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.

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Baron Realty - Brokers in Canada, Ontario, Quebec, Toronto, Montreal

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 outlies?

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

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!


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


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

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