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ents Environmental Hurdles of Asset Management p.6 Growing by Hops and Bounds p.14 Is Now the Best Time for Business Owners to Buy and Occupy Their Commercial Real Estate? p.20 Investment Market – The Evolving Buyer p.28 When Is It Safe to Waive Conditions? p.34
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Letter from the Editor As the fall colours transform our landscape, many of us start to think of the coming year’s end; it’s the culmination of a long journey with fond memories of the months gone by. However, for us at Koble Commercial Real Estate & Brokerage, fall represents yet another beginning, one in a long line of exciting new endeavours that have taken us through 2016. It seems like yesterday we were hard at work developing our new brand and communications infrastructure, one built to better serve our clients and our community. Though that project seemed never-ending at the time, we’re thrilled with the results of this effort and the new opportunities it affords our clients. And so, true to our nature of seeking out new ways to take things to the next level, and to commemorate our first full year in business, we are celebrating with the launch of our quarterly magazine: InvestCRE. If you had asked us a year ago whether or not we would ever be in the publishing business, our answer would have probably consisted of a confused look more than a well-articulated answer— after all, what would a real estate brokerage be doing in the magazine industry? However, here we are. Through this initiative, we will bring you opinions and perspectives from some of the best and brightest minds in and around the real estate industry. Now, as we look at the reasons behind our magazine, it makes perfect sense. Let’s face it, when it comes to commercial real estate, people—for the most part—see the buildings as structures in the landscape, a place where they go to work or, at the very most, as investments that fall into a portfolio. But seldom do people see the faces behind the buildings—the investors, business owners and industry professionals who make our community a thriving and downright amazing place to live. Behind the glass and steel resides the backbone of our community: places where we work, shop, gather, eat, laugh and enjoy our lives—it’s where industry happens, influence is leveraged and our government policies are born. It’s for this reason that we decided to take on this venture— to spotlight the human elements of real estate and the people that make our industry, and our community, tick. So, with that, we sincerely hope you enjoy this inaugural issue of InvestCRE Magazine. Let the next adventure begin! Marc Morin Co-editor
Graeme Webster Co-editor
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By Ian Murdoch and Skyler Besley, Pinchin Ltd. “Deal killers,� the animated term given to your local Environmental Consultants when they uncover those historical property issues and let the skeletons out of the closet. Albeit no one wants to uncover hidden secrets on a potential acquisition, it’s important to understand asset management and site assessments from the eyes of the consultants. Whether you represent the real estate, investment or site management team, understanding the basics of asset management and Environmental Site Assessments (ESAs) could help in closing deals faster, providing better leverage and competitive bid opportunities.
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Phase I ESAs Let’s start with your friend the Phase I ESA specific to the Ottawa market. You’ve got three types of Phase I ESAs to understand: 1. The majority of the Phase I ESAs prepared in Canada are completed in general accordance with the Canadian Standards Association (CSA) document entitled “Phase I Environmental Site Assessment, CSA Standard Z768-01” dated November 2001 (reaffirmed 2012), which typically includes a review of readily available historical records, a review of readily accessible regulatory records, a Site reconnaissance, interviews, an evaluation of information and reporting. CSA Phase I ESAs are the most common, cost effective type of Phase I ESAs and are accepted by all financial institutions. 2. In Ontario, when you need to change land uses to a more sensitive use (e.g., from commercial to residential), you must file a Record of Site Condition (RSC) with the Ontario Ministry of the Environment and Climate Change (MOECC). As such, the Phase I ESA must be completed in accordance with Part VII and Schedule D of the Province of Ontario’s Environmental Protection Act R.S.O. 1990, c. E.19 and Ontario Regulation 153/04: Records of Site Condition – Part XV.1 of the Act, and last amended by Ontario Regulation 333/13 on December 13, 2013 (O. Reg. 153/04). O.Reg. 153.04 Phase I ESAs are much more in-depth than CSA Phase I ESAs and can become costly due to the filing of the RSC and the correspondence with the MOECC. 3. In Ottawa, specifically, as well as some other municipalities in Ontario, when filing for Site Plan Approval (SPA), the Phase I ESA must be completed in general accordance with O.Reg. 153.04; however, you do not have to file an RSC with the MOECC. SPA Phase I ESAs are typically twice the cost of CSA Phase I ESAs due to the different reporting structure and additional information that needs to be reviewed/summarized as part of an SPA Phase I ESA. As you can see, the purpose (e.g., financing, SPA or change of land use) plays a large role in the cost, complexity and timeline of the reporting.
