Windsor's Moving Up Against The Big Boys - New Series

Source: National Post

Great way to kick off our new series, COMMERCIAL PROPERTIES  – WINDSOR FOCUS.  

Real Estate was hit hard during the 2007-2010 period, but since 2010 we have seen major moves across all sectors of our real estate market. 

via National Post

Just to highlight a few key areas –

* Multi family vacancy rates are down below 4% (from 12% back in 2010)
* Industrial lease rates on a per ft. basis (have increased 70-80 % since 2010)
* Industrial building sales on a per ft. basis  (have increased similarly)
* Residential sales activity (both new and resale) are turning over at unprecedented rates
* Commercial Property interest and sales are in a significant growth phase given strong demand
* Out-of-town investment into the Windsor market is at record levels

What is the take away? 

Windsor’s market offers a great upside for investors / developers / landlords and owner-occupants looking to acquire good (aka sound) real estate value.  Cap. rates are more attractive than other major Canadian markets, competitive financing terms are available, a good mix of products exist, and many new developments are either under way or on the horizon. The population is once again growing and the economic issues of 5-6 years ago are now in the rear view mirror.

The Windsor Market is still in the ‘early innings’ and it is really just starting to make its move. Whether you are local or from outside of the area, give us a call and let us put our commercial expertise to work for you in Windsor – Essex.

We love feedback so don't be shy about letting us know your thoughts and where we agree/disagree! Intellectual discussion is always welcome. 

We are rolling out a new BLOG series, COMMERCIAL PROPERTIES – WINDSOR FOCUS, and we look forward to all your comments as we move through the last quarter of 2015. 

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

How A Sold Windsor Multi-Family Portfolio Affects You

For those of you that either own rental properties, or just generally follow the real estate industry in your region, you have surely noticed the froth of the market over the last several years.  

With the continuation of historically low interest rates, investors of all sorts have been searching for returns in different asset classes and that has resulted in a hard charge into multifamily real estate.  

With this increased demand, prices have been rising and cap rates (click here to learn more about a similar concept) have been compressing. 

This seems to have come to a head this summer as Boardwalk REIT (Real Estate Investment Trust) has agreed to sell their Windsor multifamily portfolio to Skyline Apartment REIT.  This transaction turns Skyline into the dominant Landlord in the region with close to 2000 units.  Of note to market observers is the reported cap rate of 5.43% or $80,800 per unit.

Illustration By Chloe Cushman/National Post

Takeaways to Note From This Deal:

1. Cap rate compression.  This is a new benchmark for the multifamily sector in Windsor as cap rates have never been this low.  This has major repercussions for the market as Sellers will try to adjust sale prices to reflect this favorable comparable.  Back in 2010, it was common place to see cap rates in the range of 10%.  Now those came with higher vacancy rates and a more difficult financing environment, but is telling in how far things have come in the last 5 years.
2. Low interest rates continue to drive asset prices up as investors can still make money at these cap rates when they can borrow at less than 3% interest rates.
3. Multifamily is considered a safe haven asset class, and as such, commands a premium relative to comparable properties in other sectors of Commercial real estate.
4. Ability to finance multifamily properties remains robust, even as cap rates have compressed.
5. Skyline is making a large bet on Windsor and must be bullish on the region long term, with regard to employment, populations growth, etc.
6. Finding large multifamily properties for individual investors will become more and more difficult as the market is increasingly controlled by REITs such as Skyline and Timbercreek (to name a few in the Windsor market).
7. There could be a pushback from Buyers at these cap rates as they view the market as priced for perfection and therefore higher risk.

What do you think readers? What are your views regarding this transaction and how it pertains to the Windsor multifamily market?

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620

New Series - Agency (Both as Buyer and Seller)

In every market, agents will offer to work on your behalf as a Buyer’s Agent (BA).  The principal of being a Buyer Agent, revolves around the concept of the Agent, REPRESENTING YOUR INTERESTS. In the commercial market, their role and level of service (A.K.A.- expertise) are significant if you are to successfully Buy or Lease a property. 

A true BA agreement is a written contract, between yourself and the agent. It is typically exclusive (meaning you’re committed to the agent), runs for a set time period, includes a brief description of the property sought (ie. search area, building size), and sets out how fees are to be paid. Contracts will vary depending on your jurisdiction, but should include the above points – and of course, can be customized if necessary depending on your specific arrangement.

