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VOL. 32 NO. 3 • JULY/AUGUST 2017

SPACE FOR SUCCESS

PA R T O F T H E

Linking Building Performance to Occupant Output P A R T

O F

T H E

DECONSTRUCTING THE ENCLOSED MALL SHOPPING EXPERIENCE STRATEGIES IFRS READINESS ORGANIZATIONAL PRODUCTIVITY FACTORS BOMEX 2017

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VOL. 32 NO. 3

JULY/AUGUST 2017

Editor-in-Chief Barbara Carss barbc@mediaedge.ca Publisher Sean Foley seanf@mediaedge.ca Publisher, Greater Stephanie Philbin Toronto Area & Beyond stephaniep@mediaedge.ca Editor, Greater Michelle Ervin Toronto Area & Beyond michellee@mediaedge.ca Contributing Writers Rebecca Melnyk, Jenna Morley, Sean Moynihan, Task Force on Climaterelated Financial Disclosures Senior Designer Annette Carlucci Wong annettec@mediaedge.ca Web Designer Rick Evangelista rickr@mediaedge.ca Production Manager Maria Siassina marias@mediaedge.ca National Sales Sean Foley seanf@mediaedge.ca

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editor’snote IN A DIFFERENT consumer age, liquor stores kept all merchandise out of sight so that the general public would not be scandalized. This no doubt presented an obstacle to building brand awareness and is a good example of how the term "plain brown wrapper" got entrenched in our lexicon. In other aspects of the era's shopping experience, restless customers could smoke (as an alterative to checking their phones) while waiting in the queue to submit their request forms to the counter clerks.

These retailing relics were simply the stuff of my parents' reminiscences — or really just my father's since few women would have ventured into such establishments — by the time I reached the 'age of majority' so it felt like an anthropological discovery to find one in my midtown neighbourhood when I moved to Toronto in the late 1980s. As an oddity — and when the lineup was short — it was a draw for anyone with an interest in urbanism. In lieu of offering a vintages section, it was, itself, a vestige of the city's dour past.

Much has changed in the three decades since. The store converted to a self-serve format before the '90s arrived and will perhaps be adding a cannabis section before 2020, while the world outside its doors has undergone an even more dramatic economic, geopolitical and technological transformation.

Real estate is one of the least fluid elements in all this. New pieces regularly arrive in the skyline and streetscape, but the big ones are rarely removed. As part of our tagteam look at evolving retail, Rebecca Melnyk focuses on enclosed shopping centres in small and midsized cities, where "anchor" can be as much a description of the mall's role in the local social fabric as a word to define the largest tenant. She also reports industry insiders' thoughts on repositioning aging assets and the possible upside of the Sears Canada closures.

A few thousand kilometres to the west of my old neighbourhood, British Columbia now leads the country in liberalizing its liquor laws. Not only are shoppers allowed to see it, they could be sipping it while appraising almost any kind of product. We examine some of the potential opportunities and concerns for retail landlords.

Jenna Morley provides a fitting companion piece with her primer on due diligence for lease agreements. Sean Moynihan likewise delivers a timely and comprehensive overview of the International Financial Reporting Standards for leasing, as the deadline for adoption draws nearer.

Barbara Carss barbc@mediaedge.ca @BarbaraCarss

contents

6 Quantifying Productivity Impacts: Researchers derive a scale and draw applicable data from 500 peer-reviewed academic studies.

8 Mall Makeovers: Investors tap into aging assets with redevelopment potential.

11 Licensed Retail: British Columbia opens the way for in-store beverages.

14 Climate Risk Disclosure: G20 nations want guidance for better informed investment, lending and insurance underwriting.

17 Countdown to IFRS: New standards for lease accounting will have balance sheet and P&L consequences.

22 Due Diligence for Lease Agreements: Parties should confirm named tenants and landlords exist in law.

26 Career Growth Through Association: CREW Network holds leadership summit in Toronto 30 BOMEX 2017: Focus on building excellence set for Toronto.

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PERFORMANCE

ENHANCING STRATEGIES

Researchers Tackle the Challenge of Quantifying Productivity Impacts of Buildings TWO TRUISMS OF modern office environments bear up differently to critical scrutiny. A recent comprehensive review and synthesis of existing research from the around the world bolsters the supposition that building technologies and enhanced operational practices can have a positive impact on occupants' performance and well-being, but raises some questions about the purported benefits of open office plans.

These findings are in a new report from the Continental Automated Buildings Association (CABA) and the National Research Council (NRC) Canada, which sets out an analytical framework for assessing the influence of building technologies and operations on organizational productivity metrics compared to other employee-focused corporate strategies. Building automation systems (BAS) and whole-building green strategies — defined as better buildings approaches — are measured against office design/ format, workplace health programs, bonuses and flexible work options, although not necessarily in search of a hierarchical ranking.

"By comparing better buildings approaches to other corporate programs, which may have known costs and expected outcomes in a particular organization, the decision-maker is empowered to choose (or not) a better building approach relative to another approach," the introduction to Improving Organizational Productivity with Building Automation Systems states.

The report, which was released in late May, is a first step in a planned three-part project to quantify links between buildings' technical performance and organizational productivity in order to identify and demonstrate how building systems and operational practices can enhance the workplace.

6 Canadian Property Management | Part of the REMI Network

ENABLING COMPARISON NRC analysts chose seven key performance indicators (KPIs) that collectively are important gauges of organizational productivity: absenteeism; employee turnover intent; self-assessed performance; job satisfaction; health/physical symptoms; overall physical wellbeing; and complaints to the facilities manager. They then drew applicable data from 500 peer-reviewed academic studies that measure some aspect of how organizations function within their workspaces, as well as abstracts summarizing similar research efforts.

The KPIs were assigned units of measurement that could be expressed on a standardized scale — for example, days-per-workerper-year to reflect impacts on absenteeism — and values for each KPI were plotted in a matrix that allows observers to see and compare how the five productivity strategies flow through to outcomes. This illustrates the degree to which each of the strategies reduces absenteeism, negative health/physical symptoms and workers' inclination to seek other employment, while improving job satisfaction, overall physical well-being and building occupants' own assessments of their job performance. (Analysts were unable to find adequate data to derive a value for the seventh proposed metric: complaints to the facilities manager.)

The new framework provides measurable values for qualities that the report acknowledges have been "notoriously difficult to quantify convincingly" in the past, offering prospective investors a more complete package of information for their payback calculations. The framework also gives budgeters a means to evaluate outcomes against input costs, and assess expenditures on all five strategies in relation to their broader range of returns.

"Our results are consistent in showing that, in general, better buildings approaches offer benefits across multiple metrics that are comparable to the benefits from other corporate programs," the report states. "Whereas most of the other corporate strategies we studied have ongoing costs to the organization, most of the better buildings improvements would also lower building energy use and some (e.g. lighting controls that reduce lamp on-time; BAS systems that include default detection and diagnostics) will reduce maintenance costs as well. Organizations that seek to improve their overall productivity would do well to consider these results in making strategic choices."

COROLLARY RESEARCH AVENUES The comparison to other corporate strategies uncovered occupants' general antipathy to the open office format. Private offices surpassed or ranked alongside better buildings approaches and workplace health programs in every productivity metric, even while they diminish in number.

"The justification for this transition [away from private offices] has typically been the expectation that it will bring increased flexibility, transparency and enhanced communication between team members, although the underlying economic driver has been real estate cost savings," the report states. "It is a strategy that is very familiar to this report's audience, and thus serves as an excellent touchstone against which to compare other strategies."

The exhaustive look at existing research also highlights where more work needs to be done. Notably, analysts had to abandon one of their envisioned productivity metrics — complaints to the

facilities manager — because they were unable to find data that they contend should be abundant.