Baseline Property Condition Assessments Let’s say you’ve confirmed an “all clear” from an environmental standpoint. What do you need to know about the building condition and its potential performance throughout the first and subsequent terms of the mortgage? When looking to purchase a new asset, it surprises us that some people still aren’t familiar with the term Baseline Property Condition Assessment (BPCA). Think of this as your home inspection for commercial and multi-tenant residential assets. The BPCA is a look at all of the major components of your asset, including but not limited to, roof systems, wall systems, window systems and site features such as parking and access routes. The BPCA reporting will identify minor deficiencies in the building systems, as well as those major issues that often become deal killers or bargaining chips in the transaction. At the end of your BPCA report, you should find an expenditure table, which is a fairly detailed account of the anticipated expenditures related to maintenance and life cycle replacement costs of key components of your asset. It’s not uncommon for these anticipated costs to be broken out into either cost per square foot or cost per unit, depending on the asset. Although we may be seen as biased, when we take off our consulting hats, common sense still tells us that having a Phase I ESA/BPCA report package provided as part of the “go to market” planning, or as a necessary step in the due diligence period, is a smart business move for educated buyers and sellers alike.
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Hazardous Building Materials So you’ve purchased, financed or brokered a deal on a new asset. What value-add can you offer your client or tenants to show them you have the right tools to represent them? When it comes down to regulatory responsibility during the ongoing management of a building, we have to discuss that oh-so-scary “A” word: asbestos. In the province of Ontario, there are specific regulations that outline all buildings suspected of containing asbestos-containing materials (ACMs) must be surveyed for asbestos. Just to set the record straight, we are seeing a lot of ACMs in buildings up to the late 1980s, and even some ACMs are found up until the late 1990s. If asbestos is found in your building, you must inspect it on a regular basis to confirm its condition and repair or replace said materials when they become damaged or are found to be in fair or poor condition. This is Ontario Regulation 278/05 and is often referred to in your Phase I ESA reports. Aside from this regulation, you also should have a basic understanding of Ontario Regulation 490/09 and the Occupational Health and Safety Act. This is an active regulation that identifies several designated substances (e.g., lead, asbestos, mercury, etc.) that are found in many of our buildings. The nuts and bolts of this regulation detail that prior to any planned building renovation or demolition, a survey must be completed for all designated substances to be disturbed. Any such materials must be handled appropriately during renovation or demolition activity. Both of these regulations are enforced by the Ontario Ministry of Labour (MOL), and you or your client can quickly become on the receiving end of a stop-work order for not supplying such documents when the MOL pays visit to the property. So what does this have to do with you as a Broker or an Agent, or better yet as a Lender? Let’s look at it this way: your client is looking to mortgage an asset with a purchase price of $1,200,000. You know they have a planned renovation budget of $300,000. After the deal closes and the money is in the account, your client finds out that the drywall and all mechanical insulations in the building are ACMs, and much of the building interior had been painted in 1976 with lead-based paints. All of a sudden, that contractor estimate has skyrocketed to $550,000 and your client is wondering how this happened. For this reason, we feel it’s never too early to have that initial discussion with respect to dealing with hazardous materials and designated substances prior to planned renovations. In closing, it’s important to keep the items discussed herein on the top of your mind when structuring a real estate transaction. By having even a basic understanding of the hurdles outlined above, you will be able to show your clients that they have chosen the right representation for their file.
