Real Estate Brokers’ Program

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Real Estate Real Estate Brokers’ Brokers’ ProgramProgram

Barbara Grodaes

COMMERCIAL REAL ESTATECOMMERCIAL REAL ESTATE

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Scope - Commercial Real EstateScope - Commercial Real Estate

Industry requiring warehousing, Industry requiring warehousing, manufacturing, integrated office space and manufacturing, integrated office space and yard storage.yard storage.

Businesses requiring merchandising or retail Businesses requiring merchandising or retail facilities as well as office space – included facilities as well as office space – included are those people seeking to buy or sell are those people seeking to buy or sell existing businesses.existing businesses.

Investors seeking an income and/or capital Investors seeking an income and/or capital appreciation and/or tax benefits from money appreciation and/or tax benefits from money used to purchase real property.used to purchase real property.

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Scope – Continued …Scope – Continued …

Industrial Real Estate (SIOR) Society of Industrial Real Estate (SIOR) Society of Industrial and Office REALTORS.Industrial and Office REALTORS.

Leasing (more lease transactions completed Leasing (more lease transactions completed than there are sales – office and retail being than there are sales – office and retail being the most significant.the most significant.

Property and Asset Management.Property and Asset Management. Business Brokerage (deals with the sale of Business Brokerage (deals with the sale of

ongoing businesses with or without real ongoing businesses with or without real estate assets) – has securities law estate assets) – has securities law implications.implications.

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““Security” AB Securities ActSecurity” AB Securities Act

The broad definition includes (plus stocks & bonds):The broad definition includes (plus stocks & bonds): Investment contractsInvestment contracts Fractional interest in oil and gas propertiesFractional interest in oil and gas properties Interests in profit sharing arrangementsInterests in profit sharing arrangements Evidence of indebtedness, and several other itemsEvidence of indebtedness, and several other items Condominium apartments, when sold in with a Condominium apartments, when sold in with a

developer-sponsored rental pool or hotel operationdeveloper-sponsored rental pool or hotel operation Interests in limited partnershipsInterests in limited partnerships Other interests if involving the three elements of an Other interests if involving the three elements of an

investment contractinvestment contract Other interest in ownership entities involving profit Other interest in ownership entities involving profit

sharing arrangements, but not profit sharing sharing arrangements, but not profit sharing retirement plans.retirement plans.

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Investment ContractInvestment Contract

Critical test in any real estate transaction is Critical test in any real estate transaction is the manner in which the property is the manner in which the property is marketed. Is the property alone offered, or it marketed. Is the property alone offered, or it is offered with management or in an entity is offered with management or in an entity arrangement sufficient to constitute an arrangement sufficient to constitute an investment contract?investment contract?

Securities law will apply every time the 3 Securities law will apply every time the 3 elements of an investment contract exist. elements of an investment contract exist. They are:They are:1.1. Investment in a common enterprise.Investment in a common enterprise.2.2. Profit motive; andProfit motive; and3.3. Expectations that the profit would derive from Expectations that the profit would derive from

the efforts of the seller (sponsor) or a third the efforts of the seller (sponsor) or a third party.party.

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Scope – Continued …Scope – Continued …

Investment – Investor is essentially buying Investment – Investor is essentially buying an income. Sales cover the sale of income-an income. Sales cover the sale of income-producing projects to investors looking for 3 producing projects to investors looking for 3 things: a good rate of return on capital things: a good rate of return on capital investment, security of that rate of return and investment, security of that rate of return and potential for investment to grow in value. potential for investment to grow in value. Users simply look for property to house Users simply look for property to house business and concerned with location.business and concerned with location.

Land Sales – Industrial Land Sales, Land Sales – Industrial Land Sales, Commercial Land Sales, Sale of Residential Commercial Land Sales, Sale of Residential Subdivision Land to Developers or Builders Subdivision Land to Developers or Builders and Design Build.and Design Build.

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InvestmentInvestment

Purchase of a property with the expectation Purchase of a property with the expectation of future profit to maximize wealth. Obtain of future profit to maximize wealth. Obtain the highest return (income plus capital the highest return (income plus capital appreciation) over an extended period of appreciation) over an extended period of time.time.