"This is surprising because the data are routinely collected and archived in electronic format in most large organizations, and it seems like such an obvious outcome for building researchers to pursue, with their historic focus on occupant comfort," the report's authors observe. "This is also an area in which a business case could be made in a relatively straightforward manner. Even excluding the potentially large benefits that lowering occupant discomfort might have for a range of organizational productivity metrics, responding to a complaint has direct tangible costs too, with both fixed and variable components."

In future, they foresee that the Internet of Things will provide tools for measuring existing and emerging metrics. At the same time, researchers are grappling with how to measure concepts such as employee engagement, creativity, the battle for talent, internal communication effectiveness and presenteeism, and how to do this comparatively across multiple workplaces or with findings from multiple studies. In all this, they stress the importance of a common scale for key metrics and longitudinal data for assessing the connection between strategies and outcomes, and the persistence of effects.

CABA is currently recruiting interested organizations to participate in the next phase of the project, slated to begin later this year. zz For more information about Improving Organizational Productivity with Building Automation Systems see the Continental Automated Buildings Association website at www.caba.org. www.REMInetwork.com | July/August 2017 7

redevelopment retrofitredevelopments

BAGGING A

NEW CLIENTELE Investors See Open-and-Shut Case for Mall Redevelopment

By Rebecca Melnyk

PLAZA RETAIL REIT strategists saw promise in an aging asset when they purchased the Mountainview Mall in 2015.

The enclosed shopping centre in Midland, Ontario — a town of 16,000+ and a popular vacation destination in the Georgian Bay region — was not unlike many declining malls across Canada, with only a handful of stores still open and few patrons walking through the murky hallway leading to the vacant space that once housed a giant Zellers.

For its first redevelopment venture in Ontario, the New Brunswick based retail owner and developer had plans to reduce the mall's footprint and transform it into a mixed-use strip plaza. To date, about $9 million has been invested in a refocus to prime areas along the mall's frontage and construction of a separate pad building, which will house some of the tenants relocated from the soon-to-close mall interior.

“It was an amazing property, with so much potential. We’ve been seeing a lot of demand so far and we’re really pleased with the market,” says Jamie Petrie, Executive Vice President and Chief Operating Officer of Plaza.

“One thing we’ve noticed in the redevelopment of regional shopping malls is many of them have really large parking fields that are underutilized,” he 8 Canadian Property Management | Part of the REMI Network

adds. “Moving from an enclosed centre of 331,000 square feet of pre-redevelopment to what is now 173,000 square feet, means not as many parking spots are needed, leaving more opportunities for pad or separated buildings.”

That remaining 173,000 square feet now boasts a Mark’s Work Wearhouse, which relocated from another part of town, and Winners is a confirmed tenant, set to open by 2018. Outside, a "well-loved" full-service restaurant is pending for a nearby pad.

Forging new entrances in the mall's frontage and upgrading the sidewalks, curbs and landscaping has also attracted interest in the backside of the property.

So far, professional services, colleges, a school board, gym and groups looking for storage space have all pursued the idea of relocating offices to the rear. Other operational savings will come through closure of interior common space that will no longer need to be heated, cooled, illuminated, cleaned and repaired.

CHALLENGING COMPETITION Smaller markets have struggled to sustain enclosed shopping centres in recent years.

Petrie suggests the loss of Canadian anchors like Zellers, and now Sears, which “kept things going”, has spurred the decline, but demographics also play a role.

SEARS CLOSURES FREE UP SOME LUCRATIVE ANCHOR SPACES Few Canadian retail landlords were caught unaware last month when Sears Canada announced the pending closing of 59 of its 255 stores, including 20 full-service department stores. Market analysts suggest that the company's significantly dropping revenues will have already prompted many landlords to start lining up replacement tenants.

“This comes as no surprise,” says John Williams, senior partner with the retail consulting firm, J.C. Williams Group. “The handwriting has been on the wall for at least a decade that a traditional full-line department store as an anchor is not performing a very important function anymore.”

Canada's largest retail owner, RioCan Real Estate Investment Trust (RioCan), backs up his hypothesis.

“The announcement by Sears is a much different situation for RioCan than when Target announced their filing in 2015,” RioCan CEO Edward Sonshine reiterated in a statement issued June 26th. “Our exposure to Sears is far lower, and we have been preparing for just this situation at many of these locations for some time now.”

Seven store closures within RioCan's portfolio mean a loss of just 0.4% of RioCan's total annualized rental revenue.

Most of RioCan’s exposure to Sears is through the Sears Home banner, with an average store size of 40,000 to 45,000 square feet.

“In all but one case, these are smaller retail stores that will not require redevelopment as was the case with Target,” Sonshine adds.

Simpsons-Sears was founded in 1952 as a mail-order business and later took bricks-and-mortar shape in some burgeoning Canadian suburbs, which have since flourished and become more central to now much larger cities .

“They were a much sought-after anchor, and most Sears locations are really good, which is a big plus,” Williams recounts.

“Because they were in the game early, their rental rates are very low; consequently, for many developers and landowners, this is a positive break. They will be able to replenish that space with much higher revenue rates.”

Sears has been granted temporary court protection from creditors under the Companies’ Creditors Arrangement Act. For the past 18 months, the retailer has revamped its product offerings and brand and plans to keep reinventing itself.

However, it hasn’t made further progress due to ongoing liquidity pressures and legacy components of its business.

FLEXIBILITY IS A SURVIVAL MECHANISM Canada’s retail stock faces “fundamental structural change” in the next decade, predicts James Smerdon, retail consultant and strategic planner with Colliers International Consulting in Vancouver. Colliers' National Retail Report for spring 2017 charts the continued transformation of shopping malls and surrounding lands, which are “reinvested in, rebuilt, remodelled, or somehow reinvented on a regular basis.”

Shopping centres typically operate on 10-year strategic planning cycles (or life cycles) due to standard leases, changing demographics and store design trends. Smerdon advises landlords to keep this in mind in lease negotiations — for example, including clauses to allow for demolition and relocation.

“They should also remove anything favouring the tenant that is linked to the continuous operation of an anchor tenant,” he says. “If an anchor goes dark it is not the end of the mall, but landlords will want maximum

flexibility to move the chess pieces around. If they can get those things, and are not hamstrung by parking clauses, sign as long a lease as possible.”

The town centre model, which incorporates residential components, offices and other uses at a higher density, has begun to replace the traditional enclosed shopping mall. Rising residential land values and urban planning policies to promote intensification are driving the trend.

Meanwhile, longstanding regional malls like Toronto's Yorkdale, Ottawa's Rideau Centre and Burnaby's Metrotown have survived and thrived through active reinvestment.

“Those malls are at the pinnacle of retailing in Canada, and don’t have any issues with patchy or chronic vacancy,” Smerdon maintains. “The ones that have real problems are where there is a lack of tenant turnover and struggling anchor tenants."

www.REMInetwork.com | July/August 2017 9

redevelopment

“The growth of restaurants in the retail sector is astronomical because more and more people are relying on fast food or sit-down restaurants to feed their family.”

“Fashion was the lifeblood of these centres,” he notes. “A lot of young people who used to frequent enclosed centres, particularly for fashion, are no longer there in great numbers as they once were, and the aging population of baby boomers may not shop in the same type of retail mix.”

Beyond demographics is a “major shake-up in the fashion industry” and the pull of regional malls with more diversity.

“A lot of old Canadian retailers cannot seem to compete against new offerings from Europe, the U.S. and in Canada as well,” he says. “Fashion seems to be moving to the discount style like a Winners or H&M, where it’s more treasure fashion that you dig through for a great deal. Then there is Lulu Lemon, Mark’s Work Wearhouse and Sport Chek — fashion that has become part of what we wear every day, certainly among youth.”

Prospective shoppers may be willing to make the longer-range trek to regional malls, but they still value their time.

“Shopping habits have also changed due to lifestyle. There’s less time to do everything you need to do, which is why there are so many restaurants. The growth of restaurants in the retail sector is astronomical because more and more people are relying on fast food or sit-down restaurants to feed their family," Petrie submits. "Similarly, strip plazas meet that lifestyle change quite well.

