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

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 - Brokers in Canada, Ontario, Quebec, Toronto, Montreal
CategoriesAdvice

Flushing the Highest Priced Offer: Apartment Buildings

During these uncertain times, as we are approaching the end of 2020, apartment buildings for sale in Ontario and Quebec are still few and far in between; in fact, apartments have become the most coveted asset class, because people can’t (yet!) live online.

The Bid Process

We have been successful in a few dispositions this year, and almost all of them involved a “bid process”. During a bid process, an asset is presented to the market, and a future date is set for reviewing offers. The “market” can be the market at large, or, the brokerage database of proven buyers, or, the most logical buyers for the asset – all dependent on what the building, and the vendor’s comfort level of exposure (owners of apartment buildings are often notoriously discreet). The offers can come on a template requested by the vendor (certain conditions), however, vendors must understand a buyer can still submit an offer, and the broker, under the listing agreement, is obligated to present it to ownership group, irrespective of its price and conditions. Of course, most buyers are serious about acquiring the building and will follow the instructions laid out, but some do not. Vendors are always free to reject or ignore any, or all, received offers.

Baron Realty’s Bid Process

Our bid date process involves analysis of current and potential NOI, analysis of rental upside and demographic trends for the area – all facts of the ultimate sale price, as well as projected building refinancing for the ultimate buyer. A tour of a few apartments and common areas is also agreed to by most vendors for proven buyers that have downpayment proof and/or an indisputable track record. The potential buyers often receive verbal price guidance (as per Vendor’s instructions). When offers come in, they are generally close together in price, giving the vendor the opportunity to have confirmed the market, as well as counter the offer that has the most favourable conditions. We generally present 5-10 offers during a bid process.

What if there are outliers?

Those one, or two offers that stand way above the rest in terms of price? Caution and deeper analysis are required. Sometimes the non-serious buyers are easy to identify: it’s the buyer that calls and says “I don’t have the time to see the building, put in the vendor’s price expectations, 3 months to finance, and 3 more months to close”. This is a buyer who is looking to tie up the building and raise the funds later, and/or renegotiate the price after a building tour/inspection (after all the other offers have gone away).

Things to Consider

Some other times though, it is the more subtle than that. Here are a few elements that you should consider in reviewing an outlier:

  • A long closing date – this should always be a red flag as to the funds that are available and the intention of the buyer to renegotiate the price in the future. Time is always against deals and the longer it takes for a transaction to close, the less likely it is to close.
  • No financing condition, yet the buyer refuses to agree to provide proof of funds – the gap between financing and purchase price has widened so much over the last 2 years or so, that the downpayment requirements have gone from approximately 30-35% to 50%+. This means, that for a $6M purchase price, the buyer would have to show a bank account balance of $3M.
  • A condition to visit ALL apartments aside from the inspection – there is no reason for a buyer, after doing an initial tour of 2-3 apartments, to request this as an additional inspection to the inspection clause. This probably means the buyer is looking for defects that he can point out in order to renegotiate the price, even before his certified inspector has been mandated.
  • No “time is of the essence” clause – legally, in offers without this condition, acting outside the specified delays has been sometimes proven acceptable in court. This is why, “time is of the essence” for delivery of deposit, or proof of funds becomes key to be able to move on to the next offer should the accepted one not work out.
  • Buyer’s refusal to provide a deposit – we have heard an “you know who I am, so I’m not providing a deposit” once on this one. The Vendor decided to accept this argument despite our advice. The buyer was ultimately unable to come up with financing as all of his many buildings were maxed out.

Be Aware

Be cautious of buyers who stand above the rest if you have done a proper bid process. The market decides the price based on many complex factors, not just NOI and location, but buyer confidence, banks willingness to finance, available cash, even current politics. If you have a current direct deal, look at it from more than just a legal perspective, to determine the true intention for closing. Generally, when a vendor “cleans up the offer” with proper conditions and delays in a counter-offer, the outlier simply “goes away”.

