Implications for Agents of the new Real Estate Regulations in BC

While the smoke hasn’t cleared on a lot of the intricacies of the new regulations brought about by the Real Estate Superintendent’s office, the direction is clear.

Rightly or wrongly, the new regulations are intended to ensure rigorous standards of ‘agency’ in the truest meaning of the concept. In short, it means that a licensed agent (licensee) must always act solely in the best interests of their client and hold those interests above their own.

Therefore, limited dual agency will no longer be permitted as of March 15, 2018, since it amounts to a conflict of interest. This will mean the break up of full service teams representing both parties to a transaction, including investment sales & lease transaction in commercial real estate.

Licensees will also have to watch out for the interest of unrepresented parties in a transaction by disclosing that the licensee is the agent for one party, that the unrepresented party should seek independent representation and note the pitfalls of not being represented. The licensee then must have the unrepresented party sign what amounts to a waiver, should that party wish to continue discussions while not being represented; or terminate the discussion while the party seeks independent representation.

So what does this mean in practical terms?

Full service teams will cease to exist, as noted earlier.

Licensees must know when they are providing simple “factual information to general questions” when dealing with unrepresented parties. I’ve asked the Real Estate Council to define what is factual information and general questions, but have yet to receive a reply. The issue is that if the licensee inadvertently provides an opinion during the discussion, that could be interpreted as de facto agency with the other party and run afoul of the dual agency prohibition.

Different licensees within the same office may each have agency with either the buyer or seller, in most cases. This is problematic when it comes to small brokerages and may mean that the brokerage itself is prohibited from representing one of the two parties.

In some cases, where the motivations of each party are known to the licensee, the Real Estate Council suggests the agent give up representing both and refer them to two different licensees.

However, if different licensees in the same brokerage can represent both parties there must be a physical and knowledge separation between the licensees. This could mean they are placed in separate parts of the building, a forceful ‘closed door’ policy so conversations cannot be overheard by the other licensee, and separation of databases, CRM contacts and files.  There cannot be shared staff either, such as financial analysts and administrative support to the two licensees. The idea is to create a cone of silence around each licensee. Managing Brokers will be tasked to ensure this separation exists.

During the negotiation, the licensee must take extra care not to relate any information that may detract from their client’s negotiating power. As a result, this may shift the office atmosphere to being more closed and less communicative.

There could be significant impact on the commercial leasing industry, particularly when it comes to entrepreneurial lessees. It is estimated that up to 80% of all lease transactions involving small to medium businesses are conducted between the landlord’s representative and the entrepreneur directly, where a real estate agent does not represent the businessperson.

Landlord representatives, if they are licensed Realtors, will have to make the appropriate disclosures and potentially terminate the lease discussion until the prospective lessee has signed the waiver or obtained representation, just as a residential Realtor would have to do the same at, say, an Open House.

This presents a few practical problems concerning the lease negotiation. The licensee will have to be very careful to know when they are simply providing “factual answers to general questions” and when the negotiation actually starts. It appears the best way to deal with this, is to ask the question of representation up front and get waivers and disclosure documents signed at the very beginning.

There is also a competitiveness issue. While licensees are required to counsel unrepresented parties about the potential pitfalls of self-representation and have them sign a waiver, the same requirements are not imposed on unlicensed, in-house leasing agents for large landlords and developers.

There is a cascading effect to the new regulations that must also be carefully managed. For example, if a licensee represents the purchaser of a commercial property, the licensee may become aware of the new owners motivations and interests. To uphold the concept of agency that licensee may provide representation to the new owner in lease transactions but would be forever barred from representing lessees while that owner owned the property. The reason is that the licensee now has inside knowledge of the landlord. That prohibition would end once the property was sold again – unless the license was involved in the new transaction; or the licensee has ‘inside’ information about the new owner’s motivations and interests from working for the purchaser in another transaction (past or present). Anything gleaned from the general marketplace and research is fair game however.

On the plus side, while up to 80% of small to medium sized business owners lease without representation currently; the new disclosure requirements suggesting the party obtain licensed representation should mean more lessees will engage a licensed agent to assist them. This should translate into more business for commercial licensees.