Now, you can park right in front of a strip plaza, run in, get what you need and leave.”

SMALL MARKET PLAYER He's gaining familiarity with the slice of the retail investment market where the town's only enclosed shopping centre may be viewed as a “major part of the community”.

Plaza also acquired an enclosed mall in

Kenora, Ontario, as part of the deal with the vendor of Mountainview Mall, and partnered with RioCan to complete a mall simplification in two other smaller Ontario markets, in Cornwall and New Liskeard.

Mea nwh ile, public reaction in Midland, a town of 16,000 people and growing, has been generally positive.

People are interested in the mall's fate and happy to see a company investing millions of dollars in its future.

“It’s great for employment, investment, property taxes and the energy that comes from a vibrant, new property,” Petrie adds. “The community does lose an interior, public space, but now they’ll have a much more vibrant centre.” zz Rebecca Melnyk is an online editor with the REMI Network. See www.REMInetwork.com

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PERFORMANCE. INNOVATION. RELIABILITY. 2017-08-02 9:18 AM

regulations

B.C. SETS NEW BAR FOR RETAILING Relaxed Liquor Rules Add Some Complications

By Barbara Carss RETAILERS IN British Columbia could soon be adding another dimension to their in-store offerings. Recent amendments to the provincial Liquor Control and Licensing Regulation allow all types of businesses to apply for a liquor license — potentially giving physical store locations an extra perk to counter online competition, but also increasing landlords’ risks under the Occupiers Liability Act. Flexibility for a broader field of license holders is part of a package of modernization measures promoted as both a consumer service improvement and a vehicle for economic development. A media release from B.C.’s Ministry of Small Business and Red Tape Reduction identifies barbershops, salons and bookstores as examples of enterprises that will have “opportunities to generate new revenue” while other analysts see spinoff benefits for retailers’ image and the more esoteric concept of the shopping experience.

“Particularly for malls, BIAs (business improvement areas) or lifestyle retailers, I think this is an opportunity to up the game,” says John Williams, senior partner with the retail consulting firm, J.C. Williams Group. “This could be used very strategically.”

The strategy is likely to come with added insurance costs and security concerns, however — perhaps along with some juggling of competing interests. Landlords or condominium strata councils may encounter pushback from tenants or unit owners who are not happy to welcome licensed establishments to the business mix, or, contrarily, opposing landlords could have limited ability to prevent a resident business from introducing alcohol to its product lines.

PERMITTED USES vs. EXCLUSIVE RIGHTS “If you want to discourage it, there are conditions you can put into the lease of incoming tenants. For existing tenants, there is not going to be much in the lease to address it because we have rarely contemplated these kinds of issues before,” says Peter Anderson, a shareholder and specialist in commercial leasing with Vancouver-based Boughton Law. Most relatively sophisticated retail leases will have mechanisms to allocate new costs for security and insurance to the tenants who engender them. Other standard use clauses — dictating that a space is to be used for the sale of clothing, for example — could be open to interpretation if alcohol sales are legal and common in the industry.

“I think the tenant could potentially argue this is within its permitted use,” Anderson reasons.

Meanwhile, existing liquor license holders with contracted exclusive rights could put a brake on any new competition or create other conundrums for landlords.

“If you have a wine bar in the mall, it may have an exclusive right to provide alcohol for on-premises consumption. So what happens if the hair salon next door starts offering complimentary glasses of wine to customers?”

Anderson muses. “The wine bar might claim for breach of its exclusive right. I don’t know what the solution is going to be.”

More licensed establishments will also heighten the importance of vigilance since landlords have a duty of care under the Occupiers Liability Act making them responsible for the safety of occupants, visitors and trespassers on the property.

Owners/managers will need to monitor their tenants’ legal compliance and have documentation to demonstrate their efforts.

Beyond merely ensuring that tenants actually have a permit to serve alcohol, landlords should ask for proof that any staff serving alcohol are of legal age and have completed the provincially mandated training program for employees who dispense liquor. “That would be very important, particularly if there was a claim in the future,” Anderson advises.

THE SHOPPING EXPERIENCE Nevertheless, even if the new liquor laws complicate retail leases, few real estate or retail analysts would characterize that as a major business obstacle.

“Anything that helps the retailer in terms of ensuring they stay in business and pay rent over the long term is good for the owner,” observes Keith Reading, research director with Morguard.

The market is still largely untested, but John Williams sees in-store beverages as a way for retailers to differentiate themselves and play to consumer demand. He points to successful examples in the United States and Europe, such as the Westfield Mall in London, where patrons can find refuge and refreshment at a champagne bar in the concourse.

Indeed, drink is arguably the instinctive companion to one of shoppers’ leading preoccupations. “Today, food is the hot anchor commodity; it has replaced fashion,” Williams maintains.

“How do properties stay relevant? That’s the big issue,” he adds. “How do they stay relevant and compete with the lambasting they are taking from web-based retailers?

They have to offer a better experience.

Something like this would greatly augment the experiential component of your store.” zz www.REMInetwork.com | July/August 2017 11

SPONSORED CONTENT

GOING ABOVE AND BEYOND LPI wins Pinnacle Award for customer service excellence

W

hat would you do if several floors of the building you manage were flooding? What if it were a holiday and the part required to fix the issue was not readily available?

What if tenant relations were already strained due to previous building issues? All these what-ifs may sound like a situation you don’t want your building to be in, but for property manager Amanda Lambrou, it became a nightmarish reality.

Luckily, she was able to work with LPI (Lunardo Plumbing Inc. and LPI Mechanical Inc.), a full-service company that specializes in design/build, HVAC, and plumbing solutions for the commercial, industrial and institutional sectors, to solve the problem before it got more out of hand.

It is for this event that LPI was recently awarded a Pinnacle Award from BOMA Canada for going above and beyond in its customer service. Pinnacle Awards recognize role model companies that demonstrate standards of excellence that BOMA believes its members and employees should aspire to. The awards are presented to Canadian companies that demonstrate outstanding innovation, teamwork, customer service and commitment to clients.

A FLOOD EMERGENCY On Family Day, 2016 (Feb. 15), the downtown Toronto office tower that Amanda managed suffered floods on three floors due to the extreme cold, which caused some water pipes to burst. Not only did these floods cause physical damage, but they came at a time when tenant relations were already fragile due to previous bathroom shutdowns in recent months and the resulting interruptions to business.

Although Amanda had an emergency contractor on site to contain the flooding, they ran into a new obstacle: they required a pressurereducing valve to repair the flooding mechanical system, but since it was a holiday, no suppliers were open. Amanda was told that the only option was for the building to be closed for another day, but she felt that she couldn’t risk shutting down for that long.

“I knew the tenants would be very upset,” says Amanda. “It doesn’t look good on management to have to shut down the water due to a flood. I didn’t want to have to deliver more bad news.”

Amanda decided to call her contact at LPI, founder and company president Italo Lunardo, as he had come through for her in the past. Although he was on vacation at the time, Italo placed a call to a key supplier to see if they could help.

SPONSORED CONTENT The supplier happened to have the part in stock, and Italo had him open his warehouse, where he dispatched a team member to coordinate the pickup and delivery of the part, allowing the repair to continue and business to carry on as usual. “[LPI] saved me so much in tenant relations. They said they could do the repair and we’d have the water running the next business day,” says Amanda.

A DIFFERENT APPROACH LPI places the highest importance on providing excellent customer service to anyone that requests their help. Italo, who has been in the plumbing business since 1990 and has owned his own business since 1999, knew something had to be done when Amanda called.

“I could hear the tension in her voice from the problem, while she was letting me know the technical aspect of it,” he explains. “I knew it was a serious [situation], especially not having water in the building on a work day.”

Italo knew the part was likely in stock with his supplier as it was prepared for his existing clients at the time, should they need it. “I have a relationship with my suppliers and part of the service we provide is to be open 24 hours a day,” he says.