Influencing factors include (Influencing factors include (RALMYRALMY) ) RiskRisk,, AppreciationAppreciation (inflation/deflation), (inflation/deflation), Liquidity Liquidity,, (Marketability),(Marketability), Management Management,, Yield Yield..

Investment Considerations Comparison Investment Considerations Comparison Chart (rating high, moderate or low) is used Chart (rating high, moderate or low) is used to show relationship of risk versus return.to show relationship of risk versus return.

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Fixed Return Fixed Return vs.vs. Variable Return Variable Return

Fixed Return InvestmentFixed Return Investment means rate of means rate of return is established at the beginning of the return is established at the beginning of the investment and is committed for a specific investment and is committed for a specific period of time.period of time.

Variable Return InvestmentVariable Return Investment means rate of means rate of return varies according to the performance of return varies according to the performance of the investment.the investment.

Remember, real estate generally is a Remember, real estate generally is a variable return investment.variable return investment.

““How much additional risk is acceptable for a How much additional risk is acceptable for a 1% increase in the expected rate of return?”1% increase in the expected rate of return?”

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Real Estate InvestmentReal Estate Investment

Any real property bought with the intention to Any real property bought with the intention to accumulate wealth or to gain a profit – the accumulate wealth or to gain a profit – the buyer’s intention for use of property rather buyer’s intention for use of property rather than the actual nature of the property.than the actual nature of the property.

Single-family home as investment real estate Single-family home as investment real estate is purchased with the intention of buying, is purchased with the intention of buying, holding and renting it for investment holding and renting it for investment purposes and hoping it will increase in value.purposes and hoping it will increase in value.

Investors concerned primarily with a return of Investors concerned primarily with a return of (and on) their investment through cash flow (and on) their investment through cash flow from operations and sale proceeds.from operations and sale proceeds.

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Amenity PropertiesAmenity Properties CharacteristicsCharacteristics

Amount of financing is based on the ability of Amount of financing is based on the ability of the owner to generate income.the owner to generate income.

The market is primarily local.The market is primarily local. Ownership is usually individual or corporate.Ownership is usually individual or corporate. The property is usually owner-occupied.The property is usually owner-occupied. The value is usually based on market and The value is usually based on market and

replacement costs (including land).replacement costs (including land).

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InvestmentInvestment PropertiesProperties CharacteristicsCharacteristics

The amount of financing based on the ability of the The amount of financing based on the ability of the investment to produce income as well as owner’s investment to produce income as well as owner’s credit worthiness.credit worthiness.

Generally, the market is local except very large Generally, the market is local except very large investments where market is national/ international.investments where market is national/ international.

Ownership rights are either fee simple (freehold) or Ownership rights are either fee simple (freehold) or leasehold and can be held individually, corporately, leasehold and can be held individually, corporately, or through joint-venture or syndications.or through joint-venture or syndications.

The property usually leased to third-party tenants.The property usually leased to third-party tenants. The value is based on investment value. The return The value is based on investment value. The return

is anticipated from operations and/or eventual sale.is anticipated from operations and/or eventual sale.

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Areas of ConsiderationAreas of Consideration

Return is usually commensurate with risk.Return is usually commensurate with risk. Potential Income Stream can affect the Potential Income Stream can affect the

investor’s perception of risk, according to the investor’s perception of risk, according to the following 3 characteristics of income:following 3 characteristics of income:

• Quantity of the net income (how much?)Quantity of the net income (how much?)• Quality of the income (how good?)Quality of the income (how good?)• Certainty of the net income (how long?)Certainty of the net income (how long?)

Appreciation of both land and buildings.Appreciation of both land and buildings. Liquidity (readily convertible to cash) – Real Liquidity (readily convertible to cash) – Real

Estate has limitations but has partial liquidity Estate has limitations but has partial liquidity as owner can obtain a loan on property.as owner can obtain a loan on property.

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Consideration AreasConsideration Areas, Continued …, Continued …

Management involvement – degree can be Management involvement – degree can be controlled by nature of the investment.controlled by nature of the investment.

Yield (result of the investment) varies.Yield (result of the investment) varies.• Return OFReturn OF is the return of the amount of money is the return of the amount of money

invested over the life of the investment.invested over the life of the investment.• Return ONReturn ON is a return for the use of that capital over is a return for the use of that capital over

the life of the investment.the life of the investment. Leverage (use of borrowed funds to finance Leverage (use of borrowed funds to finance

a portion of the cost).a portion of the cost). Taxation (how the investment income is Taxation (how the investment income is

affected by all forms of taxation).affected by all forms of taxation).

