and buyers understand operating and maintenance costs and helps to provide confidence to prospective purchasers that the transaction is solid.  Our professionals work together with clients to determine the scope of inspection services needed, and are committed to providing outstanding client service and satisfaction with the technical experience and knowledge to meet our client’s most specific needs

AmeriSpec’s professionals are experienced in inspecting a variety of commercial properties including:

·        Office Buildings

·        Industrial Buildings

·        Retail Stores and Shopping Centers

·        Apartment Building and Hotels

·        Hospitals, Research Centers

·        Warehouse Buildings

·        Condominiums

The scope of the inspection needed and the specific areas to be inspected are based on various factors.  Age, occupancy and type of construction are considered when determining how the property will be inspected and the performance criteria needed to complete the inspection.  Inspections can vary from a visual examination of the property to a comprehensive inspection of all technical components of the building.

A baseline commercial property inspection includes:

·        Site Characteristics (Paving, Landscaping and Utilities)

·        Structural Frame and Building Envelope

·        Roof Surface Areas

·        Mechanical and Electrical Systems

·        Plumbing Systems

·        Heating Systems

·        Air Conditioning and Ventilation Systems

·        Vertical Transportation

·        Life Safety/Fire Protection

·        Interior Elements

·        Opinions of Probable Costs

·        Recommendations

Additional services that may be available include:

·        Elevator Inspections

·        Fenestration Inspections

·        Fire Safety Inspections

·        Lead-Based Paint Inspections

·        Wood-Destroying Organism Inspections

·        Phase I Environmental Site Assessments

·        Sewage and Treatment Systems Inspections

·        Asbestos Inspections

·        Indoor Air Quality (IAQ) Assessments

·        Radon Inspections

Depending on the type of property and the needs of the client, inspections may require specialists, consultants or a TEAM (Technical Experts and Management) approach.

THE TEAM APPROACH

The TEAM approach allows specialists or consultants to assist in the commercial inspection by providing their expertise in areas where it is required.

The specialists or consultants that can assist in a property inspection include:

·        Structural Engineers

·        Environmental Specialists

·        HVAC (Heating, Ventilation and Air Conditioning) Specialists

·        Electrical Specialists

·        Fire Protection Specialists

·        Elevator Specialists

·        Roof Specialists

·        Paving Specialists

·        Wood-Destroying Organism Specialists

Special thanks to Robert for his contribution.  To learn more about his services or to book your next commercial property inspection, email amerispecwindsor@gmail.com or call (519)739-1010.

Operating Cost Review (Owner-Occupant or Landlord)

Whether you are the prospective Owner-Occupant or Landlord of a commercial property, a review of the operating cost/ft to run the property, is an important analysis to consider.  First to understand the concept, let’s look at the terms which exist within the industry - COMMON AREA MAINTENANCE (CAM), COMMON COSTS (CC), TAX MAINTENANCE INSURANCE (TMI) – all of which commonly are referred to as ‘Additional Rent’ within a typical lease document (to view our related post, from a leasing perspective, click here).

Regardless of how they are labelled, they consist of the cost/ft to operate the property in a given year. Typical costs include – property taxes, building/property insurance, maintenance/repair/management costs etc. They will vary from year to year, as the input costs (ie. taxes) will change on an annual basis.

In the case of an owner occupying a property for his own commercial purposes, this

review will reveal his cost/ft to operate out of this location. Beyond your mortgage

payments and equity contribution (downpayment), this represents the additional cost in operating your business at this property.  You almost look at it from the perspective of a tenant – as in lease terms, this would be viewed as ‘additional rent'.

In the case of a landlord (investor owner), this review will indicate how competitive

this property is against the overall market. Using an example of a typical retail plaza

center with an operating cost/ft of $8.50 – it is easy to see where you might be at a disadvantage in marketing space, when competitive sites reflect operating costs/ft at $7. A word of caution here though, as the “the devil is always in the details” – and more specifically, look closely at the budgets (line by line) provided, overall condition of the plaza, areas of deferred maintenance etc.

Remember that the costs for operating a plaza or business premises are either covered

by the tenants or the owner-occupant of the business. These are real dollar items that

need to be factored in as you analyze any transaction, and a sound per/ft analysis of

operating costs is simply good due diligence.

As always, consult with an experienced commercial broker in your market, to assist

in evaluating the operating costs on commercial properties which you are considering.

Closing Costs - Intended for (Ontario) Canada Only

This post is targeted to Ontarians and directed towards Buyers within the Province of Ontario. Those in other jurisdictions should consult with officials within their own markets, to determine all relevant closing costs. Suffice it to say, these costs need to be projected at the outset, to avoid a cash requirement ‘surprise’ come closing date.

Potential Buyer costs summarized as follows:

Land Transfer Tax - Paid at closing and as % of the purchase price (see your lawyer for exact calculation at the time).

Survey/Title Insurance - Lender generally requires this and survey costs can be significant, if it is a larger site. Title insurance may not be an option, depending on the property/lender.  Canvass your lender on whether title insurance is an option.

HST - If applicable, HST is additional to the purchase price.  See earlier blog here on HST – but if due, it becomes closing cost.

Legal Costs/Disbursements Fees for lawyer expenses in preparing the title deed, preparing the mortgage, & conducting title searches.  Disbursements are considered out-of-pocket costs incurred by the lawyer – such as search costs, supplies,
registrations/preparing discharges etc.