Italo notes that creating an excellent impression on clients involves LPI’s relationship with its supplier partners. “It’s important to be aligned with the right one,” he says. “Our vision is to not have vendors, but suppliers that are partners. It’s the vision of their company that we partner with.”

Amanda called LPI that day because she had a positive experience with them at another property where they came through for her, she says. According to Amanda, what sets LPI apart from its competitors is the level of customer service it provides. That level of service saved her tenant relations and allowed the building to be restored to business as usual status in very little time.

“Their customer service is one of the best out there. You always get an immediate response,” she says.

LPI went on to sign contracts with other properties managed by that company after the plumbing incident, but Italo says the most important detail is that the client’s problem was resolved quickly.

“It’s not for us to shine, it’s for us to get the client what they need,” says Italo. “I feel honoured that we have the privilege and opportunity to work with a client like Amanda and her firm.”

PREVENT IT FROM HAPPENING TO YOU

Plumbing • HVAC • Design / Build

A preventive maintenance plan with regularly scheduled inspections should be part of every property manager’s policies and procedures. LPI recommends the following preventive maintenance steps be taken for a better experience: • Annually inspect HVAC and plumbing equipment.

• Annually inspect domestic water booster and circulation pump systems.

• Annually inspect domestic water heaters and boilers.

• Annually inspect sump, sewage ejection pumps and pits.

• All fixtures should be repaired as required and checked for leaks regularly (review manufacturer’s recommendations on how often to replace the internal workings such as flappers and cartridge sand diaphragms).

• Annually test backflows (as per your city’s requirements).

• Annually inspect all piping for cold and hot water.

• Annually or semi-annually power flush storm, sanitary and parking garage areas.

• Annually clean catch basins in parking lots and garages.

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MARKET OVERSEERS GRAPPLE WITH CLIMATE RISK Financial Filings Provide Framework for Disclosure

Late last year, the 32-member Task Force on Climate-related Financial Disclosures delivered recommendations for transparent and consistent reporting to support better informed investment, lending and insurance underwriting decisions. This responds to a call from G20 Finance Ministers, Central Bank Governors and the Financial Stability Board for guidance on avoiding the severe financial shocks and sudden losses in asset value that might come as economies worldwide navigate climate volatility and make the transition to a low-carbon era.

Resulting recommendations are centred on the core elements of governance, strategy, risk management, and metrics and targets, and are intended to align with other disclosures for mainstream financial filings. The following excerpt sets out the philosophical premise for climate-related financial disclosures and provides an overview of risks and opportunities – Editor.

14 Canadian Property Management | Part of the REMI Network

ONE OF THE ESSENTIAL functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. Accurate and timely disclosure of current and past operating and financial results is fundamental to this function, but it is increasingly important to also understand the governance and risk management context in which financial results are achieved.

The financial crisis of 2007-2008 was a n i m p o r t a nt r e m i n d e r of t h e

investment

repercussions that weak corporate governance and risk management practices can have on asset values. This has resulted in increased demand for transparency from organizations on their governance structures, strategies and risk management practices. Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.

One of the most significant, and perhaps most misunderstood, risks that organizations face today relates to climate change. While it is widely recognized that continued emission of greenhouse gases will cause further warming of the planet and this warming could lead to damaging economic and social consequences, the exact timing and severity of physical effects are difficult to estimate.

The large-scale and long-term nature of the problem makes it uniquely challenging, especially in the context of economic decision making. Accordingly, many organizations incorrectly perceive the implications of climate change to be long-term and, therefore, not necessarily relevant to decisions made today.

The potential impacts of climate change on organizations, however, are not only physical and do not manifest only in the long term. To stem the disastrous effects of climate change within this century, nearly 200 countries agreed in December 2015 to reduce greenhouse gas emissions and accelerate the transition to a lower-carbon economy.

The reduction in greenhouse gas emissions implies movement away from fossil fuel energy and related physical assets. This, coupled with rapidly declining costs and increased deployment o f cl e a n a n d e n e r g y- e f f i c i e n t technologies, could have significant, near-term financial implications for organizations dependent on extracting, producing, and using coal, oil and natural gas. While such organizations may face significant climate-related risks, they are not alone.

Climate-related risks and the expected transition to a lower-carbon economy affect most economic sectors and

industries. While changes associated with a transition to a lower-carbon economy present significant risks, they also create significant opportunities for a broad range of organizations focused on climate change mitigation and adaptation solutions.

In most G20 jurisdictions, companies with public debt or equity have a legal obligation to disclose material risks in their financial filings — including material climate-related risks. The Task Force believes climate-related risks are material risks for many organizations, and this framework should be useful to organizations in complying more effectively with existing disclosure obligations.

In addition, disclosure in mainstream financial filings should foster shareholder engagement and broader use of climaterelated financial disclosures, thus promoting an informed understanding of climate-related risks and opportunities by investors and others. Improved disclosure of climate-related risks and opportunities will provide investors, lenders, insurance underwriters and other stakeholders with the metrics and information needed to undertake robust and consistent analyses of the potential financial implications of climate change.

RISKS AND OPPORTUNITIES An impor tant element of such a f ra mework is t he consist ent categorization of climate-related risks and opportunities. Climate-related risks fall into two major categories: risks related to the transition to a lower-carbon economy and; risks related to the physical impacts of climate change.

Climate-related opportunities will vary depending on the region, market and industry in which an organization operates.

Policy and Legal Risks Policy actions around climate change continue to evolve. Their objectives generally fall into two categories — policy actions that attempt to constrain actions that contribute to the adverse effects of climate change, or policy

actions that seek to promote adaptation to climate change. Some examples include implementing carbon-pricing mechanisms to reduce GHG emissions, shifting energy use toward lower emission sources, adopting energyefficiency solutions, encouraging greater water efficiency measures and promoting more sustainable land-use practices. The financial impact of policy changes depends on the nature of the policy change.

Another growing risk is litigation or legal risk. Recent years have seen an increase in climate-related litigation claims being brought before the courts by property owners, municipalities, states, insurers, shareholders, and public interest organizations. Reasons for such l itigation include t he fa ilu re of organizations to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks.

Technology Risk Te ch nolog ica l i mp r ovement s or innovations that support the transition to a low-carbon, energy-efficient economic system can have a significant impact on orga n izations. For exa mple, t he development and use of emerging technologies such as renewable energy, battery storage, energy efficiency, and carbon capture and storage will affect t h e c om p et it ive n e ss of c e r t a i n organizations, their production and distribution costs, and ultimately the demand for their products and services from end users.

To the extent that new technology displaces old systems and disrupts some parts of the existing economic system, winners and losers will emerge from this “creative destruction” process. The timing of technology development and deployment, however, is a key uncertainty in assessing technology risk.

Market Risk While the ways in which markets could be affected by climate change are varied and complex, one of the major ways is www.REMInetwork.com | July/August 2017 15

investment

Disclosure in mainstream financial filings should foster shareholder engagement and broader use of climate-related financial disclosures, thus promoting an informed understanding of climate-related risks and opportunities. through shifts in supply and demand for certain commodities, products and services as climate-related risks and opportunities are increasingly taken into account.

Reputation Risk Climate change has been identified as a potential source of reputational risk tied to changing customer or community perceptions of a n orga n ization’s contribution to or detraction from the transition to a lower-carbon economy.

Physical Risks Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme t emp e r at u r e ch a nge s i mpa ct i ng organizations’ premises, operations, supply chain, transport needs and employee safety.

Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events such as cyclones, hurricanes, or floods.

Chronic physical risks refer to longerterm shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heat waves.

Resource Efficiency Opportunities There is growing evidence and examples of organizations that have successfully reduced operating costs by improving efficiency across their production and distribution processes, buildings, machinery/appliances, and transport/

mobility — in particular in relation to energy efficiency, but also including broader materials, water, and waste management. Such actions can result in direct cost savings to organizations’ operations over the medium to long term and contribute to the global efforts to curb emissions. I n n o v a t i o n in technology is assisting transition. Such innovation includes: developing efficient heating solutions and circular economy solutions, making advances in LED lighting technology and industrial motor technology, retrofitting buildings, employing geothermal power, offering water usage and treatment solutions, and developing electric vehicles.

