Why Commercial Real Estate is NOT the Next Bubble

For the last several months, I've been saying that commercial real estate is not collapsing.

John Levy, president of the John B. Levy & Company, shares some really good insights on why he believes this too. First and foremost is that the reduction in values in commercial real estate and the necessity of refinancing undervalued assets are not a surprise. This is something that we've been watching for some time and is not a 'bubble about to burst'. It's already happening and, in fact, institutional investors are preparing for it by readying their funds to take advantage of the situation. Really informative video that's worth every second to watch and does an excellent job of putting the current real estate market in perspective.

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Why Peterborough Retail Rents Are Cheap!

via MSN Money: The world's most expensive shopping districts.

According to real estate advisor Cushman & Wakefield, it costs an average of $300 USD per square foot to set up shop along Bloor, the street that stretches through the heart of the city.

Often, when asked about retail rents in Peterborough, we're surprised when the reaction we get is one of disbelief, "You get how much?" As if $16-22 per foot for new retail space in Peterborough, Ontario is some kind of out of this world number that can't possibly be correct.

You haven't seen anything yet!

Check out some of these statistics as gathered by Cushman & Wakefield in their Main Streets Across the World Report (registration required, but free):

$300 - Bloor Street West, Toronto
$110 - Queen Street West, Toronto
$200 - St. Catherine West, Montreal
$50 - Sussex Drive, Ottawa
$50 - 17th Avenue SW, Calgary
$210 - Robson Street, Vancouver

Still think $16 is expensive?

Now, I know that the naysayers among you will cry, "But there's a heckuva lot more money passing through the doors along Bloor West, than Peterborough!" And to a point, I'd agree. There is more money passing through the tills on Bloor Street - but enough to justify a rental rate increase of 1,838%?! Are the retailers selling 1,838% more per foot? I think not. (Note: If anyone can find some research on sales per foot in Toronto vs. Peterborough, I'd love to see it.)

Retail spending in Peterborough, on a per capita basis, has averaged over 16% higher than the provincial average for the last 6 years according to the most recent GPAEDC Community Profile.

Construction costs are lower in Peterborough, but only slightly. Using rsmeans.com Quick Cost Estimator, I found that a 10,000 foot retail store would cost about $132 per foot to build in Peterborough versus $139 per foot in Toronto - only a 5% difference that doesn't come close to making up the difference in lease rates.

Land is far cheaper in Peterborough though, and this does go a long way to making retail space much more cost effective both for tenants and landlords. But that's not my point...

My point...

Peterborough, like a lot of other mid sized towns around Ontario, is a bargain!

Regardless of what it costs to buy land and build in a given community, from the retailers perspective, the sales forecast for each store on a 'dollars per square foot' scale should be the true measure of a retailers success in a given marketplace. All other expenses, including rent, come out of this top line revenue number. If a retailer can sell $500 worth of product in Peterborough and it only cost $210 to do so vs. $490 in Toronto - which is the better location?

Let me know if you need a little help with the math... :)

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Why Shouldn't Canadians be Bullish?

Canadians Bullish for First Time Since 2007, Nanos Poll Shows

Interesting article on bloomberg.com about our (Canadians) feelings and perceptions about the economy of this country. Of note:

The share of Canadians who say they believe the economy will strengthen over the next six months rose to 45 percent, according to an advance copy of Nanos’s quarterly economic survey provided exclusively to Bloomberg News. That’s more than twice the 18 percent who predict the economy will weaken.

The results are consistent with recent data that suggest the economy has emerged from its recession this quarter, helping to fuel rallies in the country’s stock market and currency. Canadian wholesale sales, manufacturing sales and the index of leading indicators rose more than forecast last week, according to government reports, while home prices have risen to records this year.

and

Real Estate Seen Rising

Confidence is strongest in Ontario and the prairie provinces of Alberta, Saskatchewan and Manitoba, and weakest in Quebec, according to a regional breakdown of the data.

The poll also found that Canadians are three times more likely to say the value of their real estate will increase over the next six months than say it will decrease.