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Growing by Hops & Bounds
Ottawa’s Craft Beer Market Brews Itself Into Canada’s Hearts by William Scott with contributions from Darryl Bilodeau, MDK Business Law Every country has its stereotypes—for many they are just caricatures based on pop culture portrayals handed down throughout the decades. For Canada, however, one steadfast stereotype exists that holds true: our love for beer. If you have ever travelled the globe, you will see the stereotype in all its glory—from the pubs in the United Kingdom, to the beaches of the Mayan Riviera, to the quaint cafe-style restaurants of Europe, in all cases you will find Canadians doing what we love to do: drinking beer. And it’s that love of beer that has woven itself into our social fabric, one that we laugh about, take pride in, and practice at almost every event in our lives. So it’s no surprise that the National Capital of Canada has embraced one of our most beloved pastimes, making it a part of our landscape—the craft brewery is literally growing by hops and bounds in the National Capital and, in turn, taking Canada by storm.
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It seems that in almost every neighbourhood now there is another brewpub serving unique flavours of beer, all brewed with ingenuity, determination, and the love of the craft. For instance, the Clocktower pub
has been a staple in the Glebe neighborhood of Ottawa for 20 years and, because of its popularity, the booming business has since opened at multiple locations across the city, including Elgin Street, New Edinburgh, the ByWard Market, and Westboro. And in every instance, the restaurant and its in-house brew have won the hearts and minds of many in those neighbourhoods.
Then, of course, there is the now-famous Beau’s Beer, located in Vankleek Hill. Opened in 2006, Beau’s boasts an all-natural brewing process run by a close-knit, family-and-friends team. According to the folks
at the brewery, they continually try to create real relationships with the people who buy their beer. As such, the brewery is open for tours seven days a week and when the Beau’s team has downtime, they
quite often hang out in the retail store or visit a local restaurant to chat with customers at the bar. It’s this personalized approach that seems to be a constant in all craft brewers’ DNA—businesses based on a combination of great beverages paired with a unique social experience.
Speaking of social experience, that is exactly what newcomer to the Ottawa Beer Baron fold, Tooth and Nail Brewing Company, is doing. Its highly unique and beautifully rustic environment is built around
the social aspects of pairing amazingly fresh beer with the “pull up a bar stool and relax” lifestyle. Matt
Tweedy, Owner and Brewmaster, Tooth and Nail, explained, “The love of craft beer is directly related to the intimacy that people have with the brewers, something that doesn’t exist with big beer companies.
In our case, those who have come to love our beer know that Tooth and Nail is more than a logo, it’s
a product that is brewed by people who love the art and who have the passion to create something amazing that people can really enjoy. It’s for this reason that we have also created an environment
where people can come to spend time with their friends, and with us—a setting without pretense where the love of great beer truly comes alive.”
Despite the personal mantra of many of these local craft brewers, it does not mean that people can’t enjoy their favourite beer in the comfort of their own living room. In fact, the distribution channels in Ontario have recently opened up for small businesses, making their reach that much further.
Up until this past year, there were three channels by which Ontario craft brewers could essentially sell
their beer, including direct sales to customers at their brewery, or to local bars and restaurants, sales
through the publicly owned LCBO, and sales through the foreign-owned Beer Store. However, in June of this year, the LCBO introduced a fourth sales channel allowing a chosen seventy Ontario grocery stores to sell Ontario craft beer and cider. The LCBO anticipates that the initiative will eventually be expanded
to allow as many as three hundred grocery stores to sell beer and cider, and will include sales through both large chains and independent grocers.
The good news for our brewers is that this latest initiative will undoubtedly continue to fuel the growth and demand for Ontario craft beer for the foreseeable future.
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toothandnailbeer.com 3 Irving Ave Ottawa ON, K1Y 1Z2 +1.613.695.4677
Is now the best time for business owners to buy and occupy their commercial real estate? by Marc Morin, Koble Commercial Real Estate & Brokerage It appears that there has never been a better time for business owners to invest in commercial real estate. It is like a perfect storm, a confluence of events that have led to unique investment opportunities in the Ottawa commercial real estate industry. Today, you can make a smart real estate investment that will help you meet your long-term investment goals, while finding the right location and space to house your growing company.