Energy Source Opportunities According to the International Energy Agency (IEA), to meet global emissionreduction goals, countries will need to transition a major percentage of their energy generation to low-emission alternatives such as wind, solar, wave, tidal, hydro, geothermal, nuclear, biofuels and carbon capture and storage.

For the past two years, clean energy investments have exceeded fossil fuel i nve st m ent s. T h e t r end t owa r d decentralized clean energy sources, rapidly declining costs, improved storage capabilities and subsequent global adoption of these technologies are significant. Organizations that shift their energy usage toward low-emission energy sources could potentially save on annual energy costs.

Products and Services Opportunities Organizations that innovate and develop new low-emission products and services may improve their competitive position and capitalize on shifting consumer and producer preferences. Some examples include consumer goods and services that place greater emphasis on a product’s

16 Canadian Property Management | Part of the REMI Network

carbon footprint in its marketing and labelling (e.g., travel, food, beverage and consumer staples, mobility, printing, fashion and recycling services) and producer goods that place emphasis on reducing emissions (e.g., adoption of energy-efficiency measures along the supply chain).

Market Opportunities Organizations that proactively seek opportunities in new markets and types of assets may be able to diversify their activities and better position themselves for the transition to a lower-carbon economy. In particular, opportunities exist for organizations to access new markets through collaborating with governments, development banks, smallscale local entrepreneurs and community groups in developed and developing countries as they work to shift to a lowercarbon economy. New opportunities can also be captured through underwriting o r f i n a nc i ng g r e e n b ond s a nd infrastructure (e.g., low-emission energy production, energy efficiency, grid connectivity, or transport networks).

Resilience Opportunities Many organizations’ profitability depends heavily on suppliers and employees, and opportunities exist to build capacity and improve contingency planning in “at-risk” communities.

Opportunities also exist in specific sectors. For example, organizations involved in agriculture have opportunities related to cultivar adaptation and efficient water management, and, insurance companies have opportunities to underwrite new assets (e.g., renewableenergy technology installations). zz The complete Recommendations of the Task Force on Climate-related Financial Disclosures can be found at https://www.fsb-tcfd.org/

finance

CFOs PREPARE FOR NEW ACCOUNTING STANDARDS Profit and Loss Impacts Foreseen as Leases are Capitalized on Balance Sheets

By Sean Moynihan

www.REMInetwork.com | July/August 2017 17

finance

One of the biggest obstacles to readiness is the availability of information about existing leases.

I M M I N E N T N E W international financial reporting standards (IFRS) related to leases will have balance sheet and P&L (profit and loss) consequences. Public and private companies are advised to prepare for the 2019 implementation now to avoid the risk of significant enterprise value impacts.

The Financial Accounting Standards Board (FASB) new lease standard will take effect for fiscal years, and interim periods within those fiscal years, beginning December 15, 2018 for the following: • A public business entity; • A not-for-profit entity that has issued, or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; • An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

For all other organizations, the new lease standard will take effect for fiscal years, and same-year interim periods, beginning after December 15, 2019. The effective date for the International Accounting Standards Board (IASB) will be January 1, 2019.

Both the FASB and IASB standards will require leases with a maximum term longer than one year to be capitalized on a company’s balance sheet. With the exception of leases with maximum terms of less than 12 months, no leases will be grandfathered in, so the impact will be immediate and, in many cases, material to financial statements.

A lease will create a right-of-use asset and a lease liability on the balance sheet, which are primarily derived from the net base rent charges in the lease term, plus any renewal or termination options that may be exercised because of economic incentives or strategic necessity. The difference between the new right-of-use asset and the lease liability will have a meaningful impact on shareholder equity.

CLASSIFICATION Under the IASB’s standard, all leases will be classified as a finance lease. Under FASB’s standard, there will be operating and finance leases.

Operating leases are recorded on the income statement as straight-line rent expenses – similar to today’s operating lease model, but nonetheless capitalized onto the balance sheet. Finance leases are similar to the current capital lease model.

The following factors will trigger a finance classification under the FASB rules: a. The lessor transfers ownership of the underlying asset to the lessee by the end of the lease term; b. The lease grants the lessee an option to purchase the underlying asset, and the lessee is likely to exercise that option; c. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease; d. The present value of the sum of the lease payments and any lessee residual value guarantee not reflected in the lease payments are equal to or, exceed, “substantially all” of the underlying asset’s fair value; and, e. The underlying asset is expected to have no alternative use to the lessor at the end of the lease term.

New lease classifications will have real impacts on financial statements, influencing everything from cash flow presentation, balance sheet metrics, net income and earnings before interest, taxes, depreciation and amortization (EBITDA). Below are examples that demonstrate how the new rules will affect financial statements.

• A finance lease will be categorized as a financing activity on the statement of

18 Canadian Property Management | Part of the REMI Network

cash flows whereas operating lease payments are recorded under operating activities.

• The liability for a finance lease will be classified as debt, having a detrimental impact on a company’s debt-to-equity ratio and threatening loan covenants.

• Shareholder equity will take more of a hit from a finance versus an operating classification because the asset – also known as the aforementioned right-ofuse asset – will be amortized differently than an operating lease on the income statement.

• For finance leases, expense reported on the income statement will include a combination of amortization of the rightof-use asset and front-loaded interest expense assessed against the outstanding lease liability.

These impacts translate into big changes to balance sheet metrics like debt-to-equity ratios or return on assets metrics and will also have a significant impact on net income and EBITDA. This case will be especially true for finance leases. Operating leases, in contrast, result in straight-line rent expense being reflected on the income statement – a method that most companies deploy today when recording leases.

STRUCTURE Under the new rules, a gross lease will trigger the inclusion of operating expenses on the balance sheet. As a result of this change, companies that are focused on EBITDA may find gross leases classified as finance leases to be more advantageous.

Finance leases allow taxes and insurance to flow through the income statement as interest and amortization – instead of selling, general and administrative (SG&A) expenses. In contrast, companies concerned about the balance-sheet implication of a lease classification will prefer operating leases because of their limited impact on shareholder equity.

Operating expenses are often included in rent payments, but will need to be segregated from gross rental costs for purposes of calculating the asset and liability associated with any lease, while property tax and insurance costs in a gross lease – which may be part of an aggregate operating expense value – will have to be included in the capitalization calculation after the effective date of the new standards. Failing to bifurcate service components from “rent,” or entering into gross leases as opposed to net leases, will result in the balance sheet

www.REMInetwork.com | July/August 2017 19

finance being materially and unnecessarily overstated.

Under the new standards, FASB and IASB have provided guidance for renewal and termination options within a lease. An entity shall determine the lease term as the non–cancellable period of the lease, together with all of the following: • Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; • Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option; • Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

RENEWALS & LEASEBACKS If it is reasonably certain that a significant economic incentive exists, then the renewal periods will go on the balance sheet as if they were exercised. A 10-year lease with a five-year renewal option may be considered a 15-year lease on the balance sheet.

The first consideration will be whether the presence of discounts and penalties are significant to the lessee. If so, then they will

have a significant economic incentive to exercise the options. However, tenants can define “significant” for themselves, but this practice must be reasonable and consistent.

Secondly, if tenants make space alterations and improvements that will continue to have a useful life beyond the initial lease term, then they may have an incentive to exercise their renewal options. Finally, if a facility has a strategic value, such as being a highly profitable flagship location, then it would likely qualify as a significant incentive to exercise the renewal option.

The sale-leaseback transaction has been dramatically changed under the new lease accounting standa rds.

Different accounting outcomes can exist depending on the structure of the transaction. In addition, the accounting treatment can be complex.