One of the most common ways a BA agreement is amended, is with respect to the payment of fees. Typically an agreement will set out what the fee amount is and that it may be paid by the Seller -  but if there is a deficiency for any reason, this obligation would fall back to the client (Buyer). This is a pure out-of-pocket expense to any Buyer, in addition to all other closing costs, and one they may not wish to face. The fee provision in the agreement then may be amended such that, the agent must receive full compensation from the Seller and that any deficiency will not be the responsibility of the Buyer. Keep in mind that typically on MLS listings, there is a provision for a selling broker share on the commission being paid – meaning it should not be an issue on an MLS generated sale.   

Other exceptions might include:

·         Can the Buyer buy out of the search area, without affecting the BA agreement

·         Can the agreement only apply to MLS properties (and not Private Sales)

·         Removal of a holdover clause applying at the expiration of the contract period

    (meaning – no obligation after contract expires)

 

Are non-exclusive agreements available and can they suit your purposes? Perhaps – but

in most competitive markets probably will not serve you well.  Most successful agents will not work in this capacity, and are unlikely to devote the time and energy if you are not fully committed to the relationship.

Even in its simplest form a BA agreement is a contract and must be viewed as such. Best

practice here is to have your lawyer review the agreement before signing it.

Next up – how to find the right Buyer Agent candidate(s) in your market.

Final Thoughts on Power of Sales – Providing Private Financing

As noted in an earlier blog, there may be opportunities within your market to provide the financing required for investors to purchase POS  properties. Often times, financing is hard to come by and the projected returns (ROI) can be very attractive as a result.

As with every investment, the key to providing private financing is doing a proper risk assessment. Closely examine the basics of the deal, with particular consideration to the following:

·        Suitable loan to value ratio

·        Cash flow which supports the debt obligations

·        Or – credible business plan with owner-occupant

·        Viable buyer covenant (aka – credit rating/financial standing)

·        Quality/value/liquidity of the real estate

·        No surprise issues – ie. environmental, zoning/municipal

·        Secondary Financing – will there be any (behind a Private First)

If the deal meets the above criteria or most of it, then it’s time to assess what sort of return is required to move forward. Typically, it will be higher – possibly 3-4-5% higher than conventional commercial financing – creating a high return investment. In the right circumstances and on the right properties, providing private financing can be very profitable.

In the broker world, we often see where a prospective Buyer investigates the purchase of a commercial property, doing considerable due diligence – only to take a pass on the investment as an owner.  To then take a look at it as a private mortgagee for a subsequent buyer, may make sense and might just be the better investment with respect to the property.

Again, private mortgages aren’t for everyone, but if you target POS properties as part of your investment strategy, it’s just another way to play that market.  In today’s ultra low interest rate environment, it might just help provide the type of yields you are seeking.  Next up… a new series of topics starting in February.

Power of Sale Properties - Most Common Myths (Ontario, Canada)

1.     THE SELLER (LENDER) ONLY NEEDS TO RECOVER THE MORTAGE BALANCE OUTSTANDING. Myth – As the Lender (who commences the POS proceeding) needs to make best efforts to realize fair market value.

2.     SELLER  WILL OFTEN TAKE THE FIRST OFFER SUBMITTED. Myth – Institutional lenders will often require an advanced marketing period (prior to considering offers) to ensure adequate exposure to the market. This not only creates a higher likelihood of multiple offers, but shows best efforts to broadly expose the property.

3.     SELLERS RARELY NEGOTIATE. Myth – Again, in making best efforts to obtain market value, sellers often will negotiate hard and for better terms (aka) to realize a market supported sale. Infact, most institutional lenders will likely have a full appraisal report on file which they will be relying on.

4.     SELLERS OFTEN WILL PROVIDE NEW FINANCING. Myth – Most institutional lenders avoid this facet of re-selling the property, given the conflicts of interest which it creates. Not to say it never happens, but inquire early on to see if it is even possible.

5.     SELLERS HAVE AN OBLIGATION TO REMOVE ALL TITLE PROBLEMS – Myth – You are dealing with an ‘as is’ with ‘no reps/warranties’ sale in most cases and can because of this inherit title problems which you will need to deal with. Get your lawyer involved on the purchase early in the process, to make sure you deal with any title/ownership issues which exist.

