Stop and think for a second – every office building, storefront or apartment building you have ever walked into is owned by an
individual or corporation. That building is what we refer to as broadly as a commercial property, with its subsets of multi-res,
industrial, mixed use, and so on.
On the surface, commercial properties are not all that difficult if you look at them from a transactional standpoint. They have
owners, they appreciate (or depreciate) in value over time, they are bought and sold. The owners may be corporations, groups,
trusts, or individuals. They usually have existing tenants, depending on the type of property, and their value can stretch from
hundreds of thousands to hundreds of millions. Most importantly, just like any other property, they still require real estate agents
and legal representation. While buying or selling a commercial property on paper is not overly complex, there is a seemingly
endless number of unforeseen challenges on every deal, regardless of its size. This is how The Doyle Team, who specializes in
commercial real estate, have set themselves apart, by not only being able to identify potential issues, but by overcoming these hurdles.
Challenges and What to Watch For
It’s no secret that commercial purchases and sales can come with their own difficulties during a transactional period. These can
vary widely in severity and frequency, but one can generally count on at least one difficulty of the below types coming up over
the course of a commercial deal.
Zoning and Bylaws
Zoning will determine what uses are allowed at an individual property. Individual property bylaws or larger official plans may
have their own effects on permitted uses of a property, as well as regulations pertaining to setbacks, allowable height, parking,
etc. It is therefore crucial that we communicate with the city during pre-listing or pre-offer periods.
Oftentimes, our clients come to us excited to list or buy a property, and through our due diligence we uncover points of value or
concern that may be critical to a successful transaction, or may discover limitations for their use of the property, which can either
reduce the viability of their property (i.e. limited to agricultural uses, no development possible) or in some cases even greatly
propel it into top dollar range (i.e. downtown location with an impressive allowable height).
Facts and Figures not Lining Up
Commercial transactions can take months or even years from offer acceptance to the completion date. Typical conditional
periods can last 30 to 120 days and closing can typically come at a minimum 60 days after such conditional period is fulfilled.
At the onset of the deal all can seem like you have it together. That lasts until you really dig into the details. This can happen a
few ways – one being a lender or buyer requesting an unusual set of information (i.e. interpretations of new or obscure bylaws as
we mention above) not part of the original due diligence package. This can cause considerable delays and disrupt the flow and
timeline of the deal. Other problems come when the numbers presented on a profit and less (P&L) statement do not match what
come out of due diligence discoveries. Such discoveries can affect the value of a purchase by thousands, if not hundreds of
thousands of dollars. To be able to quickly identify or avoid these issues, we have a full-time Data & Information Analyst on our
team to support our clients and keep the deal moving forward.
Tenants
Tenants can become a major challenge or setback. They may deny access to the property or make it difficult to do so. They can
often have too much to say during a showing or simply have the unit tied up in tribunal or other legal matters, leaving the
outcome of the tenant uncertain. This can have a more significant impact with a commercial lease space than a residential
lease. It is therefore important to know the rules when dealing with tenants. Additionally, establishing a rapport and treating them
with care and respect is always the best approach.
Inspections & Reports
Inspections and reports can add significant cost or value to a deal. Requiring engineers and other specialized professionals,
such reports can run up to thousands of dollars and take months to fully complete, as is the case with Phase 2 Environmental
Site Assessments (ESAs). Structural reports or building condition reports review all system, structures, and operating
equipment. Geotechnical reports survey what is below the land and help determine soil and groundwater conditions and how
much the earth can handle should you develop upon it. Financial audits are independent, objective evaluations of an
organization’s financial reports and their reporting process. Hazardous material surveys (hazmat report/survey) are reports
that identify all materials in a building that could be harmful if not handled properly prior to renovation or demolition of a building.
Especially in a historically industrialized city such as Hamilton, it’s important to be aware of the needs of the end user when
assessing the site. At The Doyle Team we make every effort to identify and plan for what could happen.
Money
Getting through a due diligence period can be a lengthy and expensive process and down payments on such properties can run
well into the millions. Many of the reports and studies mentioned above can run into the thousands of dollars, as outlined below*:
● Building conditions reports: $2,000 – $5,000
● Appraisals: $2,000 – $3,000
● Phase 1 ESA: $2,000 – $3,000
● Phase 2 ESA: $10,000 – $30,000
● Geotechnical Report: $2,000 – $3,000
● Planners: Project-specific (typically into the $1,000s)
● Architects: Project-specific (typically into the $1,000s)
● Hazardous material testing: $500-$1,000
● Down payment: 25-50% depending on project and cashflow
* Estimates – not meant to be used as exact prices
Many service providers can get involved in a deal, all providing many opinions and lots of information to go through. A recent
deal of ours had planners reviewing zoning, buildable height, and a road widening requirement. Architects were working to
determine how the site could be maximized to increase the buildable square footage. City staffers were engaged to discuss
variances allowable on a complicated site where a new zoning was being implemented. Various professionals would review past
environmentals and the Record of Site Condition (RSC) obtained by the seller.
While most investors and developers have significant cash reserves, we find that the initial onset of fees and due diligence
material required can put off those who are either risk-averse or are just dabbling in the commercial property market. That is not
to say commercial real estate is not for everyone, though it is not something to be taken lightly by any investor. It is not
uncommon for all upfront fees to be paid out only to find in a Phase 2 ESA that a certain contamination leaves the site rendered
unfeasible for the intended purpose and thus the deal dead on the table. This can be frustrating for us as agents as well, but
there is an amount of risk associated with every deal and we pride ourselves on having overcoming these hurdles before and
hope to guide our clients in the best direction to both avoid and overcome them.
No Difficulty Cannot be Circumvented
Over the past few years we have run into every type of by-law issue, zoning limitation, negative environmental finding, and cash
flow issue one could imagine and we have developed the tools required to overcome these with our clients. This is why The
Doyle Team is perfectly suited for your next commercial deal. Whether you are just looking, have questions, or simply want
general insights into a commercial property, we are happy to help. This is what sets us apart from the competition – we are no
stranger to commercial properties and every hurdle that comes with them, and knowing what could go wrong allows us to plan
for success.