Under the new lease accounting standards – both for GAAP and IFRS – the linkage between the sale and the leaseback is effectively eliminated. The leaseback after the sale will be required to go on the balance sheet, eliminating a previous form of off-balance-sheet financing for many companies.

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Another clause that can nullify a saleleaseback is the existence of an option to purchase the building – even at “fair market value” – in the future. Currently, one of the primary benefits of a sale-leaseback is to defer the capital gains or losses over the term of the lease. Once the new standards take effect, 100% of any gain, or loss, will be booked on the sale date. The elimination of the deferral of gains or losses will completely alter the P&L profile of the leaseback and may render the deal untenable from earnings-per-share (EPS) and EBITDA perspectives.

There are also new standards to account for new and existing subleases. Leases that have previously been subleased will reappear on the balance sheet and income statement of the sub-lessor. The new sublease accounting rules will look nothing like current sublease accounting requirements, which are already fairly complex, causing even more challenges when the time comes to adopt the new standards.

CHALLENGES & OPPORTUNITIES One of the biggest obstacles to readiness is the availability of information about existing leases. Many rent payment components are not tracked under existing accounting standards. The new lease accounting standards will add complexity to the already time-consuming process of reviewing lease structures and expenses, and many companies with legacy lease administration software are finding that they cannot use these applications to run lease accounting analysis under the new standards.

Firms are either re-abstracting lease data or finding ways to blend that data with other reporting data in order to move forward. For many chief financial officers, this situation has become a major compliance obstacle.

Chief financial officers will have to invest considerable time and resources into complying with the new standards, but the upside is a chance to better understand how lease obligations truly impact the bottom line. There is a tremendous strategic opportunity for companies to improve financial performance if they scrutinize their leases – especially those that are being negotiated, or will be soon. zz Sean Moynihan is Avison Young's global tenant advisor affinity group leader and a Principal based in Atlanta. The complete text of his whitepaper, The Big Change to the Lease Accounting Standards, can be found at www.avisonyoung.com/research/white-papersand-topical-reports-0

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leasing

LEASE AGREEMENT DUE DILIGENCE

Enforcement Turns on Named Parties

By Jenna Morley IDENTITY OF THE PARTIES is one of the essential elements of a binding agreement to lease. The parties must be named, the names must be correct and the parties must have legal capacity to contract.

While this may seem straightforward, it can be quite perplexing. In some cases, the party named as landlord is actually a property manager or a ground tenant, or the party named as tenant turns out to be an incorrect combination of the legal and business names of the entity, or a defunct or even non-existent corporation.

The importance of identifying the proper partiesto a lease cannot be underestimated.

In most cases, a landlord’s recovery rights under the lease will be limited to the named tenant. If the named tenant does not exist, or if the corporate entity is inactive or defunct, it will be difficult for the landlord to enforce the tenant’s lease obligations in a judicial arena.

On the flipside, tenants should ensure that the named landlord actually has legal

capacity to grant the rights and privileges afforded under the lease. Otherwise, the tenant risks contracting with a party that does not own, or even have an interest in the premises.

THE LEGAL ENTITY Corporation While there are several types of legal entities that may enter into lease agreements, the corporation is the most commonly used business structure. At law, a corporation is a legal entity that is distinct and separate from its shareholders. A corporation has all the rights and liabilities of a person, including the right to enter into contracts and own property.

Before entering into a lease agreement with a corporate entity, a corporation profile report and certificate of status/compliance should be obtained from the applicable government ministry to confirm: (1) that the entity exists; (2) the proper legal name of the entity; and (3) the current status of the entity.

22 Canadian Property Management | Part of the REMI Network

An “inactive” or “dissolved” status is problematic; however, the Ontario Business Corporations Act stipulates that a civil action may still be brought against a dissolved corporation as if the corporation had not been dissolved.

A duly authorized representative of the corporation, typically an officer or director, must execute the lease on behalf of the corporation. While many agreements still refer to the “affixation of corporate seals” as a means of authenticating the company’s signature, this practice is outdated, as companies are no longer legally required to obtain a corporate seal in most Canadian provinces (excluding Prince Edward Island and Nova Scotia). The signature of a duly authorized representative of the corporation is sufficient to bind the corporation.

A corporate tenant may be a “shell” company incorporated for the sole purpose of shielding liability arising under the lease.

In other words, the tenant’s business operations may be carried out through a

In most cases, a landlord’s recovery rights under the lease will be limited to the named tenant. parent or related entity, such that the company with the leasehold interest never does more than simply hold the lease (i.e. it incurs liability but never builds any assets to support it). In that situation, it is prudent for the landlord to seek indemnifiers to backstop the tenant’s obligations under the lease.

Similarly, a corporate landlord may be a property manager or a ground tenant that does not actually own, or even have an interest in the premises. A sub-search of title should always be performed to confirm the registered owner of the land.

Under the Ontario Extra-Provincial Corporations Act, a Canadian corporation incorporated outside Ontario does not require a license to carry on business in Ontario. However, a cor poration incorporated outside Canada must comply with provincial requirements for extraprovincial corporations in order to carry on business in Ontario. This issue is typically addressed by way of a blanket “compliance with laws” provision in the lease, which requires the tenant to comply with all governmental requirements relating to the tenant’s ability to enter into and comply with the lease, including those pertaining to the conduct of business in the premises.

Partnership A landlord or tenant may be a partnership.

A partnership is “the relation that subsists between persons carrying on a business in common with a view to profit”. There are three types of legally recognized par tnerships in Ontario: general partnerships; limited partnerships; and limited liability partnerships.

Unlike a corporation, a partnership is not a legal entity that is distinct and separate from its partners. From a best practice standpoint, each partner in a general partnership should execute the lease on behalf of the partnership, although the case law states that, in most cases, a partnership will not be able to deny the enforceability of an agreement simply because the agreement was not executed by all of the partners.

If the landlord or tenant is a limited

partnership (meaning it consists of at least one general partner with unlimited liability and one limited partner with limited liability), the general partner must execute the agreement on behalf of the partnership, whether alone, or together with the limited partners.

Real Estate Investment Trust A real estate investment trust (REIT) is a business trust that owns income-producing property. Many commercial landlords in Canada are structured as REITs where a trustee (or corporate nominee) holds the property for the benefit of the unitholders (i.e. the investors) of the trust. Since a trust is not a legal entity separate from its unitholders, the REIT unitholders are potentially subject to unlimited liability. For this reason, REIT landlords should include a limitation of liability clause in their standard lease, which states that the obligations of the REIT will not be personally binding upon the unitholders of the REIT and that any recourse will be limited to the revenues from the shopping centre/building.

Individual Sometimes an individual will enter into a lease in its personal capacity. If so, certain prerequisites must be satisfied to create a legally binding contract. For example, the individual must be 18 years of age or older in Ontario. For evidentiary purposes, the individual’s signature to the lease is usually witnessed, though this is not a legal requirement in Ontario.

Co-operative Though rare, the landlord or tenant may be a co-operative. A co-operative is a business organization that is owned by an association of persons seeking to satisfy common needs (sale of their products or employment, etc.)

In a co-operative, members are equal decision makers in the enterprises (one member, one vote) and contribute to the capital of the co-operative. At least part of that capital is usually the common property of the co-operative.

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The ABCs of building condition assessments When it comes to Building Condition Assessments (BCAs), it’s the details that count. And getting those right means making a few considerations: The Right Season Snow coverage or severe weather can make it difficult to determine the conditions of roofs, pavements, landscapes, and other systems. Wait until a full and unobstructed BCA can be conducted.

Specialist or non-specialist?

Specialist reviews are conducted by a team of service providers who examine property elements specifically related to their field of expertise, thereby bringing a high level of expertise and detail to the final report. Non-specialists review, by comparison, are commonly conducted by a single industry professional who completes a more generalized assessment of all aspects of the building.

Specialist reviews cost more than non-specialist reviews; however, that gap doesn’t indicate a difference in professionalism. The choice comes down to a difference in the level of detail and specialization required.