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. Contact Baron Realty Today!
Baron Realty - Commercial and Multi-Family brokers in Toronto, Montreal, Quebec, Ontario, Canada
CategoriesAdvice

The Real Cost of a Direct Deal: Everything You Need to Know

Direct Deal VS Targeted-Buyer Approach

Why would a seller ever decide on a direct deal vs a third-party (broker) targeted-buyer approach? Sometimes it’s a matter of privacy (however, MLS is no longer required to obtain the top-price for such transactions), sometimes it’s a matter of ennui and complacence (sell to the first or last buyer who approaches you with a paper on hand), and finally, many sellers believe they are “saving” the brokerage fee.

However, if any of these three are the reason, think again. The market has changed dramatically in the last 2 years and not exposing an apartment asset to the right buyers could mean million-dollar losses to private sellers. Let’s take a closer look at an example of significant loss based on a real deal:

An owner we know sold a building about 5 years ago to a private buyer for approximately $6M. The family owned one other similar, slightly smaller, building that at the time they decided to hold off on selling. Time came to sell a few months ago, and although we chatted several times, we were finally told they are “selling direct”. The deal details came through after the closing – they had sold the building to the same buyer who purchased their first asset 5 years ago, for a price of….ready? About $6M. This is an outrageous discount based on current market conditions, and, of course, the initial buyer was more than ready to capitalize on it: we calculated an approximate market discount of $2M. But, alas, no brokerage commission payable. Sometimes the saving on the costs of a sale is not worth it based on a shifting market; unfortunately, apartment building owners, especially those who have held the assets for many years, are not in tune with the quarterly shifts that occur now in terms of price per unit, best buyers for certain areas, and new buyers entering certain markets aggressively.

Why Choose a Brokerage Team?

The only respectable reason for concern of the three listed at the start of this article is privacy. You must know though, that in order to get a successful sale in this market, you need not put your building on MLS or even advertise it on a public website or the brokerage web site. The best way is to choose a well known and respected brokerage team with a track record in apartment building sales and have them prepare relevant marketing material for a proven (closed) database of buyers. The second best way to obtain top price is to have the same brokerage team show it to the top 2-3 buyers and have one or more of them bring an offer. Finally, the third option would be to have the brokerage bring just one buyer- however be absolutely sure the broker can bring the top buyer for your given asset. Remember, the “last” buyer in the area or the “top priced” buyer from a year ago, may not be the best buyer now, or for this specific asset.

Before Hiring a Broker

Here is what you should be comfortable with before hiring a listing broker:

  • MLS – not required for apartment building sales if listing with a top brokerage who has a proven database of closers. Ask to see a demo of this database.
  • Comparables – you should see all legally registered trades for the area in the last year, not just the MLS ones – if your broker only brings the MLS ones, they do not have a proper database of information. The larger deals never make it to the MLS system, and therefore the top price per door buyers will not be included in the data.
  • Downpayment requirements – your broker should be able to show you exact calculations of the downpayment required (cash the buyer must have available in order to receive a loan) based on several amortization scenarios and a cap rate range that is pertinent to the market.
  • Environmental – most assets these days come as “contaminated” based on new environmental thresholds. Contaminated properties do not get insured loans and therefore at least half the buyers will be eliminated based on the property not being “clean”. Your broker should provide a game-plan and be familiar with the costs and delays of having environmental reports ready.
  • Track-record – most brokers will be ignored by institutional buyers. Why? A corporate buyer would invest a significant time and staff effort to analyze each deal, and, if in the end this does not lead to a close, the fund performance is affected. If you have a property that may qualify for an institutional purchase, use a team that has a track record of closing deals with such buyers.
  • Last test – finally, once the broker presents you with the price data, ask them to list for a price significantly larger (20%+). If they agree to “see what happens”, do not hire them. A good brokerage team will only be taken seriously by the relevant buyer market if they bring forward assets that are priced according to what the top buyers can put forward on paper today. This requires a lot of recent and diverse selling experience.

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 Experienced Brokers. Reach Out Today!

Québec

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

Ontario

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

about us

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam 

Newsletter

Get latest news & update