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Investment AdvantagesInvestment Advantages

High degree of personal control. One ccan High degree of personal control. One ccan sell, redevelop, refinance, effect changes, sell, redevelop, refinance, effect changes, obtain new tenants, etc.obtain new tenants, etc.

Potential tax advantage.Potential tax advantage. Better than average after-tax retun on Better than average after-tax retun on

investment through operations, a retirement investment through operations, a retirement of debt (mortgage), and positive financing of debt (mortgage), and positive financing leverage.leverage.

Potential to increase the property value Potential to increase the property value through change of use or physical upgrading.through change of use or physical upgrading.

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Investment DisadvantagesInvestment Disadvantages

There is risk – always a possibility of a There is risk – always a possibility of a downturn in income and value.downturn in income and value.

Limited liquidity – real estate may not be Limited liquidity – real estate may not be liquid because it can’t be disposed of quickly. liquid because it can’t be disposed of quickly. Stocks are liquid.Stocks are liquid.

Requires personal involvement – real estate Requires personal involvement – real estate ownership requires more personal attention ownership requires more personal attention and involvement partly because one can and involvement partly because one can have more control. Don’t forget about have more control. Don’t forget about property management for cost.property management for cost.

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Elements of InvestmentElements of Investment

Real Estate Investment - package Real Estate Investment - package comprising land, buildings, equipment, comprising land, buildings, equipment, financing/yield & sometimes management.financing/yield & sometimes management.

Land (valued by highest and best use) Land (valued by highest and best use) determined by location and zoning or land determined by location and zoning or land use designation.use designation.

Buildings (main producers of income) have a Buildings (main producers of income) have a limited life.limited life.

Equipment usually has a shorter life.Equipment usually has a shorter life. Financing - value by itself can make or break Financing - value by itself can make or break

a deal (low downpayment = higher price).a deal (low downpayment = higher price).

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Types of InvestorsTypes of Investors

SpeculatorsSpeculators – buy and hold property for – buy and hold property for resale.resale.

UsersUsers – buy & retain property for business. – buy & retain property for business. InvestorsInvestors – buy & retain property for income – buy & retain property for income

from operations and eventual sale (private or from operations and eventual sale (private or institutional).institutional).

Land developersLand developers – buy, subdivide, promote – buy, subdivide, promote and sell on completion.and sell on completion.

Builder developersBuilder developers – invest in land and – invest in land and construct buildings for resale.construct buildings for resale.

DealersDealers (flippers)(flippers) buy for turnover/profit. buy for turnover/profit.

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Investors’ BehaviourInvestors’ Behaviour

Prudent investor will prefer the investment Prudent investor will prefer the investment with the following:with the following:

• Smaller initial cash investmentSmaller initial cash investment• Largest periodic cash flowsLargest periodic cash flows• Largest proceeds from dispositionLargest proceeds from disposition• Earliest cash flowEarliest cash flow• Safest cash flow.Safest cash flow.

Primary motivation is to obtain the future Primary motivation is to obtain the future cash flows the investments produce – “more cash flows the investments produce – “more is better than less”.is better than less”.

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Responsibilities of AgentResponsibilities of Agent

Understand the investment objectives of the Understand the investment objectives of the client.client.

Analyze properties that suit these objectives.Analyze properties that suit these objectives. More businesslike and unemotional More businesslike and unemotional

approach to sales is required.approach to sales is required. Have a good knowledge of clients (financial Have a good knowledge of clients (financial

needs, desires, tax position, present and needs, desires, tax position, present and expected income, etc., motivation and type).expected income, etc., motivation and type).

Develop strong relationships with specialists Develop strong relationships with specialists to provide proficient service to your client.to provide proficient service to your client.

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Selling Investment PropertySelling Investment Property

Buyers and Sellers are the decision-makers Buyers and Sellers are the decision-makers in investment real estate.in investment real estate.

Industry members are facilitators for them in Industry members are facilitators for them in the investment decision-making process.the investment decision-making process.