“A key driver for the optimistic mood relates to perceptions of real estate,” Nanos said.

While I agree that there seems to be a more upbeat attitude around town these days, there's still a ways to go. What we need are a few big commercial real estate deals to happen to show those still sitting on the sidelines that there are good deals to be had and that there's no time like the present to invest.

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Why You Should Consider Joint Ventures for Commercial Real Estate Investments and How to Make Them Successful

If you're like a lot of investors out there, you might not have access to a large enough pool of cash to get into some of the best investments out there. Sure, you can probably put together a couple of smaller deals, maybe a four unit residential building or a small neighbourhood strip with a convenience store and a dry cleaner - but what about something with a little more scale? What if you could get together with a partner and invest in an industrial property or mid-sized office building? Maybe a 50 or 60 unit apartment complex? Sound interesting?

Welcome to the world of Joint Ventures. What is a joint venture? The definition of a Joint Venture from Wikipedia:

A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship ...

What are the benefits of a JV?

• Save money
• Increased pool of resources including money and talent
• Greater opportunities based on increased scope and reach of the JV
• Appearance of increased size might offer more access to deals

What are the risks, and why do JVs fail?

• Lack of planning
• Poor organization
• Failure to clearly delineate duties and responsibilities
• Failure to understand and perform duties agreed to
• Smaller investors have less margin for error and therefore small mistakes can be exaggerated and more costly

To reduce the pitfalls of JVs and limit your exposure to potential problems you need to make sure that you do your homework and set up a formal Joint Venture Agreement wherein all parties' duties are clearly defined and understood. Use a competent lawyer experienced in this kind of contract work and set up the organization before committing to any projects. The following items are the basis of a good joint venture agreement. *Remember to get legal advice prior to signing anything.

The Joint Venture Agreement Checklist:

1. The date on which the agreement is established and executed.
2. The names, addresses and identification of the parties, including the type of business of each member of the joint venture.
3. The name under which the joint venture will do business.
4. The principal place of business of the joint venture.
5. The purpose of the joint venture. If the purpose is to access a specific project, a full description of that project is required.
6. The terms of the joint venture: when and how the joint venture is terminated; and, how such items as guarantees, defects, and insurance will be handled after termination.
7. A statement that the parties are actually co-ventures for the project whether or not the contract is in the name of all members.
8. A declaration that the organization is a joint venture, not a partnership.
9. The establishment of a fund by the parties to finance the work, together with the amounts to be contributed by each party, with the fund being deposited in a special bank account under dual control and all progress payments and other revenues being deposited in such account.
10. A clause providing that, if additional working capital is required, the parties will proportionally contribute additional funds, as needed and naming the penalty for failure to contribute.
11. A declaration of the participation of the parties and percentage in which profits and losses are shared. Usually these percentages are proportional to the contributions to the working fund, but the amount of contribution of funds by parties can be increased or decreased depending on the contributions of equipment or expertise which also must be considered.
12. Payment of any fee to the controlling co-venturer or sponsor should be specified; whether a share of the profits in excess of that contemplated is given to the controlling manager or a flat dollar sum is paid.
13. If equipment is involved, a specific clause should be inserted especially where the parties contribute varying amounts of equipment.
14. The parties to the joint venture should agree to sign all necessary documents relating to the contract, bank loans, bonds, indemnity agreements and the like.
15. Control management committee may be determined. A management committee may be established with provision for remuneration. Alternatively one of the co-venturers should be designated as general manger of the project, with authority to bind the joint venture.
16. A provision to clearly define not only the management duties, but all other duties of the co-venturers and procedures to be followed in dealing with unusual situations or problems that may develop.
17. A regular meeting schedule should be considered.
18. A financial and periodic joint venture and progress reporting procedure should be implemented.
19. Establishment of a joint venture bank account, and the appointment of a chartered accountant and lawyer.
20. The possibility of the death, bankruptcy or insolvency of a member must be handled.
21. The acquisition of equipment and materials by the joint venture and the disposal of such equipment and material either by sale with the proceeds treated as ordinary revenues, or by distributing the funds to the co-venturers on a pro-rata basis.
22. Provide for the acquisition of licenses in the name of the joint venture or each co-venturer as required.
23. Specify the type of insurance carried by the joint venture and clearly define the liabilities that are to be insured against by each participant.
24. Define items which are to be considered as costs to the joint venture for the purpose of determining profit or loss and describe those items which are not reimbursable to members of the joint venture.
25. A clause should be included respecting the confidentiality of trade information passed between the co-venturers.
26. Ownership or retention of patents, technology, and consultant reports should be addressed.
27. Establish the performance security requirements of the project and the bonding obligations of the co-ventures.
28. State that undivided pro-rata interests are held by the co-venturers on all assets of the joint venture.
29. Restriction should be considered regarding assignment of co-venturers undivided pro-rata interests in assets of the joint venture.
30. Indemnification.
31. Substitution or addition of co-venturers.
32. Payout of funds.
33. Disputes arbitration clause.
34. Winding up, final performance and financial statements for the joint venture.
35. Notice clause.
36. The applicable jurisdiction of the Agreement should be stated.

