Question:

I am looking into investing in commercial real estate in Steveston, BC. Is my investment likely to bring the same rate of a return as my residential property or does commercial real estate appreciate more slowly?
 

Answer:

Thank you for your email and your question; Steveston is an excellent place for investment currently nestled in its own part of the Greater Vancouver Area. Commercial real estate does not appreciate more or less than residential real estate. You need to analyze the trends in any particular area as it depends on the demand for space, economy, core sectors, etc. There is far less commercial space in a city than residential so its scarcity keeps values higher. There are also several asset classes to consider: retail, office, industrial, agribusiness. The returns and appreciation of each perform differently. My suggestion would be to contact a commercial REALTOR® and ask these questions to him or her. You can find several on http://www.clslink.ca, go to Find A REALTOR®. You can also search by specialization. You can find answers to questions like this on my website at http://www.eugen-klein.com. I also publish a commercial real estate newsletter which is complimentary at http://www.eugen-klein.com/newsletters.htm.  Commercial real estate resources can be found at http://www.eugen-klein.com/resources.htm

Question:

I have not purchased any investment properties yet. I have played Robert Kiyosaki's Cashflow Games many times which teach residential and commercial property purchases (generally speaking). I am certain that my end goal is to purchase commercial properties & build / develop more. I have been planning to pull out equity from my home in addition to my parent's equity to purchase commercial property(ies). First off, do you think this is a good to jump as big as this w/ the guidance of a real estate accountant, lawyer & commercial REALTOR®? And two, what are some steps you can recommend for me to ensure that this can be as smooth as possible.
 

Answer:

Real Estate Development is a risky venture and my suggestion would be to start with a fix up of a home or a conversion of a home to a duplex. Leases and commercial tenancies are also far different than having residential ones. I would recommend that you surround yourself with some level of expertise although the number of experts you have described may eat away at the profits you work for. Good developers manage risk, they don't avoid it. Feel free to contact me for the very best options and value added properties that are available. I also publish a commercial real estate newsletter which is complimentary at http://www.eugen-klein.com/newsletters.htm. Commercial real estate resources can be found at http://www.eugen-klein.com/resources.htm

Question:

My question is for my property in CA, USA. I have a home zoned residential/commercial. It is about 70 yrs old and does need repair. On the block there are four homes left, I am surrounded by a bank and another business. On the other side of the block is another bank. Would like to sell in two years I have no mortgage, what should I do? Try and fix the old house up, or sell as is? How can I get the most for this house? What steps should I take?

Answer:

Without seeing the property for myself and just based on your email message, the surrounding properties seem to be developing and the neighbourhood improving. The highest and best use of the property is not residential so that may include a multifamily and/or retail option for a developer. My suggestion is not to put good money after bad. A developer coming into play and looking at your home will be looking at land value only, the house for him, unless it has some special value, will be a tear down. You may even be wise to hold onto the property for a while longer than the two years you are suggesting. You may speculate that holding it for an additional year may yield a much better return. Timing and location are the two biggest variables in real estate buying and selling. Ensure that you contact your local commercial REALTOR® in this matter; it should be a redevelopment/land expert.

Question:

In Austin Texas what would be a good investment property, Condominiums, Strip Mall, Townhouses or Duplexes?

Answer:

Many commercial asset types have the same risks associated with them across several markets, yet there are other risks which are area specific: city zoning, OCP (Official Community Plan), bylaws affecting property operation and laws governing tenant relations to name a few. Austin Texas from my limited understanding of that market does realize higher returns in comparison to the Vancouver based market. However, you will typically see less land appreciation in Austin as well. I have an excellent commercial broker that I refer my clients to, who is located just outside of Austin. Feel free to contact me directly for the details.

Question:

I am looking to purchase Townhouse Rental Division of 10 units. What is the process for having it strata titled? Does this usually increase the value? What are the pros and cons?


Answer:

In order to have any property converted to strata title it must receive approval from the local government (city or town) and in accordance with the strata title act: http://www.qp.gov.bc.ca/statreg/stat/S/98043_01.htm

For example, the City of Vancouver's process for conversion of previously-occupied buildings to strata or cooperative ownership is intended to protect residential tenants who are unwilling or unable to purchase their proposed strata lot or cooperative unit. This ensures that the building proposed for conversion is in a reasonable state of repair. As part of the process to convert a building to strata ownership, staff inspections are carried out to ensure that the building complies with all applicable by-laws. This can be a lengthy process. For the City of Vancouver, please see their guidelines at www.city.vancouver.bc.ca/commsvcs/Guidelines/S007.pdf

Yes, the value of the property is increased because outright ownership is more valuable to the consumer than a rental property bought as a whole. The drawbacks are easy to see; first the conversion is time consuming and requires capital; second, the strata conversion, may, in the end, not receive the approval. Please ensure that you consult an expert about your specific case.