Agents act to support buyers/sellers by Agents act to support buyers/sellers by gathering and present information.gathering and present information.

Cash flowCash flow (before and after tax) for annual (before and after tax) for annual income.income.

Sale proceedsSale proceeds is the amount of income is the amount of income generated by a sale.generated by a sale.

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Cash Flow AnalysisCash Flow Analysis

Annual Property Operating Data Form Annual Property Operating Data Form (APOD) provides a marketing tool (APOD) provides a marketing tool describing income and financial data to describing income and financial data to develop an operating statement and to develop an operating statement and to determine cash flow before taxes.determine cash flow before taxes.

It is standardized and communicates with It is standardized and communicates with buyers in selling and supporting value buyers in selling and supporting value and presents owner’s cash flow (before and presents owner’s cash flow (before taxes) with existing/alternative financing.taxes) with existing/alternative financing.

You need to know what each line is used You need to know what each line is used for and how it is used.for and how it is used.

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Cash Flow Analysis FormulaCash Flow Analysis Formula

Effective Rental Income = Scheduled Effective Rental Income = Scheduled Rental Income – Vacancy & Credit LossRental Income – Vacancy & Credit Loss

Gross Operating Income = Effective Gross Operating Income = Effective Rental Income + Other IncomeRental Income + Other Income

Net Operating Income = Gross Operating Net Operating Income = Gross Operating Income – Total Operating CostsIncome – Total Operating Costs

Cash Flow Before Taxes = Net Operating Cash Flow Before Taxes = Net Operating Income – Annual Debt ServiceIncome – Annual Debt Service..

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Reconstructed StatementReconstructed Statement

Developing a Reconstruction Statement Developing a Reconstruction Statement (proforma) allows the forecasting of the (proforma) allows the forecasting of the property’s cash flow before taxes under property’s cash flow before taxes under normal market conditions for the coming normal market conditions for the coming year. (Buyers are paying for future potential)year. (Buyers are paying for future potential)

Aids present or potential owner in Aids present or potential owner in understanding the future investment potential understanding the future investment potential of the property.of the property.

To develop, listing information (personal To develop, listing information (personal knowledge and research), brokerage files knowledge and research), brokerage files and interviews can be invaluable.and interviews can be invaluable.

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Investment MeasuresInvestment Measures

Value is directly related to use. Market Value is directly related to use. Market Value, Assessed Value, Reproduction Cost, Value, Assessed Value, Reproduction Cost, and Value in Use - ways to determine value.and Value in Use - ways to determine value.

Time is money. Agent must be able to Time is money. Agent must be able to adequately forecast revenue and expenses adequately forecast revenue and expenses (income streams).(income streams).

Present day value can be put on a future Present day value can be put on a future benefit.benefit.

If you know income stream and desired If you know income stream and desired return, through methods of discounting and return, through methods of discounting and compounding, you can arrive at a present compounding, you can arrive at a present day value on an investment.day value on an investment.

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Discounting/CompoundingDiscounting/Compounding

Money has a ‘time value’.Money has a ‘time value’. Compounding is the amount a dollar will Compounding is the amount a dollar will

grow over a given number of periods at a grow over a given number of periods at a given rate of interest, if the total investment given rate of interest, if the total investment including interest is left in the investment.including interest is left in the investment.

Discounting (reverse of compounding) is Discounting (reverse of compounding) is computing the value of a dollar to be computing the value of a dollar to be received in the future at a given discount received in the future at a given discount rate.rate.

Not having money at hand is Not having money at hand is opportunity opportunity costcost..

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Rate of Return FormulasRate of Return Formulas

V = IR

R = IV

I = RxV

V=ValueI=Net Operating IncomeR=Capitalization Rate

This formula is used when an investor uses a capitalization rate with the net operating annual income to determine the maximum an investor can pay to achieve the value.