6.     SELLERS WILL NOT ACCEPT CONDITIONAL OFFERS. Myth – Maybe/maybe not, it will more likely depend on the competitive environment of the property and your particular market.  As much as ‘non conditional’ offers may be more common on residential properties, they are not as common place on commercial properties and generally lenders understand this. Best practice, is tight timelines and very specifically drafted clauses which clearly address the reason(s) for the conditions.           

Although not necessarily a comprehensive list, these would be the most common myths that we see in the market.  As always, seek out the assistance of experienced commercial brokers when dealing with Power of Sale properties.

Power of Sale - Basics of Buying a 'POS' Commercial Property (Ontario, Canada Only)

In recent years, Ontario has generally seen an increase in this type of property sale - that is a sale based on a mortgage default. Although they can be an excellent opportunity under the right circumstances (aka – “great deal”), you should proceed with ‘eyes wide open’ as you negotiate a purchase agreement.   

 

First let’s consider what you will be accepting/assuming in buying the property:

 

·         Buyer accepts it in AS IS condition (with no representations/warranties)

·         Buyer assumes all municipal violations (work orders/deficiency notices)

·         Discharge of previous mortgages not required by the Seller

·         Buyer has the RIGHT TO REDEEM right up until closing

·         Fixtures/Chattels accepted in AS IS WHERE IS condition

·         No representations on ownership of Fixtures/Chattels

·         Tenants on the property and the status of their leases/occupancy rights

·         Limited documented history on the property (ie. HVAC system, roof etc.)

 

All of it needs to be considered in your evaluating the risk in acquiring the property. But there are certain measures, which can you can take to better protect yourself as you attempt to negotiate a purchase.

 

·         Insert a Building Inspection condition to review/examine the property

·         Order a title search to examine any title issues & request any municipal violations as part of that review (do it within the conditional period)

·         Insert a mortgage condition, if financing’s needed, with a tight timeline

·         Request access to any tenants, to determine their viability and assure them of your status as ‘future landlord’

 

Realistically some or all of the above, can be problematic in trying to strike a deal - especially if it is an active/highly competitive property. But if presented reasonably within the offer  - and include tight conditional timelines, quick closing dates, substantial deposits, and the financial resolution the Seller is looking for – it can be accomplished. We like to say - a short conditional Due Diligence period, is better than not at all!

 

Again, review your Purchase Agreement with your lawyer and make sure you understand the implications of the POS Schedule attached to it. In addition, seek out Experienced Commercial Brokers in your area, who have an established record on the ‘Buy Side’ of POS properties.

 

Power of Sale - The Basics for Re-Selling the Property (Ontario, Canada - Sellers Only)

Once you proceed to redeem a mortgage now in default, what comes next?  A Power of Sale (POS), as noted in our prior post, is the most efficient and typically quickest means of resolving the default (aka – recovering your funds).

 A properly enacted POS should include much of the following:

·         The mortgagee (lender) has the right to re-sell the property

·          Property should be listed for sale at fair market value

·         Independent appraisals should be obtained (minimum of 2)

·         Document the marketing process (MLS exposure, ads run, signage etc.)

·         Property is Sold on “AS IS” basis with no reps. or warranties

·         Negotiate as with any normal property sale (record all offers/counters)

·         A provision in the sale agreement allowing the mortgagors (borrowers)

    ‘the right to bring the mortgage into good standing’ prior to closing

Although this last point is most often unlikely, legally you must provide for it within any sale agreement. Your lawyer will likely recommend that you attach a POS appendix to any agreement, which will not only address this issue, but also the matter of “no representations/warranties, AS IS sale etc."  This Appendix is a must in re-selling the property and serves to protect your interests with a 3^rd  party buyer.

On the matter of  accounting for all costs associated with a POS proceeding, make sure you maintain a clear record of what these additional expenses are. They typically include legal fees and appraisal costs, but also can involve such other expenses as – property insurance, utility costs, maintenance/management, carrying costs, etc.  Under a properly executed POS, you are entitled to the recovery of such costs which are above and beyond the mortgage balance itself.

Best practice is to follow the clear advice and direction of your lawyer. In addition, seek out experienced commercial brokers in your area, who have an established track record in the marketing of POS properties.