Question:

I want to purchase a commercial property. How is the property purchase tax calculated?


Answer:

Information on the details of the property transfer tax can be found in two places on the web:

General Information and new pre-sale condo information:

http://www.rev.gov.bc.ca/rpt/ptt/ptt.htm

Property Transfer Tax details:

http://www.rev.gov.bc.ca/rpt/ptt/pttbulletins/PTT_001.pdf

Generally, property transfer tax in BC is calculated as 1% of the property's value up to $200,000, after that it is 2% of the value thereafter. Please feel free to consult an expert with the specifics of your property.

Question:

I am considering selling a commercial property in northern BC. It's current value is about $3,000,000 and it is comprised of 45 residential units and 9 commercial units. I have two questions. First, should I hire a REALTOR® that lives in the town where the building is located, or would you recommend a REALTOR® from a large centre (ie. Vancouver) where most of the potential purchasers may live? Second, what is a fair and/or typical REALTOR® commission structure for commercial property of this size?


Answer:

This is a typical request that I receive from out-of-town sellers. I have suggested to several clients who have unique resort/development/recreational properties for sale to consider the benefits of co-listing the property locally and with an agent in the large city. The large city broker does not attempt to bring to the table the local clientele -- a broker from the city should be able to bring international and out-of-town investors to smaller communities. The local REALTOR® has the expertise to show the property, the surrounding knowledge, and market facts. You do receive two brokers for almost the same price, maybe even a small premium, but I have found that you will close at a higher price, and more quickly. With two offices and two agents, it offsets the workload so that there is always someone working on your project.

Question:

Having found an ad for development property to sell near Mission I had to pose the question. As a 47 yr old going through mid life crisis would it be an idea to purchase half the property then co-op with the property owner and a trusted builder to develop the property and share the profits? If this doesn't seem logical or involves more than I'm aware of can you let me know?

Answer:

Thank you for the email. Development projects are inherently risky projects. I deal with many developers from both the US and Canada on land sales, acquisitions and in various asset classes: multi-family apartment, townhomes, detached, industrial, built-to-suit etc. The more experience the developer, in most cases, the less they move from what they know. Each type of multifamily project has differing expertise. In this market, many of the developers are letting their lands go because of fear of over supply. Some have acquired too many projects and are now selecting the best ones they have secured. Unless you are very sure, my suggestion is to stay away from it unless you are prepared for that risk. Please examine it very carefully and seek as much outside advice about specific market facts as possible. There may be other options:

- Can you purchase and flip?
- Can you purchase, cosmetically upgrade and flip?
- Can you hold for another rise in appreciation?

These can be looked at without the risk of holding the bag as the market moves.

Question:

I am interested in recreational property in the Okanagan/Shuswap BC and collecting the revenue from rental income. I would be borrowing $100,000 from my mom at 2.5 - 3.0%. I have heard that cabins rent for $200 a night or $1200 a week in the summer. Is this a good idea, what are the pros and cons? Do you have any other suggestions?

Answer:

Thank you for the interest in investment properties. Recreational property is not my prime investment choice for return dollars as a net investment. There is an upside that is more in capital appreciation, but you must be very selective and careful in the acquisition process. In the summer there is a wide variety of rental rates in the Okanagan but what about all the rest of the months where you are paying taxes and maintaining the property? I have a client who has very high demand in the winter months and is considering building more rooms, but is hesitant to grow too quickly with the vacancy rates in the summer. The best suggestion I have would be to begin your commercial portfolio in a duplex or triplex property in a growing urban centre that needs some tender loving care. Strata industrial in a good park can also see higher returns. These will allow you to borrow money at a far better rate than the bank can provide and you would see your equity rise quite quickly.

Question:

I have been looking at China and India as markets of the future. My friends think that it is far-fetched to think of them for real estate investment. Can you tell me some information about those markets and the associated risks?

Answer:

China and India's rise as economic superpowers have the potential to make them lands of opportunity for real property investors. A huge population base - China has the world's largest population with 1.3 billion, closely followed by India with 1.1 billion – means low labour costs and unprecedented demand for goods and services. Government economic reforms, growth initiatives and a willingness to embrace the entrepreneurial spirit in both countries are paving the way for continued economic growth.But this doesn't mean that investors shouldn't exercise caution and plenty of it. Political and social uncertainties remain strong concerns as China's and India's governments struggle to maintain job growth for tens of millions of workers. An equally important concern is whether China and India will cooperate or compete with one another and their neighbours.