NOI

Cap Rate Value

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Formulas Continued … (ratios)Formulas Continued … (ratios)

Gross Rent Multiplier .. GRM = Price / Gross Rent Multiplier .. GRM = Price / Scheduled Rental IncomeScheduled Rental Income

Capitalization Rate or Yield Rate .. Capitalization Rate or Yield Rate .. Capitalization Rate = NOI / ValueCapitalization Rate = NOI / Value

Cash-On-Cash Rate .. COC = Cash Flow Cash-On-Cash Rate .. COC = Cash Flow Before Taxes (CFBT) / Initial InvestmentBefore Taxes (CFBT) / Initial Investment

After Tax Cash-On-Cash .. COCAT = CFAT / After Tax Cash-On-Cash .. COCAT = CFAT / Initial InvestmentInitial Investment

Equity Return Rate (ERR) .. ERR = CFAT + Equity Return Rate (ERR) .. ERR = CFAT + Principal Payment +Change in Value / Initial Principal Payment +Change in Value / Initial Equity InvestmentEquity Investment

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Financing InvestmentsFinancing Investments

Financing of real estate investments is Financing of real estate investments is generally based on the ability of the property generally based on the ability of the property to generate sufficient income to repay funds. to generate sufficient income to repay funds. Several variable items are significant:Several variable items are significant:

• Rate of interest on the loan.Rate of interest on the loan.• Ratio of the loan amount to the value of the property.Ratio of the loan amount to the value of the property.• Term of the loan or the period over which the loan is Term of the loan or the period over which the loan is

made and the method of amortization of the loan.made and the method of amortization of the loan.• Ratio of annual debt service to net operating income Ratio of annual debt service to net operating income

or the coverage factor.or the coverage factor. The higher the interest rate, the lower the The higher the interest rate, the lower the

ratio of the loan amount to the value of the ratio of the loan amount to the value of the property – safety of investment decreases.property – safety of investment decreases.

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Principles of LeveragingPrinciples of Leveraging

Positive leverage – borrowing at interest rate Positive leverage – borrowing at interest rate below the overall rate of return.below the overall rate of return.

Neutral leverage – borrowing at interest rate Neutral leverage – borrowing at interest rate equal to the overall rate of return.equal to the overall rate of return.

Negative leverage – borrowing at interest Negative leverage – borrowing at interest rate higher than the overall rate of return.rate higher than the overall rate of return.

Loan-to-Value Ratio = Loan Amount / Loan-to-Value Ratio = Loan Amount / Property Value.Property Value.

Annual Debt Service (ADS) – total principal Annual Debt Service (ADS) – total principal and interest payments for year.and interest payments for year.

Debt Coverage Ratio (DCR) = NOI / ADS Debt Coverage Ratio (DCR) = NOI / ADS (DCR >1 if NOI is > than ADS)(DCR >1 if NOI is > than ADS)

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Terms & SourcesTerms & Sources

3 General Types typically available being: 3 General Types typically available being: Interest-Only Loan, Fully Amortized Interest-Only Loan, Fully Amortized Mortgage Loan, and Amortized Mortgage Mortgage Loan, and Amortized Mortgage Loan With a Term.Loan With a Term.

Variety of sources including Institutional Variety of sources including Institutional Lenders, Private Investors and sometimes by Lenders, Private Investors and sometimes by the seller of the property.the seller of the property.

There are additional costs and expenses There are additional costs and expenses involved because of the financing and should involved because of the financing and should be evaluated so that the investor can be evaluated so that the investor can measure potential yield on amount invested.measure potential yield on amount invested.

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Loan Application ProcessLoan Application Process

Primary Application, Interim Submission, Primary Application, Interim Submission, Final Submission (broad checklist).Final Submission (broad checklist).

Overview of the Project, Market Studies, Overview of the Project, Market Studies, Feasibility Study, Site Location, Geo-Feasibility Study, Site Location, Geo-Technical Surveys, Plan for Building, Cost of Technical Surveys, Plan for Building, Cost of Project, Management Plan, Ownership Project, Management Plan, Ownership Information, Description of Loan Terms Information, Description of Loan Terms Requested, Appraisal, Real Property Report, Requested, Appraisal, Real Property Report, Environmental Audits.Environmental Audits.

Consideration for submission to a lender in Consideration for submission to a lender in obtaining loan for investment property.obtaining loan for investment property.

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Environmental AuditsEnvironmental Audits

Three-Phased ApproachThree-Phased Approach Sampling and/or Testing required in Phase II Sampling and/or Testing required in Phase II

may include Sampling Plan, Analytical Plan may include Sampling Plan, Analytical Plan and Health and Safety Plan and then and Health and Safety Plan and then reported in a Final Report.reported in a Final Report.

