CategoriesAdvice

Apartment Buildings – Value not immune to interest rate increase

With the governments “printing” money and the inflation creeping into all aspects of our daily lives, it was only a matter of time before the federal government increased the interest rate to curb the spending. But a lot of people were surprised at just how fast this happened.

Let’s take a fictitious example of an apartment building a broker may have evaluated at $8M six months ago.

Note the down payment requirement changed by more than half a million dollars over the last 6 months, i.e., the buyer would need to have half a million dollars more in non-borrowed funds in order to be able to close this transaction.

Why does this matter? The down payment requirement is key in successful sales. The rate of down payment used to be 20-30%, further increased last few years to 40-50%, and now an almost impossible 60%+. Sure, there are all cash buyers in the market; these buyers know “their value” and will act accordingly (buying at a discount, because they know the majority of regular buyers will not be able to produce or justify the down payment required today).

Vendors need to be aware that in a fast-shifting interest rate market, deals can fall apart at financing stage just because the down payment can increase so drastically from one month to the next. Hence, if a buyer showed proof of funds with offer in October, but had to wait for the Vendor to finalize the environmental report until this April, the same buyer may not be able to close the deal.

Ways to navigate the current market (for Vendors):

  • Hold on to the asset until a significant interest rate decrease happens, to maximize the number of buyers available and willing to purchase. Of course, nobody has a crystal ball as to when this will occur; this strategy can be an issue if the building has maximized its value and is now on the decline, or for private owners who are sellers for different reasons (dissolutions of partnerships, changing life directions, no longer being able or manage the building, etc.)
  • Be prepared with all the documents needed in the sale process, most important of which being environmental reports (which can take 6 weeks to 6+ months, depending*) – without a “clean” environmental report, the buyer will not be able to obtain financing.
  • Watch for deal-delays and know that short delays are very valuable – as long as you trust the buyer has not simply committed to short-delays to tie up the deal with the intention to come and renegotiate the timelines later (buyer reputation is key*).
  • Buyers must be willing to commit in writing (offer stage) to put more down payment than required at offer-time.
  • The value of an apartment building should always be taken as the value today; in a fast-changing world, even the “safest” real estate investment asset class is not immune; if you have an evaluation from 6 months ago, it will surely not be accurate today.
  • The marketing of a property should keep in line with the changing market dynamic. Based on the asset and timing, a bid process, an asking price process or a process of no price (just a range with its respective loan potentials) and “offers anytime” may be appropriate – but the best way to market will be best determined at listing time, not based on the broker’s record from last year*.

Baron Realty custom-tailors each marketing process, and brings the right buyers based on the asset and vendor requirements for deal timelines. We have generated 5-12 offers on each of the listings we have taken over the last 18 months. *Ask us why; we are happy to talk to you about how to best navigate the current environment to achieve your end goal.

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 Baron Realty. Reach out today!

Baron Realty - Apartment Buildings in Montreal, Toronto, Canada
CategoriesAdvice

Exiting An Apartment Building Partnership

Joint ventures have always existed, and they are making a comeback now that the market is uncertain: not taking the risk alone may be worth taking less of the profit in the long term.

The following two are the most common partnerships do we usually see in apartment building transactions and our advice on how to handle the sale process for each:

Inherited partnerships

These are joint-ventures that have been structured by the previous generation (usually family) and inherited by children (usually cousins). Delicate by nature due to family dynamics, they are most of the time ran successfully by only one or two of the second generation, while the rest of the family becomes “passive” in the partnership. These can run smoothly as long as there is trust in the family structure, and as long as all parties are in agreement about keeping the asset. Once a sale discussion takes place, it is rare that all family members would be 100% on board with selling the asset, or in agreement with the ultimate price that should be achieved. The active partner usually seeks control over the sale process as they feel more qualified to do so; the rest of the partners would either grant this control, resist or insist in being involved on some level; the last two options rendering the sale process lengthy and harder to navigate.

 

Sweat / Equity

Type partnerships; apartment buildings rarely run themselves. In this type of partnership, an experienced managing partner invests together with an equity partner. The equity partner’s share of investment is usually much larger, but they are “silent” in the day-to-day operations and management such as selecting tenants, administering rent increases, addressing building code requirements, awarding building contracts, etc. Where we see complications is when the sweat partner is tired of running the building and wants to cash in on the profits; while the silent partner does not want to sell (why would they? They are passively accumulating wealth).

The sale process can be complex even for an ultimate owner (where the owner can pull the trigger on any decisions), let alone for a partnership. Here are some elements to consider for an easier exit:

 

Inherited Partnerships

If you are the active partner, take the time to explain the day-to-day operations of managing the building, building expenses, Gross vs NOI, how assessment is different than value etc.; get more than one quote for work you need to do in order to prepare the building for sale (such as environmental testing) and discuss the best option with your family. Do this way in advance of an actual sale; family can usually “sense” when the others may want out (or may need to cash in their equity). It is generally not a good idea to offer to “buy them out” unless the family dynamics are so strong that there is no doubt of fair pricing; but this is rarely possible irrespective since the active partner almost never feels they should be paying “market price” for a building they have managed for years. It is important to for all to remember that only the then-current market “makes the price” – not the owners, nor the broker, nor the appraiser, and not even the last comparable sale.  We find that every 3-4 months, the market becomes different, the players change (larger buyers may have changed strategy in the product they buy ex: older vs newer assets; smaller players may have already tied up deals and are short on capital for the next year or so, etc). Only by exposing the asset to the then-active buyers can a fair price be achieved. Most families select a bid-date process, because this ensures they get the best offer; the sale process is longer, but we believe worth it the peace of mind of every partner.

Sweat / Equity

Create a clear exit structure up front. Avoid agreeing to the shot-gun clause, which is usually only beneficial for the partner with more cash (this is usually the silent partner). A good exit strategy is to agree in the original partnership agreement the property will be marketed at the end of a 5-year or 10-year loan and sold if a return reaches a certain minimum pre-determined threshold. As well, when structuring such arrangements, ensure that the sweat partner has the latitude to run the building the way they see fit since requiring the input from the silent partner adds stress and delays. For example, making a decision to spend on a major extermination is time-sensitive and may not be able to wait for agreement from the silent partner. A tenant board case may need the involvement of a lawyer and therefore incur legal fees for the partnership, etc. When preparing the building for sale, re-involve the silent partner in agreement on quotations; even though they may not have been involved in the past they may appreciate “knowing what’s going on” towards the end.

Always keep an exit strategy when setting up a partnership; and in the cases of inherited partnerships, a good practice could be to confirm keeping status quo every couple of years; this way, the non-active partners can feel involved in the decision to sell, whenever it may come.

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 Baron Realty. Reach out today!

 

Baron Realty - Real Estate Agents in Montreal and Toronto
CategoriesAdvice

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.

Work with Us Today. Reach Out Now!

Québec

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

info@baronrealty.ca

Fax : 514 221 2221

Ontario

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

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