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reasons to consider buying versus leasing
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Record-low interest rates make it possible to purchase a building and pay less on your principal and monthly mortgage payments. The lower rate means you can apply more of your monthly payment to principal instead of just paying down your interest. In some instances, with the low interest rates you can purchase a building and the mortgage payments can be less than the rent you were paying.
There are a number of active alternative financing solutions for Canadian mid-market businesses, enabling business owners to obtain a higher loan-to-value: 85 percent and up to 110 percent financing in some cases, providing that all criteria are met. This enables business owners to keep their cash invested in the business where returns are likely greater than the ~4 to 5 percent interest rates.
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Most business owners do not have a pension plan. Real estate enables them to pay down the mortgage with business cash flow, leaving them with a mortgage-free property in ~20 years. Once the mortgage is paid off, there are numerous tax-efficient ways to access this equity and fund retirement.
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Why it’s a good time to buy
Ottawa, being the capital city of Canada—a government town—remains relatively insulated from the economic fluctuations of the rest of the country. Consider that over 40 percent of the Public Service of Canada is located in the National Capital Region; it is the country’s single-largest employer. The majority of people in Ottawa work for the government or sell into the government. Because of this, Ottawa’s economy remains relatively stable and predictable. Therefore, buying real estate in Ottawa should be a stable investment, as you are unlikely to see dramatic downturns caused by major industry-centric layoffs and closures. Ottawa poses a lot less risk and offers gradual increases over time when compared to other Canadian markets. Commercial property in Ottawa has become limited, with very few development sites providing additional space to build. This is most prevalent within the Greenbelt, with prices being pushed up by the basic economic principles of supply and demand. Although prices are going up, market dynamics provide a rare opportunity to buy if you can find space that suits your company’s commercial real estate needs. Downtown Ottawa has seen the highest vacancy rates in over 15 years but, despite the higher vacancy, property values remain strong. As a result, many owners who traditionally would never have considered selling are now open to the idea after having dealt with vacancy and lower cash flow over the last few years. Due to the leasing challenges and associated costs to re-lease the space, some owners are now open to considering the sale of their building. The reason we are at such a juncture in the market is due in part to low interest rates. In addition, with prices having increased enough since they initially acquired the building, owners can sell at market prices and make a profit, despite the existing vacancy. As a business owner, it makes sense to invest in a building that you can occupy and solve the vacancy issue with your own tenancy. As a result of lower interest rates, many business owners are finding they are able to purchase and occupy their own building at the same or even lower costs than when they were leasing. In both scenarios, the occupant will likely have to invest beyond the real estate in additional fit-up, finishes, equipment and fixtures. In a lease situation, you forfeit the ownership of these items as soon as they are installed. When you consider buying a larger building that will house not only your company, but also other tenants as well, the picture gets even brighter as you are diversifying your risk, and these tenants contribute to your mortgage payment every month.
What to consider when buying
Your choice of investment property should be based on the personal and professional reasons you have for buying. Whether it is purely for investment purposes, or moving your company to its own location to enhance your brand or provide employees with better, more productive space, your reasons will define what you buy, and what type of investment you want to make. First and foremost, we always recommend that our clients begin with their lending institution. This will require some work to gather historical financial statements and to review them with your accountant and bankers, ensuring that real estate investment is a viable option for your company. We always recommend beginning with your existing commercial bank if you have a good relationship. This will give you a baseline understanding of what your capabilities are and will determine the parameters for your search. Similar to buying a new house, when you invest in new‑build construction, although more expensive than an older building, there are some advantages. For example, in a new build, the Environmental Enforcement Act (EEA) ensures greater compliance with federal environmental legislation. Then there is the National Energy Code of Canada for Buildings 2015 that contains more than 90 new changes to ensure high energy efficiency in new Canadian buildings. If you buy a building with LEED certification, you can be assured that it was designed and built to achieve high performance in key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. With all the benefits that new construction can bring, it is rare to find opportunities to buy new construction within the Greenbelt. For smaller companies, there have been a number of great office condo products over the years, but they are typically on the outskirts of the city or at the edge of the Greenbelt. If location is important, your best bet may be to find an existing property with vacancy that would suit your requirements. When investing in an older property, there are multiple factors to consider and it is important to employ a robust and thorough due-diligence process, engaging the right professionals prior to waiving conditions. With any older building, there will be the possibility of deferred maintenance or neglect, the need and/or desire to bring the building up to modern codes, and to evaluate how changing environmental standards may impact your financing. If there are existing tenants, you will need to thoroughly review the leases and assess how rent is charged and how much can be recovered for building maintenance and management. Finally, you will want to engage an AACI-accredited commercial appraiser to ensure that the value you are paying is in line with current market conditions. Once you are satisfied with the physical and environmental attributes of the property, the financing process will begin.