Development, however, is a different story. Large cities in Eastern China such as Shanghai are seeing unprecedented growth and a building boom as a direct result of the largest migration of people in the world's history - 300 million people - move from mainly poor rural areas to urban centres. In contrast, India's real estate market is not growing as fast as China's partially as a result of a legacy of government bureaucracy which has included rent controls, development restrictions and limits on foreign investment. Both countries have significant populations of desperately poor people, although India's ratio is far higher. In total, 200 million people in China and 300 million in India still live on less than one dollar per day.

However, this low standard of living does not mean a lack of demand for consumer goods.

For example, retail demand has grown 10% per year over the last 15 years in China and is accelerating. There is an overwhelming demand for goods and services and many young adults in China, although poor by Western standards, are experiencing three to four times the earning power of their parents. This is resulting in a climate of extremely confident and risk-taking young entrepreneurs. The scale, speed and risk levels are simply unknown to Western thinking.

To give you some idea of the basis for this optimism, in 1996 there was a 55% vacancy rate for office space in the top five cities along the Eastern and Southern China. Today it is a 5% vacancy rate. Good office lease space will lease for $35 / sq. ft.

So what are the investment strategies for China? There will be boom and busts in such a volatile and unpredictable market. Investors should consider looking at short term gains in some of the secondary markets around major Eastern cities. For the longer term, investors should look to high-quality properties.

For India, firmly entrenched government restrictions remain problematic. An interesting example is that of Wal-Mart. The department store giant has attempted to penetrate India's markets for close to a decade. But government restrictions have prevented the world's largest retailer from accessing a growing consumer market. As well, there are reports that major projects can take up to a decade for the building permit and four years to build.

For other articles on investment real estate, hotel, motel, business brokerage, multifamily, industrial, retail and office for sale or for lease please visit our website at http://www.eugen-klein.com
 

Question:

What potential for commercial (i.e. office space etc.) conversion to residential exists in Vancouver?


Answer:

Commercial properties in Vancouver, especially in the downtown core, have a hold placed on commercial conversion to residential. The City is concerned that the infrastructure of downtown will be converted too quickly. The city planners want to keep the "condo craze" at bay especially now that we are seeing so much of the condo dollars coming from overseas and from United States investors.

The are a few opportunities that have had the conversion application completed but are awaiting investment dollars or resale based on the new zoning. There are other properties away from the downtown core, yet still in Vancouver, that can be purchased to convert.

See more information on the City of Vancouver's website:

http://www.city.vancouver.bc.ca/commsvcs/guidelines/D011.pdf  (Section 4)

Question:

A local retail building has been purchased with a 5 year non-competition agreement placed on. Is this agreement transferred if the current owner was to sell it?

Answer:

A non-competition clause is usually executed in association with the sale of a business. The owner and/or directors of a company would not be allowed to assist or practice in the same field or expertise for a given amount of time or within a certain geographical area. This covenant holds specifically to an individual upon sale.

I am assuming, given the way you have described it, that this is actually a use restriction on the premises. Restricted uses are contained within the leases given to the tenants to ensure that competing uses within a plaza or set of units do not cause harm to other businesses. This is quite common and they do transfer with ownership because the leases do as well.

Question:

I am considering investing in a townhome property in Fort St. John, BC. Can you give me an opinion on the market in Fort St. John? Is it growing, flat or in decline?

Answer:

Thank you for the email. Some of the best informational resources to look at out-of-town markets include www.investbc.com  and www.statcan.ca . Specifically, you can view here.

Markets up north are on the move and there are many opportunities to be had. Like I suggest to each of my clients you need to look at investments on a one by one basis. Selective areas up north are in a growth phase and the area information is important especially in smaller communities. Without knowledge of the investment and the area it serves it is difficult to comment. Whether it is a motel, hotel, multifamily or industrial will make a difference. Who are the tenants or users? What is the longevity? I am in the midst of an evaluation for a client in the Quesnel area. We are examining statistics, financials, market comparables and trends in the area. Feel free to contact me should you need someone to look at the specific details of the investment. You can find related articles to out-of-town acquisitions on my website at www.eugen-klein.com .

Question:

I have owned a number of residential rental properties in the past and am now in the market for a commercial property. Where is a good place to start in order build some knowledge in this area?