Legal Costs (Lender) Depending on the size of the financing, lenders can often require independent counsel to oversee the the mortgage process and look out specifically
for their interests. If necessary, it’s an additional cost.

It is well worthwhile to arrange a meeting with your lawyer in advance of closing,
and request a “Cost to Close’ estimate. Even if its approximate subject to certain
unknowns, it is a budget figure you need to plan for.

As always, consult with an experienced commercial broker in your market to assist you in the Purchase of Commercial Properties.

Purchase Price Allocation (Intended for Canadians Only)

It is necessary to establish an agreed upon breakdown (between Buyer and Seller) of the land-building-equipment/chattels being purchased in a typical commercial real estate transaction. Will say it at the start - it is best done through the Agreement of Purchase and Sale, and as a straight term of the sale.

The Purchase Price Allocation (PPA) is a tax reporting requirement on the sale of a commercial property. Whether done early in the process or at closing (or beyond), tax officials look to verify the information as being the ‘same'.

Consider the issues from both the Seller’s and Buyer’s perspective:

LAND
Seller - Value Establishes Capital Gain
Buyer - Value Sets Acquisition Base Price

BUILDING
Seller – Value Establishes Recapture/Capital Gain Costs
Buyer - Value Establishes Base Price From Which To Depreciate

EQUIPMENT/CHATTELS
Seller – Value Establishes Recapture/Potential Loss or Income
Buyer - Value Capitalizes A Figure For A ‘New Start on Depreciation’

Given different tax needs and priorities, it is easy to see how both Buyer/Seller may end up at cross-purposes on this matter. Best practices, is that it become a matter of negotiation, as with any other term of the sale . Beyond agreeing to the breakdown, you must also ensure that the PPA breakdown is realistic within your market and defensible based on comparable sales.

We advise clients to consult with both their lawyers and accountants with respect to PPA, to ensure they understand the requirements and the related costs.

As always, consult with an experienced commercial broker in your market to assist you in the Purchase of Commercial Properties.

Tax Matters - Intended for (Ontario) Canada Only

This post is targeted to Ontarians and affects purchases within the Province of Ontario only. Those in other jurisdictions should consult with officials within their own regions to determine any tax consequences which might affect their real estate purchase.

In Ontario, we generally need to be concerned with the following:

Harmonized Sales Tax (HST) – On purchases of commercial properties (new or resale) the sale is generally deemed to be subject to HST (currently at 13%). However, if the Buyer is an HST registrant prior to closing, they will not need to pay the HST and instead are required to provide the appropriate warranties/file the prescribed forms upon completion. This is generally a closing process carried out by your lawyer, but it is generally a best practice, to verify this matter prior to finalizing an Agreement to Purchase. If for some reason the sale of the property is not subject to HST, Sellers should agree to certify this on or before closing and your Agreement to Purchase should reflect this fact. As a final note, if a Buyer is not registered for HST, the amount is due and payable at closing – something to be mindful of for cashflow reasons.

Other HST implications – Beyond the actual purchase, HST will apply to chattel/equipment values, professional service fees (ie. real estate, legal, surveying costs etc). On chattels/equipment, it should be noted that the HST clause in a standard ‘Agreement of Purchase and Sale' states that “HST on chattels, if applicable is not included in the purchase price”. - meaning any tax liability is above and beyond the purchase price.

Land Transfer Tax – Commercial property sales are taxed by the Province of Ontario at varying rates depending on the value of the purchase price. Contact your lawyer to verify the applicable amount, at the time of estimating all other relevant closing costs. Again, a prudent move, based on cashflow considerations.

We advise clients to consult with both their lawyers and accountants with respect to the above matters, to ensure they understand both the requirements and the related costs.

As always, consult an experienced commercial broker in your market to assist you in the purchase of commercial properties.

Financing the Purchase - Considering the Mortgaging Options

Understanding the mortgaging options available to you for a commercial property acquisition, should be considered even prior to looking at real estate possibilities. A pre-qualifying meeting with a commercial lender and/or a mortgage broker specialist, is a great place to start.

Although certain specifics cannot be necessarily determined (ie. the actual property is likely an unknown at this point) -- you can still determine loan to value requirements, rate/term/amortization criteria and other specific details (a.k.a. – costs), which you will encounter in arranging the mortgage. You can also allow the lender to approve of you or your company, based on credit rating, financial standing, and overall covenant.

When considering where to look for financing, one size does not fit all, and especially in commercial lending. But some of the better options might include:

i) Your Primary Bank (established relationship & they know you)
ii) Institutional Lenders specializing in commercial lending
iii) Mortgage Brokers (willing to shop the market for you)
iv) Private Lenders (often for restricted situations and generally costlier)
v) Seller Financing (often available and could be via 1st or 2nd Mort.)
vi) Assuming Existing Financing (subject to an approval & re-qualifying)


Beyond the basic mortgage terms you are looking to obtain, make sure you review the costs associated with arranging it. In addition to any legal/administrative fees as charged by the lender, there may be additional mortgage brokerage, appraisal, and inspection fees which you will be subject to as a condition of funding. All of this should be clearly spelled out in a written “Mortgage Commitment" document and as provided by your lender. If you have any doubts or questions at this stage regarding the Mortgage Commitment, consult your lawyer. Obviously, any unwillingness to advance mortgage funding on the part of the lender, will affect your ability to close the transaction.

Again, seek out experienced commercial realtors within your market to guide you in the area of mortgage financing and to help you find the most suitable lenders for your purchase.