Friday, February 26, 2016

Taking Title on Closing - Cost-Benefit of Incorporating

Maybe one of the most debated topics that come up with Buyers, when they look to close on a rental building. It's not 'a one-size-fits-all' proposition, but we can at least highlight the major considerations.

Benefits - the major ones generally cited include limits personal liability, provides some degree of anonymity, potential tax benefits (assuming the corporate tax rate is better than one's personal rate), and dividend payments (as cash flow to the owners) may be more tax efficient.

On the liability issue, lawyers (at least those on the other side of a claim/litigation), would likely beg to differ with this position, and look to sue directors or company officers when pursuing a legal action.

With respect to anonymity, corporate searches generally reveal the owners/officers of a company, so it may not offer the level of cover you seek. The last 2 points are strictly tax matters - which need to be reviewed relative to your personal circumstances. Keep in mind 'tax laws' are continually changing and what seems practical today, may not be so tomorrow.

Costs - the major ones are accounting and legal costs, especially the expense of the initial set-up. It will vary from deal to deal and based on the corporate structure you are looking for, but rest assured you are looking at costs in the 'thousands'. In addition, you have the on-going expenses - a.k.a. annual yearly statements, legal resolutions/minute books and possibly annual meetings to consider.

Obviously any costs would become less of an issue, if the corporation is destined to acquire 3-4-10 properties, as opposed to a single property. Again - not a 'one-size-fits-all' proposition.

Other factors to consider include property financing (most often lenders want both corporate & personal guarantees}, will/estate planning, and both property/liability insurance. Ensure you consider these items as well, as you weigh your decision on incorporating.

Incorporation - Finally, we often see Buyers incorporate for all the wrong reasons. It should at a very minimum be a 'PROS & CONS ANALYSIS' and it should be realistically determined during your CONDITIONAL OFFER PERIOD. This is not a week before closing matter and best practice is THE EARLIER THE BETER.

We welcome all the horror stories you can send us on setting up corporations for both the right and wrong reasons.

And as usual, just a click/call away from discussing investment opportunities here in Windsor-Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, February 23, 2016

What You Should Know About Credit Score and Your Financial Health

Do you know what your credit score is? Do you know what is on your credit report?

You should because your credit score is really important for your financial health. It can help you get approved for a mortgage, credit cards or other loans. It can also affect your ability to rent housing or get hired for a job.

What is your credit report?

It is a record of your past and present use of credit cards and loans. Mobile phone and Internet accounts may be included, even though they are not credit accounts. It includes details about your bill payments and your personal information. The two major credit reporting agencies that keep your information on file are Equifax Canada and TransUnion Canada.

Consistently, we come across credit reports in the course of our business and rarely do the borrower/mortgagor/tenant know what to expect. They might not know how missing a few payments a couple years ago or closing down those credit cards and lines of credit recently can affect your score. With the increase in cyber crime, idenity theft is also rising. One of us has been a victim of identity theft, and let us tell you, its not fun to deal with. Here is a list of what you should know to protect yourself.

How often should I check my credit?

A rule of thumb is to order a credit check every 12 months.

What can you do if you find errors?

You have the right to dispute any information in your credit report that you believe is wrong. You can ask the credit reporting agencies to correct errors. It’s free.

Why it is important to check for errors?

Errors can give lenders the wrong impression. You could be turned down for a credit application or be charged a higher interest rate.

Errors can also be a sign that someone is trying to steal your identity and open credit cards, mortgages or other loans under your name.

What errors should I watch out for?

Order your credit report from both Equifax Canada and TransUnion Canada. They may have different information about you.

Check for the following:
  • mistakes in personal information, such as wrong mailing addresses or incorrect date of birth
  • errors in credit card and loan accounts, such as a payment you made on time that is shown as late
  • negative information about your accounts that is still listed after the maximum number of years it’s allowed to stay on your report
  • signs of identity theft, such as credit cards or loans listed that you never opened yourself.
What cannot be changed?

You cannot change factual, accurate information related to a credit account. For example, if you missed payments on a loan or a credit card, paying the debt in full or closing the account will not remove the negative history.

Negative information will only be removed after a certain amount of time. The specific time period depends on the type of information and the province or territory where you live. For most information, the maximum is six or seven years.