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How much equity is required?
While commercial real estate typically requires a down payment of 35 percent of the purchase price, traditional banks will often consider loans at 70 or 75 percent loan to value for owner-occupied properties. Furthermore, both the Business Development Bank of Canada (BDC) and RoyNat Capital, under the right circumstances, will offer 85 percent—and even up to 110 percent— of financing, depending on the strength of the buyer and the cash flow of the company that is purchasing the property. While purchasing a property is certainly not the right decision for every business owner, when you have a strong stable business for the foreseeable future, then owning rather than leasing your space may be worth considering. “The main reason people buy rather than lease is that it allows them to build equity and pay down their mortgage in the building, rather than paying rent for, let’s say, 20 years,” says Brian Cave of the BDC. “At the end, they have a large nest egg built up in their building, money that would have been lost if they had continued to pay rent.” Regardless of your personal reasons for looking at real estate investment, Bruce Knight of Roynat Capital says, “There has never been a better time for business owners to invest in their own commercial real estate.”
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Given the state of the Canadian economy, low interest rates will probably continue for another two or three years.
With a lot of vacancy in downtown Ottawa properties, there has been tremendous downward pressure on rental rates, so companies are moving from cheaper C Class and B Class buildings to A Class buildings. The higher vacancy in B and C Class buildings is leading those owners to consider selling.
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Buying property that is larger than your current needs allows for long-term flexibility and scalability. Excess space can be leased to provide extra income now and enable growth in the future.
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Learn how to complete a comprehensive and well supported loan presentation package. You can think like your lender, anticipate their questions, understand their concerns, and effectively promote your property to your advantage. Set yourself up for success with Finance Your Income Property Like A Pro.
Allan Jensen www.yourpropertyloanpro.com
Investment Market – The Evolving Buyer by Graeme Webster, Koble Commercial Real Estate & Brokerage
Over the past 10 years, we have seen a transition in types of active buyers in the Ottawa commercial real estate market, most notably between $2 to $20 million. The most recent change has occurred over the past 36Â months.
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Up until 2007
It was only 10 years ago that we witnessed the subprime mortgage meltdown in the US and the ensuing financial crisis. Up until that time, we were in a seller’s market and most of the buyers in the $1 to $20 million range for commercial real estate were Real Estate Investment Trusts (REIT), institutions, developers and some professional syndicators, along with long-term real estate family investors. Deals were plentiful and competition was everywhere. It didn’t matter if properties were fully leased, or had vacancy, there was always a buyer looking to place capital. During this time frame, the market relied on projected future growth, aggressive leasing assumptions and the competing low cost of capital. Today’s fundamentals seemed to be an afterthought for most deals. In August 2007, when the subprime crisis began to affect the lending market and Ottawa’s commercial real estate market, transactions in this size range essentially came to a standstill. Lenders weren’t lending and buyers paused, assuming that the prices of real estate would plummet.
2008 to 2012
Prices didn’t plummet, but the transactions seemed to be on hold. It felt like the market had changed to a buyer’s market overnight, but values didn’t drop and sellers didn’t suffer. Although many lenders became less active, buyers were still able to finance deals from traditional lenders who had tightened up their lending criteria. During this time, there was an emergence of local professional real estate buyers and some institutional buyers with local representation. They often had in-house management and construction teams, sometimes their own leasing team. The active buyers during this period understood the fundamentals of the leasing market and the overall economy in the Ottawa area, and they were pricing any risk with respect to vacancy or any potential risk in the specific asset class, ending up with some excellent deals.