Answer:

In addition to the Jurock network, the best place to start looking at commercial properties would be websites like www.clslink.ca

BC focused commercial properties and businesses listed by commercial REALTORS® www.icx.ca

Canada focused commercial properties and businesses listed by commercial REALTORS®.

Further information and investment tips can be found through a variety of sources.

Clark Wilson publishes an excellent resource: www.bcrelinks.com

Articles on Commercial Real Estate Trends and Investment: www.eugen-klein.com/newsletters.htm

I could not help but also include the need to speak to a commercial investment specialist as well. They have specific knowledge about a variety of asset types which may suit you investment needs and risk best: Commercial, Industrial, Investment, Businesses, Land, Hotel/Motel, Ranch, Farm etc. Find a person who has a specialization in an area that interests you and schedule to meet with them. Bring with you the information you have collected and have them give you some insights on how to take the next steps into investing. The most important thing you will begin to realize from them are the unobvious pitfalls. Their expertise and experience will save you time and money.

For additional articles visit www.eugen-klein.com

Question:

I wanting to get signage up. The quickest way being to locate open listings and negotiate with the owner. What tips can you offer? Are there any approaches to entice other commercial real estate offices participating in the open listing to provide their contact info?

Answer:

This is a question that I often get asked regarding the sale of commercial real estate investments and businesses. Whether you are selling a hotel, land parcels, shopping centre, multifamily or industrial property, exposure and incentive are the keys to transaction success. Open listings or sleeve listings as they are commonly called, serve the interests of the seller in that there is no protection for the REALTOR®. Most open listings are opportunities on very high demand properties or ones with very difficult owners. In either case the REALTOR® will be looking for some security from you - usually in the form of a buyers agency agreement to ensure that a deal is not struck without their services. Knowledge is all the REALTOR® has at the end of the day - which properties are for sale, who can purchase, how to purchase, how to negotiate and the specific problem solving skills during the due diligence process in preventing transactions from collapsing; it is not just listing information. My suggestion is to work closely with a commercial REALTOR® who has demonstrated the best skill and knowledge about the market, trends and the players in it. See what transactions they have done and the projects they are working on. That knowledge will make money for you in hiring an expert to dedicate their time to finding the best opportunities in the market whether they are market listings, open listings, for sale by owners, estate sales, foreclosures, reit sales, government properties etc. Feel free to find other related articles about REALTOR® expertise on my website at www.eugen-klein.com .

Question:

My wife and I have an agriculture lease. I am looking at entering into a 50/50 partnership with another person to build a business on the land. I want to offer this other person 1/3 ownership of the land lease and then have a 50/50 business arrangement for what we build on the land. Is this possible and if it comes time to sell, or an offer is made for the farm as a whole how do we decide how much each portion is worth? Basically can we take the land out and give it a separate value to divide three ways?
 

Answer:

Be very careful when entering into any partnerships that the entry, cash flows and exit strategies are all very clearly defined on paper. There are several ways to structure this type of transaction; you will need legal advice on this - that's where to start. A few ideas that I would put forward would be to:

1. Keep the land lease entirely in your name, but give an extended sub-lease to the business for the land of which your partner owns 50%.

2. Many of the commercial properties we sell are because of "partner" related issues - be careful who you choose; everything seems great at the start.

3. The percentages that you allocate between you, have a direct impact on your control and decision power. Understand the consequences and benefits of each tier.

You will need to allocate values to the business and to the land lease. This will have different tax implications as well and from this is where the tension arrives. Are the improvements you make to the land part of the business venture or a fixture of the land? This must be detailed in your partnership agreement.

Question:

We own a lot (c4 zoning) on the lake in Osoyoos. We are planning to develop it and can put as many as 12 to 14 suites on it. We could also put fewer suites and make them larger and very 'high end' and sell them as fractional units. The property is very unique and has the lake on both sides. Every unit would have north and south lake views. High end lakefront also seems to be very much in demand. Price per square foot seems to be much greater in these very high end fractional developments. What are your thoughts?


Answer:

From the market data I have seen I would agree, higher end construction is fetching higher prices and faster absorption in the Okanagan Region - you will need to look at relative profit margins. Without seeing the specific development and doing a proforma analysis anyone should hesitate to comment. A few things I would consider:
 

• Comparable selling price per square foot

• Layout and Plan of development

• Finishings in the suites

• Amenities and access

• Views from each suite

• Land costs

• Development costs

• Market Risk

• Construction Risk

• Financial Risk

Project marketing is a specialized field of expertise where demographic really needs careful consideration. Please feel free to contact us about the specifics of your project at www.eugen-klein.com. For articles related to this one and other commercial real estate concepts please visit our site at www.eugen-klein.com.

