Thursday, June 28, 2012

Purchase Price Allocation (Intended for Canadians Only)

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

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

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

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

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

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

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

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

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

Tuesday, June 19, 2012

Tax Matters - Intended for (Ontario) Canada Only

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

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

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

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

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

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

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

Thursday, June 7, 2012

Financing the Purchase - Considering the Mortgaging Options

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

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

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

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

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

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