Baron Realty - Real Estate Agents in Montreal and Toronto

All-Cash Offers: Here’s What You Need to Know

Have you ever had an all-cash offer for your building, and did it make you wonder if the price offered equated to a discount on the asset’s market value, or if it was simply a fair price with few conditions?

Why would a Buyer commit itself to an offer with no-financing? Unless the Buyer is a trusted institution whose financing is not in question, the motivation to submit an all-cash offer has to do with securing the asset from competing interests, and/or solidifying the Buyer’s credibility to close the transaction.

However, sometimes the all-cash offer is simply used as a negotiating tactic by entities who have no control over the funds, or who simply try to raise the money after they put the property under contract.

How do you protect yourself from accepting an all-cash offer that is not really “all-cash”? Is it better to take an all-cash offer with a quick closing, or an offer with a financing condition (provided there is proof of sufficient down payment)?

A few elements to consider:

Know the Buyer

Ask yourself, who is the Buyer? Is the buyer a REIT or a reputable institution that has closed on thousands of units in the last few years? If so, there is less reason to be cautious.

Ask for proof of funds

Is the money available in cash (liquid) or is it in assets that need to be (re)financed? If the latter, there is no real guarantee nor secure timeline; even if the asset is financeable, the owner may not like the rate they get; or worse, there may not be enough equity in the existing asset to pull out. We once had a buyer assert that a $30M asset of theirs would serve as collateral for their potential acquisition loan. We did out due diligence though and noted it was carrying $28M in debt – leaving no room for additional leverage.

Question the motives of your all-cash offer

If this a competitive bid environment and this is your only all-cash offer, be particularly careful. Some buyers intentionally lock up a property to eliminate the other buyers, then come back and ask for renegotiations, or VTBs, or (most commonly) price reductions weeks later when the other buyers have cooled off and the vendor it too caught up in closing the deal.

Question the buyer’s track record, and their acquisition team

The market has changed substantially in the last few years. If the Buyer has a large portfolio, but has not transacted in the last 2-3 years, it is unlikely that they will be as familiar with the timelines, requirements and transparency of the current market. New standards such as environmental tests or structural inspections may scare them off weeks or months after an accepted offer.

Find out about the buyer’s conditions and delays

More importantly, all cash offers (if the cash is truly available), should include a substantial deposit delivered within 5 business days. Otherwise, question the availability of cash. If an all-cash offer misses putting the stated deposit within the timeframe provided, you can be certain that there will be additional delays. Long closing delays signal the need to raise funds.

Find out if the buyer is raising money

Is this a real all-cash offer, or will the buyer, upon acceptance, begin to pray that he can raise the capital in time? A long-closing date will be the first signal of this (which is of course, just the normal timeframe for business for a reputable but bureaucratic institution, but not so for private funds that should be immediately ready to deploy their capital).

In today’s market, financing, environmental, and inspection periods are taking increasingly long. The temptation to take the “simple” offer – the all-cash-minimal-conditions deal can be great. It’s clear through that caution needs to be advised to steer the boat past the Siren Song, and towards a successful transaction.

Baron Realty specializes in matching buyers and sellers of apartment buildings. Ramona works in partnership with Mikael Kurkdjian and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec.

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Baron Realty - Brokers in Montreal and Toronto - Commercial and multi-familial

How to Avoid Killing your Net Operating Income: Apartment Buildings

The NOI (or net Operating income) is what the buyers use to determine the maximum price they would pay for an apartment building. The higher the NOI, the higher the price, as per formula (GROSS INCOME (rent and ancillary) – ALL EXPENSES = NET OPERATING INCOME). It is basically the cash in the owner’s pocket at the end of the day. NOI is “normalized” by buyers, especially the sophisticated ones, therefore private-ownership savings may not be applicable to boost NOI (i.e. an owner who takes care of its own janitorial will not have that expense removed from the calculation of NOI by any purchaser, rather this expense will be included at market rates or, at the buyers’ standard operating expense rate in the case of sophisticated buyers).

In today’s market, what are some of the expenses that could seriously hurt NOI?

Building Insurance

We have seen this go up quite a bit in the last year or so, mostly because of the replacement cost which is part of any standard insurance (should building need to be reconstructed, and founded in the reality that construction costs have risen substantially over the last 5 years). Shopping around ahead of your policy renewal is key. Here are some numbers for perspective: A client of ours was able to reduce the insurance bill from $18K to approximately $10K per annum ahead of renewal, by switching insurance companies. Total value-add: $160,000 increase in asset value! There are still insurance companies out there that will surprise with a much lower rate, and when it comes to selling or refinancing, a few thousand dollars in expenses will make a huge difference in returns/loan available.

Ancillary revenue miss

Many times an owner does not maximize the potential for additional revenues such as parking, storage, and others. We had a client who did not have parking agreements with the tenants and was charging the same amount for indoor as for outdoor parking, losing $30/spot per month in potential revenue. Based on our calculation for the NOI impact, this translated as an approximate $600,000 in building value! This was great news for the buyer, but what’s surprising is that the ownership group did not even realize the impact was going to be “significant” on what they considered a minor variance.