Have you ever had any issues with credit reports?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Monday, February 22, 2016

The 5 W's of Tenant Estoppel Certificates

So you’ve purchased an Income Property with 2-4-7-10 tenants, all of which are being assumed on closing date. In short, a TEC becomes a document which forms part of your closing package.

WHAT? TEC is a document signed by the Tenant which confirms the basic terms of the lease agreement in place (which presumably you have already reviewed during your due diligence, and summarizes the status of the tenancy as of the closing date. It’s primary purpose is to verify the basic details contained in the lease, and to ensure the terms have not been modified since the lease was initially signed.

WHEN? The document is prepared by the Purchaser’s lawyer (in most instances) and provided to the Tenant for signing. It needs to be provided on or prior to closing and often can hold up closing if not available with all the other closing documents.

WHY? Purchaser wants to ensure that the current status of the tenancies, is as presented via the leases. Other matters typically outlined will include – deposits held, confirmation that all rental payments are current, any outstanding obligations with the present landlord (seller), no lease assignment exists etc.

WHO SIGNS? The Tenant and more specifically the actual corporation/individual shown on the lease agreement. The more detailed the TEC, the more advance notice you should give the Tenant to make sure it gets signed in a timely fashion.

WHO RECEIVES? The TECs are forwarded to the Purchaser (or their lawyer) to review as part of the closing process. Depending on the amount of financing, often the lender can also be party to the TEC and certain provisions shall ensure the lender’s rights with respect to their mortgage security.

In addition, a TEC will often include a DIRECTION to the tenant, specifying where future rental payments are to be made and the Buyer’s (New Landlord) address for service. It’s a good idea to incorporate the requirement for a TEC/DIRECTION within your Purchase and Sale Agreement, to make sure the Seller is aware that it is required at closing.

This is normally a matter for the lawyers, but it’s always best discussed early in the process of buying.

Any past experiences with Estoppel Certificates that you would care to share with us – either as Buyer or Seller. Just a click/call away from discussing the opportunities here in Windsor-Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, February 16, 2016

Love Is In The Air - Market Segments Clients Love

With Valentine’s Day just this past weekend, love is definitely in the air. After a weekend of blowing your budget on your significant other, our investor clients are thinking of ways they can reverse some of the damage by making a solid investment.

In honour of Hershey’s favourite holiday, we have a list of some of the market segments our clients are loving in 2016:

  1. Industrial – During the downturn of 2008-09, the manufacturing sector was especially hard hit, with several of the large automakers on the brink of bankruptcy. The restructuring that went along with that has brought about the rebound of the last several years. This year we are looking at a record year for auto sales and the roll out of many new cars. This is all translating into super low supply of buildings, increasing rents and the start of a new construction cycle. We see continued upward pressure on prices and rental rates as new construction costs are prohibitive compared to resale in many cases.
  2. Multifamily – The demand for yield with today’s near zero percent interest rates has fueled unprecedented demand for multifamily investment properties. This demand has far outstripped supply and prices have rose and cap rates have fallen. With continuing low supply and high demand we see this trend persisting and further downward pressure on cap rates. In our market specifically of Windsor ON, we still have a cap rate discrepancy with larger markets in Canada and we see that continuing to narrow.
  3. Retail Plazas – Stable, long life assets such as these have always had plenty of investor interest and with cap rate compression this has increased demand. Cap Rates on Retail Plazas are still significantly higher than multifamily and as such we see a narrowing of this spread as plaza prices continue to rise.
  4. Small Turn Key Office Space – Office space units of 1500-2000’ with good existing buildouts are in high demand in our market and landlord’s with these vacancies are sure to benefit. Office tenant’s seem to be doing more with less square footage these days and smaller spaces such as this are more marketable.
  5. Townhouses & Condos – With our previous discussion about the aging population, demand from downsizing baby boomer has been buoyant in the townhome & condo market. Millennial buyers have also had a preference to this segment of property. New construction of townhomes have been booming and a new wave of condo construction has begun. We see this trend continuing as demographics continue to support it.

These are the segments being shown the love in our market. Where is the love in yours?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, February 12, 2016

Property Management Q&A - Necessary? Benefits? Costs? Who Pays?