Question:

Why invest in commercial real estate instead of buying another home?

Answer:

To name a few of them:

Sometimes in the residential market prices can be quite high and it becomes virtually impossible to invest in a single-family home or condo and then rent it out for enough to cover the mortgage payments.

Whether in mixed use (commercial downstairs and residential above), multifamily, an RV park or a strip mall the advantages of commercial real estate are,
 

• the cost per unit in most cases is less

• the competition for purchasing is less at least giving the buyer a better price in theory

• The time investment would be less because an owner could delegate some responsibilities to an on-site manager

• The investor can cover expenses even if there were a few vacancies

• Tenants are generally long-term, as businesses do not have the flexibility of moving frequently

• Tenant generally pay for all improvements to the property (fixtures, paint, lighting, etc.)

Some of the disadvantages are,

• Acquisition costs are higher

• Bank demand larger down payments and commitments

• If the business tenant goes bankrupt and needs to vacate, the property may take longer to rent

• Liquidity for some commercial assets is generally more difficult.

Question:

What is the difference between a residential and commercial REALTOR®? Why should I use a commercial REALTOR®?

Answer:

Just as there are real estate professionals who specialize in residential real estate ­ or helping clients buy and sell homes, there are REALTORS® who specialize in commercial real estate. That means they work for clients who are buying or selling real investments, multifamily apartment or townhomes with more than 4 units, retail, shopping centres, land, office, businesses, industrial, redevelopment, site selection, land assembly and project marketing.

Selling a commercial real estate is complex. It requires the expertise of a professional who understands the commercial market and can follow through with an aggressive marketing plan to sell your business for its maximum value. Your commercial REALTOR® can develop a comprehensive marketing plan specific to that commercial asset.

Setting the price of your business is critical. It requires extensive knowledge, training and access to the latest market information. Are you really aware of the value of your business in today's changing market? Can you risk pricing your commercial asset too high and discouraging potential buyers - or pricing it too low and losing some of your equity?

Commercial REALTORS® are experienced negotiators. Ask yourself: Are you able to make a follow up call with a potential buyer without placing yourself in a poor bargaining position? REALTORS® are skilled in arranging financing, environmental inspection and closing transactions. They also provide undivided loyalty in protecting their client's negotiating position at all times.

Think of your Commercial REALTOR® as your real estate consultant, implementing marketing initiatives, advising you on market conditions and preparing your legal documents when drawing up a legally binding contract. Simply put, a Realtor's professional skills and networking connections can be indispensable in attracting serious, qualified buyers.

Considerations in an offer different than that in residential real estate may include vendor financing, earnouts, environmental inspections, roof assessments, property drainage, leasing terms, share and asset sales, inventory, equipment, and machinery to name a few. Use an expert.
 

Question:

We recently sold a commercial business through a local REALTOR®. The business (a small cafe) was incorporated and our REALTOR® had little to no knowledge of the laws pertaining to the sale of a corporation. The sale was completed five months ago. We have now received a letter from the purchaser's lawyer stating that some of the restaurant equipment broke down shortly after the sale. He wants us to pay for repairs or replacement. He is also asking us to pay the utilities, payroll, accounting, etc. up to the date of the sale and doesn't seem to understand that those are company expenses that are paid by the company, not out of the pocket of the former shareholders. Is a corporate sale not different from that of a proprietorship in that the vendor would not pay all utilities, etc. up to the sale? Instead, the new shareholders would simply step in and continue operating the business as if there had been no Share sale? I appreciate any help you can give to us with this. The REALTOR® who represented us knows nothing about selling an incorporated company and is a close friend of the purchaser.
 

Answer:

In any transaction of commercial property or business you would be best advised to use a commercial specialist. Make sure that you have a specific set of questions ready to ask about their expertise, recent transactions, current projects, their marketing plan and how they have put transactions together in the past - before you hire them. During the process of negotiating a business sale, the contract of purchase and sale becomes the agreement in form from which the lawyers then make up an asset purchase agreement or a share purchase agreement. Expenses and revenues are all adjusted to the time of sale regardless of an asset or share sale. Another interesting point of fact is that Revenue Canada can come back after the original owners years back for unpaid taxes, GST and the like, regardless if it is a partnership, corporation etc. The situation you have described is now of a legal nature and I would suggest having a lawyer look at the specifics if any further action is taken. Feel free to contact me directly if you would like me to refer a few names to you.