Retail revenue miss or not actualized

Having a retail component in an apartment building completely changes the underwriting of the asset. Key differentiator is the inability to obtain a CMHC insured loan; however, even leaving this aspect aside, not actualizing retail revenue can render the building unsellable (or sellable only at a significant discount). Even if you have “enough” revenue from the apartments, do not keep the retail empty if you are planning to sell or refinance in the next 12 months.

High expenses from old equipment

You may be on the fence regarding spending thousands of dollars on a new furnace, but how much asset-value are you losing by keeping your existing one? As the energy costs seem to approach infinity, your NOI will reflect heat loss from an inefficient furnace, old windows, and improper roof. A hard winter will have a significant impact for the asset value the following year as buyers typically review expenses for the last 6-12 months in their underwriting.

A market underwriting of your building can help identify missed revenue sources and other NOI killers.

Before Accepting an Offer

  • Ask about the buyer’s track record of closing transactions
  • Request to see Proof of Funds for down-payment (assume 30-40% of price)
  • Re-evaluate conditions and delays
  • Find out if the buyer has to raise money to make the deal happen
  • Clarify if the buyer can renege on the deal without consequence to them after your selling power was “on hold” during their conditional period
  • Know that if your offer falls-thru this will raise a question mark in the mind of other buyers and potentially impact the sell-ability of the asset.

We only work with proven buyers, who generally can put forward offers that are not conditional on financing.

Baron Realty specializes in matching buyers and sellers of apartment buildings. Ramona works in partnership with Mikael Kurkdjian and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec.

Work With Our Team of Experienced Brokers. Contact Us Now!


Baron Realty - Prime Chartered Brokers in Canada

Increase Your Net Operating Income: Apartment Buildings

Having traded apartment buildings for over a decade, we’re still surprised at how many investors misunderstand the concept of NOI and its impact on the sale or refinancing of an asset.

What does NOI mean?

An abbreviation for Net Operating Income, NOI is the Gross Income from an apartment building (including rent, parking revenue, laundry revenue, etc) minus the expenses required to run the building.

Why does a seller care about the NOI? Because, in a sale, the purchase price is going to be compared to the NOI, and a Cap Rate determined. If the ratio between income and price is substantially poorer than is being seen in other comparable transactions, the buyer may not accept the price being demanded.

Cap Rate = NOI / Purchase Price

It follows that the higher the NOI, the higher the potential Purchase Price.

Why does a buyer care about the NOI? Because the higher the NOI, the higher the loan available for the property, and hence the lower the down payment the buyer must contribute to the purchase.

We see a lot of investors and owners focusing on the “wrong” way to increase the NOI. The big caveat in calculating an asset’s NOI are: the words “required expenses”. Some owners erroneously believe that cutting expenses by either reducing the building’s services or by performing the services themselves, will automatically count toward improving the NOI. While that is true for their own bottom line profit, it is not true in a sale or refinancing scenario. The buyer (and especially the lender), normalize expenses. This means, they use industry standard expenses in their underwriting.

We know an owner of a 100+ unit portfolio who, on snowy days, would flag down a passing snow plow and offer the driver cash to quickly plow around his buildings. His expenses excluded what would otherwise be a $12,000 per annum snow plowing contract; however, this doesn’t mean the buyer, or the lender, would also leave this expense off their pro forma.

While seeing the NOI’s relationship with revenue and expenses may be easy, we encounter many owners who mis-allocate capital before a sale. How so?

Capital improvements should be performed with a strategy in mind

For example, take an apartment building where a new roof will cost $120,000. If the building owners were planning on holding the building to sell it in 10 years (or more), this $120,000 could be amortized over the lifespan of the roof but simply maintain, not improve, the value of the asset.

However, if the building owners were planning to sell within a year or two, that same capital should be deployed in some other way to improve the building’s NOI.

For example, if the building had an aging furnace, installing a new fuel-efficient heat plant could have a tremendous impact on NOI, and hence asset value. A $60,000 furnace could save 20% of a $45,000 annual gas bill ($9,000). If the sale occurs at a 5% cap rate, that $9,000 improvement to NOI results in a potential $180,000 increase in value ($180,000 = $9,000 / 5%).

Another way of spending the $120,000 could have been to renovate the kitchen and bathrooms in say 5 apartments. If the average unit now rents at $200 more per month, some $240,000 in building value may have been realized ($240,000 = $200 x 5 x 12 (months) / 5%).

Owners who are positioning their asset for sale should not assume that all savings on operating expenses in their buildings will necessarily equal an increase in NOI and therefore building value. Instead, the best strategy is to allocate capital such that it influences either reducing expenses permanently, or increasing revenues.

Note: the cap rate used in this article is for example and simplicity purposes. The cap rates vary across the country based on location, asset type/size and several other factors.

Baron Realty specializes in matching buyers and sellers of apartment buildings in Ontario and Quebec.

Work with our team. Contact Us Today!


Baron Realty / Immobilier Baron
400 – 6500 Transcanadienne
Pointe-Claire, Québec H9R 0A5
Telephone: 514 932 9000

Fax : 514 221 2221


Baron Realty, Brokerage
303-225 Duncan Mill Road
Toronto, Ontario M3B 3K9
Telephone: 416 301 3931

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