The nature, size and complexity of the project together with the sophistication of the parties will determine the detail in which the Joint Venture Agreement is prepared and aforementioned topics dealt with. This checklist is meant only as a guide to putting a Joint Venture Agreement together. The appropriate professional services, such as legal counsel should be sought out and utilized.

Source: "How to Use Joint Ventures - A handbook for firms bidding on major projects", A Government of Saskatchewan publication. Prepared by Thomas Pavlovsky, B. Admin., C.A. and Ted C. Zarzeczny, Jr.,B.A., LL.B. for the Major Projects Branch Originally prepared by the Government of Saskatchewan.

Failing to plan is planning to fail. Do your research, find a partner or partners you know you can work with and get out there and build your empire!

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Are You Ready to Start Your Own Business?

Interested in starting a business in the Peterborough area but need some direction? You should consider using the services of the Business Advisory Centre (BAC) at the Greater Peterborough Area Economic Development Corporation (GPAEDC).

What is the BAC?

The Business Advisory Centre, a member of the Ministry of Economic Development & Trade's Small Business Enterprise Centre network, is a one stop resource centre for entrepreneurs and small business owners. Our professional consultants advise business owners in the City and County of Peterborough on key aspects of startup and maintaining successful businesses.

Programs and Resources
Visit their website to see such resources as:

• A list of upcoming events and seminars to support small business
• Details of their mentoring program
• Start-Up information including an FAQ a Business Planning Guide and a Financing Programs Guide
• Other online resources like: How to Start a Pet Business, How to Start a Restaurant or Catering Business, How to Start an Event Planning Business

Other topics covered and resource links include:

• Getting started
• Planning
• E-commerce
• Retail
• Home-Based Business
• Developing New Products
• Advertising and Marketing
• Business Development and Maintenance
• Co-operatives
• Running a Business
  

There is so much on the site in fact, that it would take me weeks to describe everything you can find on this there! What a fantastic resource for new and experienced business owners alike. Dive in, and take a look at what the GPAEDC has put together here!

Congratulations guys, what a great package!


To reach the BAC, contact:

Nicole Truman
ntruman@gpaedc.on.ca
705.743.0777 Ext. 2123

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Is it Time to Invest in Commercial Real Estate Yet?

According to this article on netgainrealestate.com, it might be.

Using historical statistics, the current climate can be dissected to some extent. Net Gain describes a recession as a manner of alleviating surplus. There have been 20 prior recessions since the start of the 20th century, all of which have made a full recovery. Statistics show that the length of time between peaks of a recession determines the level of excess, which indicates the severity of the next recession.

In assessing the past 20 recessions, the average number of months between peaks is 59 with the most recent lasting 81 months. The average length of time between peak and bottom is 14 months. Based on this information and fact that the current recession is in its 20th month, investing in income property at this time would be a wise decision.

