New Real Estate Reporting Regulation for BC, Canada

If you, or your client, own real estate in British Columbia, Canada via a company, trust or partnership you need to know about the new reporting requirements effective September 17, 2018 as they affect the Property Transfer Tax.

The new regulation can be found by clicking HERE.

To read our previous post about this, please click HERE.

Beneficial Reporting Submission Requirement in BC, Canada

You need to be aware of an important submission date of August 19, 2018; if you are a land owner in British Columbia.

The BC Government is seeking feedback on proposed legislation concerning the reporting of beneficial ownership in land in BC.

The reporting raises several concerns, not the least of which is that it could lead to changes in the Property Transfer Tax in order to obtain it in a share sale, where the beneficial ownership changes. Additional concerns include privacy of individuals and the increase in administrative costs to continue reporting to the government.

This safe link provides more information: CLICK HERE

 

 

 

We Are Relocating

We are moving offices effective July 4, 2018

Our new address is #116, 9072 Fleetwood Way, Surrey, BC V3R oM6

Our new phone number is: 604-839-4479

The new phone number is effective immediately.

Our email addresses remain the same.

Greenstead Consulting Group Expands Services to the USA with Bespoke Real Estate Advisors Network Affiliation

Peter D. Morris, CEO of the commercial real estate advisory firm Greenstead Consulting Group announced today an affiliation with the Bespoke REA partnership team based in San Francisco, USA.

“We are very excited and proud to start this association with Bespoke Real Estate Advisors,” said Greenstead Founder and CEO Peter D. Morris. “They share our commitment to performance for our customers with a wide range of services, conducted by people who are passionate about creating client centric and sustainable results. Our existing clients will benefit from the knowledge and reach of the Bespoke network. We also believe our unique and complementary services and structure will benefit all Bespoke clients.”

“With significant investment and occupier focus transcending the border between our two countries, Canada is integral to our global coverage,” said Bespoke Real Estate Advisors Founder and CEO Robert Bagguley. “From the moment Ed Wlodarczyk (Bespoke Founding Team Partner and COO) made the introduction, it was clear that the Greenstead model and Peter’s stellar reputation were in perfect alignment with Bespoke and our goal of providing uniquely customized, high-level real estate solutions. The partnership with Greenstead will ensure quality and enhance our footprint as we continue to grow and expand our presence in Canada.”

For more information about Bespoke Real Estate Advisors, visit www.bespokerea.com.

New Leasehold Advisory Client Announcement

The Greenstead Consulting Group secured a contract to provide lease audit services for the corporate stores of Anytime Fitness, a franchised fitness business headquartered in Minnesota, USA.

According to the CEO of Greenstead Consulting Group, Peter D. Morris, this is part of a comprehensive lease management service that will be extended to the system’s franchisees across North America.

“Our Leasehold Advisory real estate service provides occupier/tenant, independent business people with the same quality of service as one would find in a large real estate department of an international chain,” said Morris. “Tenants, of all sizes, now understand that managing their real estate is not a lease transaction every 3-5 years. It is a major part of their business, and that needs to be properly planned, implemented and monitored on a continual basis between those transactions. We act as their in-house real estate department.”

Morris noted that a tenant’s lease obligation is typically one of the top three expenses a company incurs; yet most entrepreneurs don’t have real estate expertise. That was the reason he created the service, based on his three decades in the industry.

The unique service model Morris developed allows independent tenants and small chains to obtain a bundle of services on a subscription and a la carte basis. For example, Greenstead Consulting Group will manage ongoing lease management services for a small annual fee; while handling infrequent larger issues, such as a tenant relocation negotiation, or estoppel verification, on an hourly basis, and as the need arises. This saves our clients money and provides a great return on their investment.

Real estate is only a function, or a component, of the entrepreneur’s business that allows the businessperson to conduct their business, whatever business that may be. But he noted that the landlord’s business is only leasing real estate. Morris fervently believes all tenants should proactively manage their leases in order to save money and reduce risk. “This is a very cost effective way to accomplish that”, he said during the interview.

“The Anytime Fitness franchisor recognized that they could provide enhanced services to their franchisees, who are typically the tenant on the lease,” said Morris. The franchisor already provides brokerage services, whereas Morris’ firm fills in all the other areas related to the franchisee’s real estate.