As you get ready to close on a commercial property, the question of property management needs to be addressed. Assuming you are not looking to manage the property on your own (NOT hands-on), it's time to assess the issue of hiring a property management company.

NECESSARY? - any tenanted property requires some level of active management. Obviously a single tenant would be less involved, than a multi-unit property involving multiple tenants. On a regular basis, matters arise requiring a landlord's response and you must (or someone on your behalf} attend to those issues. Management services can be tailored to suit your and the property's specific needs -- but appropriate oversight is a must.

Benefits? - the major items would include 1) financial management (collection of rent, follow-up on receivables/bill payment. ,monthly statements, operating cost budgets to name a few). Established management companies can provide better rates on insurance and property services, based on bulk purchasing power. They can also be 'on call' after midnight, based on an unforeseen emergency.

Cost? - Will vary market to market and based on property category. It will also most certainly depend on the actual services being provided, and ensure you are making 'apples to apples comparisons' when considering management firms. Typically on commercial properties, it may fall in the range of 3-5% of the property's gross income. But as with everything - 'you get what you pay for' and the cheapest management costs may not be the most appropriate for your needs.

Who Pays? - That all depends on how your lease agreements read. If you are assuming "NET LEASES", ultimately the tenant pays the cost of property management, through the additional rent provided for in the lease. In most cases, this should make the argument for professional management academic. In cases where the leases are "GROSS", any management costs will ultimately be added to the expense side of the property. As a final caveat, make sure you review the lease agreements to understand what the implications are for hiring on a property manager.

As a final note, good management companies can always provide a list of satisfied clients - get in touch with those references and confirm the quality of services being offered. Good property managers generally make for good (happy) tenants, and that generally makes for a GOOD INVESTMENT!

Tell us about your past management experiences. Just a call/click away if you are interested in discussing investment opportunities in Windsor - Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Thursday, February 11, 2016

Growing Trends for 2016 Real Estate - The Aging Baby Boomers

One of the largest and most important factors when looking at the broad real estate market is the demographics within that market.

The largest and most noteworthy demographic generation of modern times, is commonly referred to as the “Baby Boomer” generation. The Baby Boomer generation refers to people born during the demographic post–World War II baby boom approximately between the years of 1946 and 1964, giving an age range between 51 and 70 as of 2016. As a group, they were the wealthiest, most active, and most physically fit generation up to that time, and amongst the first to grow up genuinely expecting the world to improve with time.

The sheer size and wealth of this cohort has had a large impact on the real estate market over their lifetimes. They own and control a significant portion of the real estate in our markets today. As they continue to age and hit traditional retirement age, their future plans for this real estate and their future real estate needs will undeniable influence our markets.

A few of the impacts we have seen from this aging baby boomer trend and expect to see in the future include:

  1. As their children move out and they become “empty nesters”, they will seek to downsize their personal residences. This should lead to higher resale supply at some point, although the timing of this is uncertain as boomers have been staying in their homes longer than expected. This supply might come as a godsend considering the low supply the current market has seen of late. Also note that not only are they looking to downsize physically, but also importantly to downsize financially, as a large part of their net worth’s are tied up in the equity in their homes.
  2. The boomers who have downsized are seeking to not have to deal with stairs as they age, so one floor homes are attractive. This translates into larger demand for ranch/bungalow style homes. Also townhouses or semi-detached homes or condos are popular choices.
  3. These boomers are more active and have higher retirement incomes than previous retirees and as such require more amenities or available activities. Trails, parks, golf, tennis, etc are important in these neighborhoods catering to aging boomers.
  4. The demand for healthcare will increase as the proportion of the senior population increases and life expectancy continues to increase. This healthcare needs to be high quality and conveniently located and the new medical development we’ve been seeing in various markets has reflected this.
  5. As this age cohort continues to age in the future, nursing homes or assisted care facilities demand will greatly increase. Also considering the retirement income of this group, the quality of these facilities will need to reflect the choice that this group will demand.
  6. Vacation and winter properties will be in demand from these retiring boomers as they have the means to afford such recreational properties. Lake communities and snowbird locations have already seen the start of this wave of demand.
  7. Lower cost communities stand to benefit from migration from higher cost urban communities. As stated before, boomers have a large amount of home equity that needs to be unlocked for retirement incomes and a move that frees up that equity will look attractive. In our home market of Windsor ON, with some of Canada’s lowest housing prices, we’ve seen a huge pickup in demand from retirees from the GTA and other higher cost markets.