Define your goal BCA’s are conducted for multiple reasons, and each require varying levels of skill and work. Therefore, when approaching your capitol planning, it pays to do the market research, define your objective, and partner with the appropriate BCA provider.

Learn more about Building Condition Assessments by visiting RJC Engineers’ website at rjc.ca.

www.REMInetwork.com | July/August 2017 23

leasing The entire accumulated property of a co-operative that can be used to pay debts or expenses, including cash on hand and money owed by customers, is held within the co-operative. Examples of Canadian co-operatives include Mountain Equipment Co-op, Home Hardware, The Co-operators and Canadian Press.

To be a legal entity, a co-operative must be incorporated under a provincial co-operative statute setting out its corporate form and mode of operation (the Co-Operative Corporations Act in Ontario) or under the federal Canada Cooperatives Act (“CCA”) when the co-operative has a place of business in at least two provinces.

Before entering into a lease agreement with a co-operative, a corporation profile report and certificate of status/compliance should be obtained from the applicable government ministry to confirm: (1) that the entity exists; (2) the proper legal name of the entity; and (3) the current status of the entity (an “inactive” or “dissolved” status is problematic).

Pre-Incorporation Contracts Sometimes, an individual or a corporation will enter into a lease agreement “in trust for a company to be incorporated”. In that case, the named party is executing the agreement on behalf of a corporation that does not actually exist.

Both the Business Corporations Act (Ontario) and the Canada Business Corporations Act state that where a party enters into a contract in the name of, or on behalf of, a corporation which is yet to be incorporated, the named party will be personally bound by the contract until the new company is formed and adopts the agreement, at which point the named party will be automatically relieved from liability.

From Boiler Room to Boardroom

If a party is entering into the agreement for the benefit of a company to be incorporated, the other party should not agree that the named party is without personal liability. Allowing the named party to sign without personal liability raises two major risks: (1) the other party loses the benefit of being able to hold the named party to any obligations arising in the period before the company is incorporated, and (2) in the extreme scenario where the named party fails to incorporate the company at all, the other party has no one to turn to in case of loss or damage.

Business Name In some cases, the party named as tenant is a business name, rather than a legal name. For example, John Smith, who operates a flower shop, may enter into a lease under the name “John’s Flowers & Gifts”.

While most business names in Ontario are registered pursuant to the Business Names Act (Ontario) — corporations are expressly prohibited from carrying on business under a name other than its corporate name unless the name is registered by the corporation — a business name is not a legal entity capable of entering into a contract.

Accordingly, the named tenant in the lease must be the person, partnership or corporation behind the business name.

THE FINANCIAL COVENANT Once the proper parties have been identified, the financial covenant and business reputation of each party must be scrutinized. Since a landlord is essentially a financing partner for its tenant, the landlord should thoroughly evaluate the ability and likelihood of the prospective tenant to perform its lease obligations. There are a number of steps that a landlord can take to ensure that the prospective tenant is acceptable, including: • obtaining a credit check of the tenant, any indemnifier(s), and if the tenant is a corporation, its principals; • requesting and reviewing financial statements and income tax returns, ensuring that there is enough information to predict the tenant’s business trend; • requesting and reviewing bank references (however, a mere statement that the tenant’s account is in good standing is not an indication that the tenant will be able to perform its lease obligations); • contacting the Canada Revenue Agency to determine whether the tenant has any outstanding liabilities; and • conducting Personal Property Security Act, execution, bankruptcy and insolvency name searches on the tenant.

While most landlords conduct some due diligence on their prospective tenants, the converse is not always true. Tenants often assume that their prospective landlord has the financial wherewithal and business reputation to live up to its commitments to the tenant. Unfortunately, this is not always the case.

Like landlords, tenants should also take steps to determine whether the prospective landlord is acceptable, such as reviewing the landlord’s financial statements, conducting a credit check or requesting bank references (obviously, this will not always be necessary or possible when dealing with large, sophisticated landlords). A sub-search of title should always be performed to confirm the registered owner of the land, as well as the names of any mortgagees or holders of any other encumbrances on title. zz

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Jenna Morley is an associate and leasing specialist with Daoust Vukovich LLP, acting for office, retail and industrial landlords and tenants. For more information, see the website at www.dv-law.com.

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professionaldevelopment

CREW Network President, Alison Bedard, with Paula Beasley, Courtney Ryan and Martha Carpenter.

NAVIGATING THE CRE CAREER PATH

Networks Foster Business Relationships and Peer Support

By Barbara Carss PROFESSIONAL, COMMUNITY and broader economic development issues were closely linked in the discussions that kicked off the CREW Network 2017 Spring Leadership Summit in late June. Delegates from 73 chapters in Canada, the United States and the United Kingdom gathered in Toronto for two days of workshops and small-group meetings that offered the 271 attendees opportunities to glean insight from prominent players in the commercial real estate industry and to share their own career experiences.

26 Canadian Property Management | Part of the REMI Network

The acronym CREW — commercial real estate women — aptly depicts the membership, which, while open to men, predominantly consists of women who have at least five years of experience working in one of the industry’s many disciplines.

However, Network is equally intrinsic to the definition of an organization that bills itself as instrumental in fostering business relationships and peer support.

The Toronto event began with an open plenary to consider best practices for advancing that network’s goals and

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“We want to bring this information to young women who may not even know what commercial real estate is. Career counsellors may not understand commercial real estate either.” providing relevant programming for members at all stages of their careers.

Panellists from CREW Dallas, New Mexico and Denver outlined the premise, logistics and outcomes of their student outreach, mentoring and member value programs.

None of these are unique to any of the chapters, but presenters had both practical advice and some bigger-picture reflections on lessons learned as they explained how the initiatives had been tailored to reflect community needs and make best use of local resources. As a package, the three examples also parallel the typical professional’s career progress from uninitiated to aspiring to entry-level to entrenched status.

OUTREACH TO STUDENTS The Dallas chapter’s CREW Careers addresses the front end of that continuum with an immersive experience for high school students. The program is strategically targeted to a demographic that is thinking about postsecondary education, with the aim of showcasing some possible options.

“We want to bring this information to young women who may not even know what commercial real estate is,” explained Paula Beasley, CREW Dallas presidentelect and a partner with the legal firm, McTaggart and Beasley PLLC. “Career counsellors may not understand commercial real estate either.”

She traced the steady momentum of the program, which was launched at one allgirls school in the Dallas Independent School District and has now expanded to 10 schools and about 100 girls. Something like a moot court for commercial real estate, CREW members coach students who

assume various roles in the development/ redevelopment process. These CREW coaches initially visit a school to talk about what they do, then leave it to school officials to sign up student participants.

An actual building site serves as the living laboratory — which might be a newbuild or repositioning of an existing building — allowing students to take on roles in design, planning, finance, project management, leasing or property management. This culminates in a competitive charrette, during which teams devise and present plans for the project.

MENTORS At the next stage of the CRE career path, CREW New Mexico focuses on the women who have not yet gained the requisite five years of experience for full membership.

The program pairs five mentors with five protégés, following a set course agenda that’s open to indefinite informal extensions.

“They are going to spend six months together and, hopefully, a lifetime being friends,” reported Martha Carpenter of CREW New Mexico, a vice president with Colliers in Albuquerque. All mentors are CREW members, while protégés are generally identified through a referral process.

The chapter’s application and interview process for both halves of the prospective friendship ensures that mentors are truly committed and protégés want real estate careers. “One question we ask is: where do they see themselves in five years? If they say: ‘I really want to be a teacher’, that’s kind of a ding there,” Carpenter quipped.

Beyond initial vetting, mentors and protégés choose each other via a “speeddating” exercise. The whole group of 10

Convince your CEO to join social media

By Steven Chester If your company’s leader is still resisting social media, they’re unfortunately not alone. But as businesses evolve and attempt to attract younger employees and clients, the results of a recent Ryerson University survey should be enlightening.