The lease audit service Morris’ company is providing to the corporate locations reviews the landlord’s billings to the tenant against the provisions of the lease. Greenstead Consulting Group then discusses the review with the landlord and seeks a refund, if a billing error is found. There is no downside risk to the client since lease audit service fees are contingency based; meaning the client doesn’t pay unless an error is found.

It is one component of the Leasehold Advisory service package offered by Greenstead Consulting Group.

To learn more about the services we can provide tenants with even just one location CONTACT US.

New Client: Medicine Hat Real Estate Board

We are very proud to now be associated with the Medicine Hat Real Estate Board. This small board has contracted with Greenstead Consulting Group to present a number of commercial real estate courses in 2018. In order to keep the client’s budget restrictions in mind we have developed two types of courses:

  1. A series of six or seven, one-hour daily webinars held consecutively (Monday to Friday) to cover longer courses such as the Masterguide to Leasing program; and
  2. short one-hour webinar courses, such as the Masterguide to Writing a Leasing Letter of Intent.

By using a webinar format the Medicine Hat Real Estate Board saves on the travel, accommodation and meal expenses typically associated with an in-person training event. It also makes participation in the courses very affordable for their members.

During the series courses, participants have email access to the instructor during the run of the course schedule to ask questions and obtain clarifications. This creates an intimate Q&A session between the instructor and each participant, where the participant doesn’t feel embarrassed by asking their question. This is a common participant concern when they are in front of peers during an in-person event.

Participants receive email access to the instructor for the first 12 hours after the short, one-hour webinars for an individual Q&A session.

Members of the Medicine Hat Real Estate Board will register with the board directly for the courses they wish to take, and pay the Board their registration fee. The Board retains a portion of the registration fee for their promotion of the courses and the administration of the registration process.

The Board has no other costs as all other logistical costs, such as the webinar hosting, are borne by the  Greenstead Consulting Group.

Please CONTACT US if you would like to learn how we can create a similar program for your Real Estate Board or Association.

Supreme Court Case Has CRE Implications

NOTE: I am not providing legal advice with this article. Please consult with a lawyer to determine the actions you may wish to take.

This past week the Supreme Court of Canada heard arguments in what is called the Redwater case. It’s expected that the Court will render its decision over the summer. At the heart of the court case is the question of bankruptcy and creditor priority versus the environment and environmental clean up.

Redwater was an insolvent oil company with approximately 70 wells operating throughout the province of Alberta. The primary lender to the company, ATB Financial, and the trustee argued that under Federal bankruptcy law the trustee in bankruptcy could sell the profitable assets and disclaim the well leases that were unproductive. This left the unproductive wells to the Orphan Well Association (OWA), an association funded by the oil industry and charged with decommissioning and cleaning up abandoned wells in Alberta. Part of their argument was Federal bankruptcy laws trump provincial environmental regulations. The lower courts appeared to agree on that point.

On the other side of the table, the provincial government argued that Redwater must clean up environmental hazards and any monies derived from the sale of assets should first and foremost go to the underfunded OWA to expedite the decommissioning of the abandoned wells.

As background to the case it should be noted that these wells are located on third-party agricultural land and the oil company had the right to install these wells so long as they paid a royalty or rental fee to the landowner. In this complicated case the lower courts ruled in favour of the trustee in bankruptcy meaning they could to pay the primary creditor (ATB) first and leave the abandon wells to the OWA to clean up.

Unfortunately, in Alberta there are approximately 1600 abandon wells and another 1500 underperforming wells. This means it could be decades before all the abandoned Redwater wells are decommissioned. This, according to the province and affected farmers, poses environmental, financial and health risks.

There is the argument that the lower courts decisions would give oil companies an ability to organize their affairs so they do not have to take responsibility for their drilling.

It is believed that the Alberta Energy Regulator erred by not requiring oil companies to post bonds or insurance to cover the decommissioning of abandoned wells.

So what does this have to do with commercial real estate?

If the Supreme Court upholds the two Alberta provincial courts decisions then it could have implications beyond the oil patch, and affect any premises or land where pollutants could be deposited.

Therefore, I believe it would be prudent for landowners to ensure their tenants post a bond, or obtain insurance in some form, to pay for the clean up of their operations if the tenant becomes bankrupt. Otherwise, a trustee in bankruptcy could simply disclaim the lease and the landlord would face the costs of cleanup themselves.

All the leases I’ve personally seen assume the environmental obligations pertain to a tenant that is viable and ongoing. They do not foresee what happens if the tenant is bankrupt.

 

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