Copyright 2018 P.D. Morris

How to Handle the Recovery of Corporate Costs in Triple Net Leases

The generally accepted rule of thumb concerning the concept of Triple Net Operating Costs is that the landlord can and should recover all costs associated with operating the common facilities of the property. These costs would include all those costs to manage, operate, secure, repair and maintain the facilities, with the exception of structural costs in most instances.

Conversely, costs associated with the landlord generating income and profit should be borne out of the basic, or minimum, rent. For example, costs associated with the process of leasing space should not be recovered from the tenants.

While it may appear that this is a simple concept, it rarely is straightforward. As an example, some people feel that any costs borne by the landlord, at a level above costs incurred at the property itself, should not be included in Operating Cost Recoveries. But what if it is more efficient to have centralized services such as accounts payable, IT and HR or regionally based maintenance services? Should these be included as recoverable Operating Costs and borne by the tenants? If so, to what extent should they be included and does the market use any standardized guiding principles?

These were the questions I recently discussed with an experienced commercial real estate lawyer and an accountant who specializes in CRE at an international accountancy.

We had combined CRE experience of over 100 years between the three of us and we agreed there was no accepted single standard in answering this question, except one person’s apt response that it is whatever the landlord can do, and the market will bear. We all agreed that seems to be the sentiment. But let’s look at these questions in more detail.

First, should regional and corporate costs incurred for the benefit of the common facilities be included as recoverable Operating Costs?

The feeling is yes, they should; if those costs are aligned to the benefit of the common facilities and not for the landlord generating profit. For example, it may be impractical from a cost and governance perspective to have all the accounts payable performed at each property in a portfolio.

Likewise, it may be more practical and cost beneficial to have roaming maintenance staff rather than staff dedicated to each property, particularly when dealing with skilled trades. Those costs – with certain caveats concerning competitive pricing – should rightly be recovered from each property served.

The second question of what extent should they be recovered can’t be answered until we tackle the issue of common guiding practices, as the two are intertwined.

Let’s look at accounts payable as an example. The invoice is received, reviewed, approved, entered into the accounting system, and a cheque is issued, in a typical accounts payable process. The cheque is then mailed and the bank reconciled once the vendor has cashed the cheque, and it is cancelled and returned.

Several people may ‘touch’ the process, from the person opening and sorting the mail to the person handling the bank reconciliation. Additionally, there are costs associated with the hardware & software used, IT support, space to house the staff, desks, communications equipment, stationary, mailing costs, etc.

Estimates to completely process one invoice range up to $21.00; while the average is $7.00 and as low as $3.41 if using a state of the art AP system, and depending on the number of invoices processed.

The question then becomes: “What method is acceptable to allocate the costs?”

In this case, is it on a per invoice basis? A proportionate share of the total costs? Some other method?

Again, we found there is no singular answer. So perhaps the pundit was correct when he said, “it is whatever the landlord can do, and the market will bear.”

We did agree that certain regional and corporate expenses should be considered for full or partial recovery. These include costs associated with:

-staffing relative to the management, operation, security and R&M of the property;

– technology costs including hardware, software and IT support staff;

– tools and equipment used for the maintenance and repair of the property;

– occupational health and safety expenses, including training;

– certain marketing costs, as permitted under the leases;

– insurance and risk management costs;

– daily banking costs pertaining to Operating Cost AP;

– services that support the above, such as HR, accounts payable, etc.; and

– costs to house and equip centralized and regional services noted above.

We also agreed that the extent of the recovery would be limited by what the market would bear. And that is a far more difficult question to answer because it is also subjective. The landlord may not optimize the recovery, or open themselves up to arguments from tenants (and their lease auditors) concerning the allocations depending on the formula used to calculate and allocate the costs.

For example, consider the issue of two same-sized buildings in different parts of the same market where the competitive operating costs recoveries in those submarkets are different. Think about the implications of attempting to come to a universal cost allocation across different asset classes. Industrial properties have lower operating costs than office buildings, and can’t bear the same per square foot allocation (if done that way), for example.

The combinations and permutations become mindboggling.

We also tackled the inevitable retort from tenant representatives and corporate real estate executives who would argue that the management fee is intended to cover the centralized costs.

Our feeling was that the management or administration fee is in addition to all the costs associated with operating the common facilities. As a result, it is not to replace any of those costs; which is the effective argument of the tenant representative.