The survey found that 53 per cent of the country’s top CEOs are on at least one social media platform, and only 16 per cent are using more than one.

Despite the many benefits, fear remains a major factor. Stories of misuse and blunders abound daily; however a desire to remain positive can go a long way.

Not surprisingly the bar to entry is quite low. According to the report: • While 45 per cent of CEOs surveyed have a LinkedIn account, only 50 per cent have a profile picture, and only 33 per cent have a biography.

• Only seven per cent of Canadian CEOs in the top 100 have Twitter accounts. On average, CEOs followed just 65 users – showing a high level of disengagement with the outside world.

• Seventeen per cent of CEOs studied have Facebook accounts. Nine of those accounts were publicly viewable, with 78 per cent of posts being personal in nature and only two per cent promoting their business.

Active CEOs were sharing several different types of content on social media, including thought leadership, philanthropy, mentorship and governance – a great game plan to play it safe and still promote your company in a positive light.

It’s time for business leaders to swim with the tide.

Steven Chester is the Digital Media Director of MediaEdge Communications. With 15 years’ experience in cross-platform communications, Steven helps companies expand their reach through social media and other digital initiatives. To contact him directly, email gosocial@mediaedge.ca.

www.REMInetwork.com | July/August 2017 27

professionaldevelopment

Beasley summed up a common perception of the commercial real estate community in her city as: “It’s a bunch of white men.” meets monthly, but duos are encouraged to communicate more frequently.

Over the course of the program, several former protégés have become eligible for full membership — including one whom Carpenter introduced as she sat among the delegates at the Leadership Summit. “Seventy six per cent of our protégés have advanced in their careers, been promoted in their careers or got another job that was a promotion,” she added.

MEMBER VALUE CREW’s multidisciplinary membership underpins the organizational goal to be “the premier resource and referral network in commercial real estate” yet poses some professional development challenges in balancing dozens of often complementary, but distinct fields. Courtney Ryan of CREW Denver noted that her chapter’s recent move to revise its programming is still subject to scrutiny and refinement, but is an effort to appeal to a broader base of members and capture specific interest groups.

“We are finding there is a definite stratification of where people are finding value,” she observed.

Smaller scale events — like the popular Dinner with an Icon, in which ten to 15 members have an opportunity to meet with a influential industry or community leader, and a bring-your-ownlunch midday seminars — have been added, while the number of Photos courtesy of CREW Network.

28 Canadian Property Management | Part of the REMI Network

all-member events have been reduced. Ryan warns that a surfeit of options stretches the base of prospective attendees in too many directions.

“We were competing against ourselves. So now we’re very strategic with no more than one signature event a month,” she said.

“Every time we creep up over two [signature and small-scale events] a month, attendance for all events falls.”

A move to limit casual attendees’ access is another part of the strategy to promote the value of CREW membership. Previously, about 95% of events were open to non-members, who simply paid a higher price for their tickets. Now, only about 50% of the events provide this option. “It was, frankly, a big shift,” Ryan acknowledged.

Part of that shift involves reframing the expenditure. “What we really found is that women have a hard time valuing themselves and their network,” she said.

Similarly, Carpenter noted that her chapter’s mentors must often be actively approached and encouraged to apply for the role because they underestimate qualities in themselves that others can clearly see. Meanwhile, Beasley summed up a common perception of the commercial real estate community in her city as: “It’s a bunch of white men.”

She urged continued action on all fronts to create a more diverse pool of replacements from future generations. “Hopefully, the idea is we’re changing the face of commercial real estate,” she reiterated. zz

Coverage that is setting the standard in the Real Estate Management Industry.

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July/August 2017

Montreal building its first vertical smart community

Wellness key in future office building designs

A new $200-million hotel-office-condo-multifamily development officially broke ground in downtown Montreal last week. Once it opens in 2020, it will be a smart city within a city, complete with its own mobile app.

Flexibility, adaptability and a more integrated approach to connect building wellness and occupant health with a high performance building design were identified as key considerations for future office buildings in Vancouver.

Existing asbestos stockpile raises concerns Although Canada is finally banning asbestos-containing products for good by 2018, that doesn’t mean a risk won’t linger. After decades of mining and importing asbestos, various types of buildings still harbour the known carcinogen in their walls, floors, pipes, roofs and electrical insulations.

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BOMEX 2017 IN TORONTO Canada's Building Excellence Summit IN ITS CENTENNIAL YEAR, BOMA Toronto (Building Owners and Managers Association) will celebrate industry accomplishments and showcase its vibrant home city as the host of BOMEX, BOMA Canada’s national conference. The two-day event, September 27-28, will focus on excellence in Canadian commercial real estate with a leading-edge educational program, tours of iconic Toronto landmarks and awards to recognize Canada’s top buildings and the owner/manager teams for 2017.

“We are very proud to host BOMEX 2017 in Toronto as we celebrate our 100th anniversary as the second largest BOMA association in the world, and one of the most influential driving forces in Canada’s commercial real estate industry," says BOMA Toronto President and CEO, Susan Allen. "BOMA Toronto has crafted a conference that will inform, inspire and connect you. It provides a high value proposition for you and all your team members, from emerging leaders, to seasoned industry professionals.”

As always, the 27th edition of BOMEX will provide ample opportunities for professionals from across the country to brainstorm on critical industry issues, network, share experiences and have some fun. This year's conference introduces a streamlined day-and-a-half agenda beginning with Wednesday's building tours and opening night party and moving into Thursday's intensive immersion in best practices and performances.

Prominent senior real estate executives will set the tone for the day in a kick-off interactive conversation about key influences — both physical and human — that drive value for their multi-billion-dollar portfolios.

Michael Brooks, CEO of REALPAC, will prompt the discussion, before turning it over to attendees for an open-mic Q&A. Keynote luncheon speaker, Mark Shapiro, President and CEO of the Toronto Blue Jays, reinforces the BOMEX message with his midday address, Building a HighPerformance Culture. Meanwhile, four overarching themes create the framework for this year's education program, which will tackle some big-picture concepts and drill down to many of the finer details of building operations and management.

Delegates can choose from a pool of 16 seminars in total, presented in concurrent streams addressing: Smart and Connected; Real Performance; Risks and Opportunities; and The People Connection. Panels drawn f r o m B O M A' s k n ow l e d g e a b l e , multidisciplinary membership and visiting experts will provide informed perspective on new trends and ongoing concerns that drive asset value and affect buildings and the enterprises they accommodate.

Noted featured speakers include Stephen Selkowitz, a senior advisor with Lawrence Berkeley National Laboratory, who will discuss how the Internet of Things is revolutionizing property management; and Alex K. Lam, Director, Global Development, with Aviemore, who will outline strategies for identifying, nurturing and effectively

30 Canadian Property Management | Part of the REMI Network

deploying the interplay of personalities on a property management team. Other sessions offer primers on: leveraging data analytics, real-time monitoring and standby generators; heightening cyber-vigilance; preparedness for severe weather and disruptive events; and real estate law.

Off-site activities showcase some of Toronto's dynamic venues, as well as prized properties in the portfolios of BOMA Toronto members. There are three options for Wednesday's building tours. Delegates can take a closer look at historic properties repurposed for the 21st century, premier entertainment facilities or the city's burgeoning new office district south of the traditional financial core. From there, the opening night party will unfold swimmingly at Ripley's Aquarium, where networking delegates can enjoy a colourful backdrop of sea and freshwater creatures.

BOMEX 2017 closes with the annual BOMA Canada National Awards Gala, set for the venerable Fairmont Royal York Hotel. Ben and Jessica Mulroney will act as co-hosts, as the TOBY, Earth, Pinnacle and President's Awards are presented.

“Whether you’re interested in expanding your network, enhancing your skills and knowledge in the latest industry trends and practices, or celebrating with your team on the national awards stage, BOMEX 2017 will provide some truly valuable insights, experiences and opportunities to connect, engage and improve your business,” Allen says. zz

www.REMInetwork.com | July/August 2017 31

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