I've tried in the past to look at various indicators of the 'right' time to buy and have always come up short. I've always felt that if a deal creates cash flow that meets your investment criteria and the risk inherent in the deal isn't higher than the return warrants then it's always a good time to invest in commercial real estate.

That said, if you do need an outside indicator, the one proposed by netgainrealestate.com is probably one of the better methods to follow. Since history tends to repeat itself (no matter how many times we fool ourselves into thinking that, "This time it'll be different. No really! ...why does everybody laugh when I say that?"), taking a look at previous recessions and the inevitable recoveries that followed is as good, or better, a method of market timing as any other.

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Should an Inexperienced Residential Agent be Selling Commercial Property?

Well, isn't that a loaded question and one that I've discussed before. Actually I came up the title for this piece after reading the following headline and question on Yahoo! Answers:

What is the process in writing an offer for a commercial property?

"I am a residential realtor. I have a client that wants to purchase a $8 million property that is listed by another broker. Do I send the listing broker a “Letter of Intent” or a commercial contract to sign? When a letter of intent is signed by the seller and buyer, does it then go to a real estate attorney? And does the real estate attorney handle the rest? Need Help ASAP!!"

Link to original page here.

The question and the answers (and I use the term 'answers' loosely), were posted about a year ago but they resonated with me because it's the kind of thing I hear from my residential counterparts fairly regularly.

First, the posted answers:

1) The answer chosen as the best solution suggested that the best way to move forward is by way of a Letter of Intent (LOI). By itself, this isn't a terrible answer and is often the right thing to do. In this instance though, there wasn't enough information given to know if that would have been the right solution or whether moving directly to an Agreement of Purchase and Sale (APS) might have been the best idea. This first answer, and remember this was chosen as the best answer, went on to say that the agent should at all costs avoid the use of a lawyer because they just charge $300 an hour and get paid whether or not the deal actually closes. Pardon? It is NEVER advisable to suggest that a customer or client NOT use a lawyer! If they feel that they'd like that extra layer of advice, by all means, encourage it! If an agent tries to discourage a client from using the services of a legal expert (we're not lawyers!) and then something untoward happens that costs the client money or other damages, guess who'll be found at fault? I'll give you three guesses, but the first two don't count...

2) The second answer suggested skipping the LOI and moving directly to the APS. Again, there wasn't enough information to make this call.

3) The third answer suggested that LOIs were a waste of time as they aren't binding. This is usually true, but is not always the case. This answer goes on to suggest that the agent must present the offer in person or he'll never learn why the property is actually for sale or what the seller will accept. He goes on to talk about agents that like to 'play games' with LOIs and bullying agents at the negotiating table. Sounds to me like this guy has had a bad experience somewhere in his past!

4) The final answer, while a little superficial, "...keep your composure; appearance is very important...", does give the best advice of the four, at least as far as it goes, "Many of your questions would be best answered by YOUR broker." At least this answer advises getting further would-be expert advice. The problem with this is that the agent is a residential agent and, in all probability, so it the broker. My hope would be that the broker would give the same advice I'm about to...

Sadly, all four of these answers are wrong.

My answer:

Don't do anything you don't have some training to do or where you just don't have a good gosh darn idea of how to do it! If you don't know the process for writing a commercial offer, should you be 'trying it out' on your unsuspecting client? Absolutely not.

I refer to our Code of Ethics, which is now enshrined in law under REBBA 2002:

5. Conscientious and Competent Service, Etc.
A registrant shall provide conscientious service to the registrants's clients and customers and shall demonstrate reasonable knowledge, skill, judgement and competence in providing those services. O. Reg. 580/05, s. 5.

Interpretation:
This provision, deriving from Rules 1(4), 40 and 42 of the previous code, generally focuses on the duty of care owed to all clients and customers. This duty involves reasonable care and skill in providing accurate information, as well as when performing functions to which the registrant has agreed. The standard of care for this duty is one of reasonableness, i.e., how a prudent and informed registrant would conduct himself or herself under similar circumstances.