Stated differently, the landlord is assuming the management of the common areas so the tenants don’t have to manage all those functions themselves, collectively; and the administration fee is akin to compensating the landlord for overhead costs not directly associated with the property operation.

Did we come to a definitive conclusion? Not really, but the discussion prompted further research, contemplation and discussion, I’m sure.

What are your thoughts?

© 2017 Peter D. Morris

www.GreensteadCG.com

New Report Predicts Vancouver House Prices Will Fall Over 20%

Dane Eitel of Eitel Insights published a new market analysis report for Realtors, lenders and developers today that predicts the average price of single family detached houses in Greater Vancouver will fall more than 20% from the previous high, according to the Greenstead Consulting Group, Eitel’s marketing partner.

“Until now real estate professionals only had the ability see what happened with real estate prices in the past”, said Peter Morris of the Greenstead Consulting Group. The new report, called S.M.A.R.T. InsightTM, uses interpreted technical analysis and advanced charting to give insights into what the Greater Vancouver market is most likely going to do in the coming months and years. S.M.A.R.T. is an acronym for Specific Market Analysis of Residential Trends.

Eitel said; “This is not a new version of the same old data, but a completely different and useful analysis using methods that have been proven reliable for the past 112 years.” The charts included in the report visually demonstrate the real estate market tops and bottoms in sales pricing along with the trend lines for home prices throughout Greater Vancouver.

GVA Fall Trend line graphicAccording to Eitel the technical charting analyzes data from 1977 to today. “Every single time the prices or sales numbers break the trend there is a predictable response from the market,” Eitel noted. He stated that his trend report indicates a price decrease because of that response, the extent of the average price decrease, when prices will most likely bottom out and then start climbing again. His research indicates that once the market has regained its losses it inevitably reaches a new high and starts the cycle again. “Unfortunately, it will be several years before prices bottom out and regain their anticipated losses, and more years yet before a new high is reached,” he stated.

Eitel cites the 2008- 2009 housing recession as an example of how those involved in real estate can use these reports, noting that the peak and bottom prices and the subsequent rebound were predictable. The top line of the trend was broken a few times, with the sale prices six and eight months earlier acting as cues that the market was overripe and a correction was forthcoming. He states that the proprietary S.M.A.R.T. Insight gave an 83% chance of correction in the first quarter of 2008.

“Our system’s historic pricing models indicated that the technical bottom would coalesce in a cluster on the way up. The initial bottom was in place on November 2008 and confirmed in March 2009. It wasn’t until June of 2009 – three months later – that the overall general market picked up the signs of the recession coming to an end for housing prices in Greater Vancouver,” Eitel said.

He said the benefit of his modeling was advance notice of several months prior to the price decline as well as an early indication of the rebound.

Greenstead is marketing the S.M.A.R.T. Insight report via the website of its subsidiary at http://www.vantageknowledge.com

Although, the first report is about Vancouver’s house prices Eitel states that his analysis can be completed for any major metropolitan area where sufficient data exists, as well as for different types of housing such as condos and townhomes. The group plans to publish reports about Toronto and Calgary early in the new year.

The End of Commercial Real Estate Teams in British Columbia?

The Office of the Superintendent of Real Estate in British Columbia (OSRE BC) has issued several new regulations governing real estate transactions that will come into effect on March 15, 2018. These new regulations affect licensees trading in either residential or commercial transactions.

One change in particular will have a significant outcome on those involved in commercial real estate transactions including leasing and investment sales. That is the elimination of Limited Dual Agency, except in very remote areas of the province.

Limited Dual Agency permitted the licensee to represent both the seller and buyer or multiple buyers in a transaction, with the consent of the parties. The same applies when acting for both lessors and lessees.

As of March 15, 2018 the licensee will only be able to act on behalf of either the seller/lessor or buyer/lessee and not multiple parties. The licensee will be the Designated Agent for the party they represent. The OSRE BC has placed the onus on the brokerage to ensure that their licensees do not act as Limited Dual Agents.

According to the official summary of the OSRE BC public outreach for comments, the OSRE BC has also taken the following position: “A team will not be able to engage in dual agency to represent both a buyer and a seller, or multiple competing buyers, in a transaction as the team is considered collectively to be the designated agent of a client [NB: the bold emphasis is mine]. While teams may be a convenient business model to facilitate a real estate transaction, a licensee’s responsibility to fulfill their fiduciary duties takes precedence over the ease and timeliness of completing a transaction. Teams wishing to represent both buyers and sellers in a single transaction could consider licensing as a brokerage in order to continue to provide this service.”