2013 to Present
Over the last 36 months, a new type of buyer has entered the market for high-quality commercial real estate with stable returns. These new buyers are people who are frustrated with their stock market returns, or are looking to diversify their portfolio. They include local private high net worth investors such as doctors, surgeons, accountants, lawyers, entrepreneurs, federal employees and local private families. Some of them are investing for the first time, while others are looking for additional commercial real estate investments.
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So what has changed for these buyers? 1. Lending Everyone knows that we are in an all-time low interest rate environment with today’s Government of Canada 5-year bond yield: 0.66%, compared with 4.572% 9 years ago. With the access to inexpensive debt, banks aggressively lending on longer amortizations, and higher loan-to-value ratios, the private investor has been enticed into the market. These private individuals also look at lending differently. For example, physicians with professional holding companies have been able to leverage their holding company funds as security.
2. Asset Class Private investors are investing in what they understand, not in speculative opportunities. Many possibilities exist for investors to purchase value-add opportunities or assets in poor-performing sectors with risk-adjusted discounted prices, but that is not what these investors want. We see our clients looking at well-located retail plazas, multi-tenanted showrooms and industrial warehouses with smaller leasable areas and good ceiling heights. It’s all about leasing fundamentals and reducing risk. The buyers want to know that there will always be demand for their properties, regardless of what is happening in the economy. Interest rates will inevitably increase and when these new buyers renew their mortgages in 5 years, they don’t want to be renewing with vacancy. Retail has been one of the most stable assets sold in the Ottawa region, with 10 years of consecutive growth in the number of transactions, with the exception of 2014. All other asset classes have had major drops.
3. Metrics Because of the low interest rates and demand on well-located quality assets, capitalization or cap rates (the ratio of net operating income (NOI) to property asset value) have been compressed. We don’t often have conversations with clients about cap rates, as these represent the return on an all-cash purchase—it’s more of an industry measuring stick than a valuable assessment tool. Because of the aggressive lending, the focus is on the opportunity cost of the investor’s savings. If the client is looking at commercial real estate, they are usually more interested in annual cash-oncash returns and liquidity. • •
Cash-on-cash – Cash flow after debt service / initial investment Liquidity – New buyers to commercial real estate want to know that if they need to exit for whatever reason, they won’t lose their money
Cap rates aren’t the focus, but they remain an important metric with appraisers and lenders to make sure that the buyer isn’t priced out of the market.
4. The Process If you are surfing the Internet and browsing MLS or other commercial brokerage websites, you are likely not going to find what you are looking for. If you do, you will be waiting a long time and will probably be competing with a number of other investors, as anything that is reasonably priced sells almost immediately. Today’s buyer is proactive, and they know what they want. When we first meet with investors, we go through a thorough review of their goals and objectives. We then design a customized plan to target buildings that will meet their criteria and help them attain their goals. Usually, these buildings aren’t for sale, so often we submit offers on multiple buildings before finding a willing seller. The “off-market” deal’s biggest advantage is absolutely no pressure. Our client isn’t competing as the property is not “officially” for sale. They have selected the asset because they are comfortable with the tenant profiles, overall condition, asset type and, most importantly, location. No compromises! We can often negotiate a price where the client gets all of the above and keeps the bank and its appraisers happy.
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Are there still opportunities for all buyers? For active buyers who have spent the past 10 years investing in the commercial real estate market, many value-add properties are still available—and most of these are still found “off market.� For owners who are suffering from vacancy, upcoming capital costs and other concerns, it could mean an opportunity for local professional buyers who are willing to roll up their sleeves and put sweat equity into the project. For many of the previously active investors, a $2 to $4 million deal is too small. Their businesses have scaled up and they now have the resources and the platform to focus on the $10 to $15 million properties and up, out of the reach of most private investors and just below where the institutional investors begin to play. There is room in the market for all types of buyers and, more importantly, many opportunities exist. You just need to have the right team in place and be ready to jump when the opportunity arises.