What does this mean? It means that you have a legal duty to ensure that any service you offer is offered with the competence and knowledge to support it. If you can't perform your duties to your clients or customers within this guideline - you should not be doing it! Not only are you not providing good service to your client - which should be your chief concern - but since the Code of Ethics is now part of the Act, you are breaking the law.

The real solution to such a happy conundrum as having a buyer willing to spend $8M:

Refer the deal to a commercial practitioner in your area who does have the knowledge and competence to provide commercial real estate services. Three things happen when you do this that will seem like magic:

1) Your client gets the service he/she deserves and you get to look like the hero for providing said service;
2) Your client will likely get a better deal by having proper representation in the transaction and there will be fewer road-bumps in the negotiation and subsequent due diligence period; and
3) Everybody makes some money! Your client earns a return on investment by successfully purchasing the asset, the agent you refer the deal to earns the lion's share of the commission because they have the expertise to see the deal through to completion, and you earn 25% or more of the commission for filling out a simple referral contract. Sounds like the ideal win-win-win to me!

If you really want to get involved in the wonderful world of commercial real estate, great! Go get some training. Find a mentor who will work with you during your first few years of learning this rewarding business and have fun with it. This is what I did, and every other successful commercial practitioner I've ever met has done the same.

If you want to take your chances and try to work deals like this flying by the seat of your pants, you might get away with it a few times, but, sooner or later you'll get your wrist slapped at best or found guilty in court and fined or jailed at worst. It's up to you, but think hard about your choices before you act.

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Self Interview, Just for Fun

Thought I'd do something different today and interview myself! Seems I'm not quite famous enough (yet) to be interviewed by one of the big guys, so I thought this might be fun. You'll get to know me a little better and I get to share a little about myself outside of commercial real estate.

Q: Most valuable gift you’ve ever received?
A: The ability to think for myself without feeling that I should 'go with the flow'. The desire to 'know' without compromise or giving up on knowing the truth. (Thanks Mom and Dad!)

Q: Favourite way to chill out?
A: Depends on my mood. Reading a good novel or just flaking in front of the tube are two of my favourites. A good video game session with friends is always fun too!

Q: If you were a Star Trek® character, which one would it be?
A: I have to go with the cliche answer of James T. Kirk. He's the captain, and who doesn't like to call the shots? He gets to go on all of the really fun missions, and he always gets the girl! I share one common belief with the character above all others: neither of us believe in a no-win situation; there's always another option.

Q: What is the last book you read?
A: The Dark Tower III - The Wastelands, by Stephen King. Incredibly, I hadn't read any of the books in the Dark Tower series before - I'm more of a sci-fi or fantasy adventure reader than a King fan - but this series has me hooked now! Action, romance, magic, gunslingers...what more could you want?!

Q: What was the last movie you went to see?
A: JJ Abrams' Star Trek. Not surprisingly. I was skeptical at first, but I have to admit, this is right up there with The Wrath of Khan and The Voyage Home in my Star Trek movie favourites. Seeing the movie sitting alongside real fans was a blast - laughing at some of the inside Trek themes and historical canon was a riot!

Q: How would you explain your business in one sentence to your eight-year-old nephew?
A: I help people earn money by teaching them how to buy buildings and trading some space in them for money.

Q: If someone wrote a biography about you, what do you think the title should be?
A: "On The Way to My Life, I Met the Oddest People."

Q: What kind of people do you dislike?
A: Rude and disrespectful people really get my juices boiling. Seriously, does it take a lot of effort to say thank you for holding a door or to give a little courtesy wave when I let you into traffic? Sheesh!

Q: How would you describe yourself in three words?
A: Trustworthy. Dependable. Lifelong learner. (Okay, that's really four words, but lifelong learner is a compound word...right?)

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A Funny for Friday

Sign Reads:
Lemonade $6.2 Million/glass
House free with lemonade

Have a great long weekend everybody!

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