Therefore, a team may not have both a buyer’s representative and a seller’s representative, for example. The OSRE BC’s proposed solution would be to create separate brokerages, which may not be feasible or desired.

In speaking with a Realtor® about this, he said his managing broker said that to ensure the licensees representing one party are independent of the other party in an instance where the brokerage represents both the seller/lessor and the buyer/lessee he believed there would need to be a physical separation at a bare minimum, such as walls. Keep in mind, that the new regulation is intended to avoid potential conflicts of interest and reinforce the fiduciary duties of agency. Therefore, my point of view is that the separation would also include information about the other party, their motivations, data, CRM information, and computer files, etc.

What does this mean to full service teams, or teams that work in a specialized niche market that is so small, or the team’s expertise is widely known and accepted by the industry players? Those teams will surely need to break up.

Additionally, brokerages will incur extra expense creating all the separation required.

I’d be interested in knowing your thoughts on this topic. I’ll also be providing information and my point of view on some of the other new regulations in other posts.

 

 

 

 

New Residential Market Insight by Greenstead Consulting Group & Eitel Insights

Peter D. Morris of the Greenstead Consulting Group and Dane Eitel of Eitel Insights have joined forces to exclusively produce and market S.M.A.R.T. InsightTM, a new and innovative technical analysis of market pricing in any residential market in the world.

According to both Morris and Eitel the S.M.A.R.T. Insight analysis not only indicates what occurred in the past, but it can be predictive of what the market is likely to do in the future. Both Eitel and Morris believe this future looking aspect is critically important. For example, the detached single-family home price in Vancouver BC is expected to drop by 21% from its high by 2019 according to a recent analysis performed by Eitel. “More importantly it also suggests when the price will recover,” said Eitel.

“This type of forward looking analysis is unique in the real estate industry, which has typically relied on historic year over year averages,” he said as he explained that the method used to analyze the data was first proven in 1902 in another industry.

Morris said the results provide a distinctive insight to the market that is useful to homeowners, Realtors, lenders, developers and many others around the world. “Imagine the competitive advantage if you knew what the market may do in the future rather than what it did in the past,” he said, adding that most people are interested in knowing what will happen in the real estate market so they can plan what they will do. Eitel, who is also a licensed residential Realtor, noted that Realtors can use this information to guide their clients and improve their business. Morris said lenders can use the information to mitigate their lending risks and developers should be most interested in knowing the future of the market due to the time it takes to get a new development to market. “Anyone involved in residential real estate needs this,” Eitel added.

READ MORE

IMPORTANT:

The pricing on these reports provides a great return on your investment. Here are some ways you can use these customized reports:

  1. Be seen as a thought leader
  2. Generate new listings
  3. Create sales momentum
  4. Improve your brand
  5. Get more PR

There are many reports that will be made available covering whole markets; sub-markets; and different asset classes, such as single family detached homes, condos, and townhomes. The first report will be out soon and will cover single detached residential homes in Greater Vancouver.

 

Peter D. Morris comments on the closing of Sears in Canada

Principle Consultant for the Greenstead Consulting Group, Peter D. Morris, comments on the closing of all the Sears stores in Canada in this article in Retail-Insider.com

https://www.retail-insider.com/retail-insider/2017/10/sears-canada?utm_source=Retail+Insider+Newsletter&utm_campaign=bcf3861251-EMAIL_CAMPAIGN_2017_10_11&utm_medium=email&utm_term=0_659c2a0c20-bcf3861251-113728729

 

Peter Morris to Speak at the VI Commercial Realtor Summit

We are pleased to announce that Peter D. Morris will be the featured workshop leader at the Vancouver Island Commercial Realtor Summit on October 3, 2017.

This full day workshop, called the Masterguide to Leasing is based on his book Masterguide to Leasing for Retail Landlords; but with expanded content to cover all asset classes and both the landlord and tenant perspectives.

The Summit is a joint presentation of the Victoria Real Estate Board and the Vancouver Island Real Estate Board. These two Boards represent Realtors throughout Vancouver Island and all the Gulf Islands.