Phase III is remedial action plan which may Phase III is remedial action plan which may include Repair, Isolation, Encapsulation, include Repair, Isolation, Encapsulation, Enclosure, Removal & Disposal, hopefully Enclosure, Removal & Disposal, hopefully limiting a problem of Stigma – market-limiting a problem of Stigma – market-imposed penalty which affects property imposed penalty which affects property known to be/was contaminated. Stigma is known to be/was contaminated. Stigma is intangible but decreases value of property intangible but decreases value of property because of the fear of future hazards.because of the fear of future hazards.

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Investor ConsiderationsInvestor Considerations

Many elements critical to the financing Many elements critical to the financing structure of a real estate investment structure of a real estate investment opportunity include:opportunity include:

• Term of the Loan, Method of Payment, Default Term of the Loan, Method of Payment, Default Conditions and Procedures, Insurance Required, Tax Conditions and Procedures, Insurance Required, Tax and Insurance Payment Required, Provincial Laws and Insurance Payment Required, Provincial Laws Under Which Leases Will Be Interpreted, Assignment Under Which Leases Will Be Interpreted, Assignment of Rents, Exculpatory (hold-harmless) Provisions, of Rents, Exculpatory (hold-harmless) Provisions, Assumption and Assignment, Recourse.Assumption and Assignment, Recourse.

Above list is not inclusive but will help the Above list is not inclusive but will help the agent assist the investor in reviewing what is agent assist the investor in reviewing what is necessary.necessary.

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LeasingLeasing

The field of leasing open to the commercial The field of leasing open to the commercial industry is literally unlimited.industry is literally unlimited.

The only alternative to leasing is ownership.The only alternative to leasing is ownership. 3 Basic types are retail, industrial and office.3 Basic types are retail, industrial and office. Lease is a contract between the lessor and Lease is a contract between the lessor and

lessee for a term.lessee for a term. Tenants receive the use and possession of Tenants receive the use and possession of

the premises for which they pay rent to the the premises for which they pay rent to the landlord.landlord.

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Types of LeasesTypes of Leases

Net Lease (net net lease or triple net lease) Net Lease (net net lease or triple net lease) requires tenant to pay all ancillary expenses requires tenant to pay all ancillary expenses except structural repairs, landlord’s income except structural repairs, landlord’s income taxes and the landlord’s debt servicing costs.taxes and the landlord’s debt servicing costs.

Gross Lease requires tenant to pay all-Gross Lease requires tenant to pay all-inclusive amount to the landlord.inclusive amount to the landlord.

Semi-Gross Lease requires landlord to Semi-Gross Lease requires landlord to assume specified portion of operating costs.assume specified portion of operating costs.

Percentage Rent Lease is a form of rental Percentage Rent Lease is a form of rental directly related to the tenant’s sales.directly related to the tenant’s sales.

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Elements of Valid LeaseElements of Valid Lease

Identity of the Parties (clearly described)Identity of the Parties (clearly described) Description of the Leased PremisesDescription of the Leased Premises Terms and Commencement DateTerms and Commencement Date Description of Rent, Rent-Free PeriodDescription of Rent, Rent-Free Period Percentage RentalPercentage Rental Use of PremisesUse of Premises Any Lease Schedules (plot or site plan, Any Lease Schedules (plot or site plan,

breakdown, legal description, building plan)breakdown, legal description, building plan) Quiet Enjoyment, Restrictions and infinite Quiet Enjoyment, Restrictions and infinite

number of variations.number of variations.

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TrendsTrends

Power Centres (strip malls)Power Centres (strip malls) Big Box (no-frills warehouse-like)Big Box (no-frills warehouse-like) Loft Condominiums (vacant warehouse-type Loft Condominiums (vacant warehouse-type

space in urban centres to residential usage)space in urban centres to residential usage) Hotelling (sharing office space)Hotelling (sharing office space) Commercial Condominium (attractive and Commercial Condominium (attractive and

advantageous to owners which want to advantageous to owners which want to control costs or generate profit in the event control costs or generate profit in the event real estate values increase).real estate values increase).

Basics for success constant – personal Basics for success constant – personal ethics, people skills and good work habits.ethics, people skills and good work habits.

Real Estate Brokers’ Program

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