The aging of the baby boomers is a huge upcoming development in the real estate market and one that has just started to play itself out. How it does play out will have far reaching ramifications for all of us.

Have you noticed these demographic impacts starting to play out in your market?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, February 5, 2016

Financing The Purchase - "Show Me The Money"

The due diligence is now complete and it's time to make sure your financing arrangements are in place in order to close. Even though you may have had a pre-qualifying meeting at some point along the way, you need to finalize the actual mortgage terms, rate/term/amortization, and costs which will be incurred in arranging the funds.

In considering sources for financing, one size does not fit all, and especially in commercial lending. Some of the better options might include:

  • Primary Bank (established relationship and a lender who already knows you)
  • Institutional Lenders (specialists in commercial mortgages)
  • Mortgage Brokers (able to shop the mortgage market for you)
  • Private Lenders (often in restricted situations and generally costlier)
  • Seller Financing (Vendor or VTB held & either as a 1st or 2nd mortgage)
  • Assuming Existing Financing (based on an approval)

Beyond the actual mortgage terms, make sure you review the costs associated with arranging it. Such costs may include - appraisal fees, application fees, brokerage fees, and associated legal expenses. All of this should be spelled out in a written "Mortgage Commitment" letter by the lender. Best to consult with your lawyer, should you have any question(s) regarding the MC prior to signing it. Any unwillingness to advance funds on the part of the lender, will affect your ability to close the transaction.

A final word on today's mortgage market (as of February 2016). It is highly competitive and with solid investment properties (ie. good cash flow, stable leases, and a solid Buyer Covenant), you should be in a position to actively shop the market. The low interest rate environmental has help expand the number of commercial lenders looking to fund real estate - meaning more sources to select from. By improving the rates/terms, loan to value amounts etc., you only enhance the property itself as an investment.

Tell us about any commercial mortgaging experiences in your market ... and as always we are just a call/click away, if you would like to investigate investment options (OPPORTUNITIES) in Windsor-Essex.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, February 2, 2016

Growing Trends for 2016 Real Estate: Bill 55

With the red hot real estate market we’ve had in Ontario for the last several years, inventory has been low, demand has been high, and bidding wars have become a normal occurrence. In these market conditions, buyers can sometimes feel helpless and end up paying more than they otherwise would’ve in a more balanced market. This has translated into some situations where buyers have complained about competing with “phantom” offers, or when a listing agent says they have another offer(s) and doesn’t, or doesn’t have as many offers as stated.

This activity has led to the creation of Bill 55, the Stronger Protection for Ontario Consumers Act. Rumor has it, it was created by an MPP that had a bad experience buying real estate in a similar multiple offer situation. Here is what you should know about changes Bill 55 has brought about:

  • Offers must be made in writing. Please keep in mind that a written offer must be signed to be valid.
  • A registrant cannot indicate that they have an offer unless they have a written offer.
  • The seller’s brokerage must keep a record of all written offers that it receives.
  • Unsuccessful offers must now be kept for at least one year. Successful offers will continue to be kept for at least six years.
  • Consumers and registrants who placed an offer on a property may contact RECO to confirm the number of offers that were received.

So these changes were put into effect to protect buyers in multiple offers situations. In our opinion, this isn’t the best way to do this, as all the remedies for the buyer are after the fact. We’ve seen this situation addressed in offers, with a clause created by prominent Ontario Real Estate Lawyer, Mark Weisleder:

“This offer is being submitted on the basis that it is part of multiple offers. If the seller receives no other offer by 10 pm, the seller will notify the buyer or the buyer salesperson and the buyer will have 1 hour to revoke or revise their offer.
If the seller accepts the buyer offer, the seller will provide, within 24 hours, the name, address and phone number of the salesperson and brokerage company that submitted the competing offer.”

So there you have it buyers. Next time you are in a multiple offers situations you know your rights and what to expect.

Have you been in a bidding war and if so how was your experience?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620