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WITH THE RIGHT FINANCIAL PARTNER, ANYTHING IS POSSIBLE.
We provide innovative financial solutions as unique as your business needs. Bruce Knight District Director 613.236.7896 Knightb@roynat.com roynat.com
® Registered trademarks of The Bank of Nova Scotia.
When is it safe to waive conditions? By Eli M. Udell Real Estate Lawyer, Merovitz Potechin LLP
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A key element of negotiating and finalizing a commercial Agreement of Purchase and Sale is determining necessary conditions and, by extension, a deadline for the waiver or fulfillment of those conditions. Conditions in an Agreement may be drafted in favour of the Buyer, the Seller, or both parties, and may range from broad strokes, such as due diligence, to narrow issues, such as the repair of a deficiency identified during inspection. Regardless of the conditions included, a deadline is typically established in the Agreement to determine the date on which each party must decide whether to waive conditions or terminate the deal. As legal counsel to real estate prospectors, investors and owners, I am often asked to highlight issues that must be considered during negotiations and during the conditional period itself. Common threads have emerged, especially in the context of Buyers and Sellers. The following is a list of recommendations from both perspectives. If you are interested in purchasing commercial property, and you have future plans for the property beyond the existing structure or layout, consider consulting with a licensed planner before submitting an offer. A planner will review the existing property footprint with you, and will also report to you on zoning. This will help you determine if the Agreement will need to be conditional on the pre-approval of plans, on obtaining a building permit, or on confirmation of re-zoning or other planning issues. After you have decided to submit an offer to purchase, it is helpful to include a general due diligence condition in your favour. Ensure that the condition deadline will give you more than enough time to complete your due diligence, so that a future request for an extension is unlikely. Extension requests degrade leverage. Also, consider scheduling the title search deadline in the Agreement on the same date as the conditions deadline, so that your lawyer may submit his or her title requests while the deal is still conditional, thereby maintaining your leverage. During the conditional period, consult with trusted experts such as an environmental engineer—it is always more cost-effective to spend a bit more during the conditional period in order to save a bundle after waiver or closing.
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Finally, it is critically important for the Agreement to state that if you do not notify the Seller that conditions are waived or fulfilled, the Agreement is terminated. In some cases, an Agreement will state that silence equals acceptance. In that case, if written notice is not delivered, the transaction automatically goes firm. Therefore, it is essential to recognize this risk and to ensure this language is correct in the Agreement. If you are selling a commercial property and taking it to market, consider retaining a licensed and experienced inspector to pre-check and pre-clear the property before entertaining offers. This will permit you the indulgence of time to repair and/or resolve minor issues (cosmetic or otherwise) before prospective purchasers tour the property, propose a conditional period and, potentially, order an inspection. When negotiating the terms of the Agreement itself, we recommend that our seller clients limit the number of conditional periods which, by extension, limits confusion and the number of potential extension requests. Even if the Buyer has multiple conditions in his or her favour, such as financing and due diligence (including a building inspection and environmental review), a single deadline for the waiver or fulfillment of conditions is strongly recommended. Finally, when finalizing terms of the Agreement, consult with your legal counsel to ensure that the “representations and warranties� you are making about the property are limited to only those items that are absolutely necessary. If the Buyer has negotiated a conditional period that includes a period for due diligence, he or she should be able to obtain their own level of comfort about the property without extra guarantees and/or warranties from you as the Seller. Ultimately, the objective is to limit the parties’ exposure after closing. To that end, it is important to take a hard look at the terms of the contract during negotiations in order to remove any unnecessary language. Conditional periods are essential to the strength and survival of commercial Agreements of Purchase and Sale. A measure of trust between the Buyer and the Seller is vital. By extension, negotiating appropriate terms in the Agreement to identify what is important to each party and to limit possible extension requests is extremely important. While these negotiations may take a bit more time and effort than expected, the resulting terms will identify issues that must be considered during the conditional period, and will reduce the number of surprises from conditions to closing.
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