Non-profits and new players in the rental real estate market – the ultimate checklist
Goodman Report
The BC government’s new $500-million taxpayer-funded Rental Protection Fund, which went live at the end of June, has injected a relatively small amount of capital but a large amount of potential risk for non-profit players being tempted into the market.
When Premier David Eby first announced the new fund in January, he said it aimed to provide an advantage to non-profit property purchasers in any competition against the relatively more-experienced and better-resourced real estate investment trusts (REITs). There are a host of problems with this approach from a policy perspective: To begin, the fund isn’t big enough to have a real impact and it relies on a flawed, ideological hostility to a portion of the rental housing sector’s investment pool. However, the biggest immediate risk is that the government has tempted a whole set of potentially inexperienced buyers to jump into a complex and ever-changing market.
So, before offering a further critique of the policy itself, we are providing a checklist for new buyers in hopes of helping them avoid some of the problems that might unduly impact their operations and undermine the health of the sector generally.
It should be clear that we support non-profits in our industry – with our time, skills, committee work and philanthropic giving. We also have assisted non-profits in the purchase or sale of rental properties over the decades, all on transactions that were executed without the need for this fund. These groups have ranged from crisis centres to faith-based organizations.
We have noticed since the BC NDP’s announcement in January, there has been a significant uptick in interest from inexperienced players calling and touring the properties we have listed. So, as a firm that has been involved in the sale of hundreds of rental buildings, we would like to point out how non-profits, and other buyers, have succeeded in the past, and identify some potential pitfalls.
Path to success
The main advice to anyone contemplating a move into this form of commercial real estate is the same as in any other major business undertaking: do your homework. Learn as much as possible early in the process to reduce roadblocks and execute with confidence. For example, does your team know what type of building they want to acquire? What attributes will serve the people you are supporting? And is that product available in the current market? It is essential to begin this process with a prioritized list of ‘must haves’ and a ‘nice to haves,’ so you don’t find yourself seduced by something that’s attractive but doesn’t actually fulfill a critical need.
Considerations
Here is a list of specific issues you need to consider:
| Issues to consider | Notes |
|---|---|
| Location (for the ownership) | Municipality, proximity to other owned assets. |
| Location (for prospective tenants) | Proximity to services, public transit, etc. |
| Price | What price range can your organization manage (preferably calculated without relying on the new fund)? What loan-to-value (LTV) and debt-service coverage ratio (DSCR) can you support? If you have a property under contract, complete your due diligence and can remove subject conditions, but your Rental Property Fund request doesn’t get approved, do you have a Plan B to complete the transaction? |
| Construction type | Wood-frame or concrete? High-rise, low-rise or townhouse? Pricing and availability of buildings will be impacted by the type of construction. |
| Suite mix | Many buildings in this market date from the 1950s to 1970s, during which time family-sized units were atypical. If there is a need for 2- and 3-bedroom units, the pool of potential buildings will be significantly diminished. |
| Number of units available for rent upon acquisition | Most properties are fully occupied, and turnover rates are extremely low. If your group has a long waiting list of would-be tenants, a building with 5% turnover per year would take 20 years to fill up with the people you are supporting. |
| Elevator access | Many older buildings do not have elevators. If this is a requirement, the pool of available buildings for purchase will be low. |
| Accessibility requirements | Many older buildings also have accessibility challenges. On one hand, corridors are typically wider and suites are larger, but bathrooms and kitchens are generally much smaller. A budget and design plan should be crafted ahead of time should a significant number of units (perhaps on the main floor if no elevator access) are required to be accessible. |
| Operating team | Have you built out your team? Property management, caretaker, waste management, insurance provider, landscaping, etc. |
| Capital upgrades | Can your organization take on a roof replacement, window replacement, boiler replacement? If not, you’ll need to make your ‘must have’ list include buildings where this work has been completed. There are a limited number of fully upgraded buildings. |
| Acquisitions team | It’s important to have a knowledgeable acquisitions person to develop your investment model for determining what buildings meet your criteria and to analyze the transaction. |
| Legal | Is your legal counsel ready, with offer template approved by your Board? |
| Building condition team | Do you have in-house or available consultant capacity to assess buildings? |
| Environmental team | Do you have expertise (in-house or available) to assure you don’t wind up with unaffordable environmental issues? Do you accept Seller-provided Stage 1 reports? (hint: you should). |
| Due diligence | What information do you need to review (current rent roll, financials, contracts, environmental reports, etc.) to satisfy your due diligence condition? Does it make sense (or are you asking for too much)? Know your ‘must have’ and ‘nice to have’ due diligence list. |
| Financing | Do you know how much debt you can service? Can you meet closing dates? If there is favourable debt in place, are you able to assume it in a reasonable amount of time? |
| Closing costs | Are you subject to Property Transfer Tax? Do you have a summary of all closing costs necessary? |
| Decision making | Most groups have a board of directors or other oversight. It is critical to develop a small group or sub-committee (maximum 3 people) to handle the transaction, offering and decision-making process for acquisition. Put power in the hands of a small number of people to analyze, tour, offer, counter and complete the initial due diligence work. If board approval is required, make that a part of the subject removal process. Once your upfront homework is complete, put only the final decision to the larger group. |
What to avoid
A perfect example of what not to do:
One group required all eight of its board members to see the inside of the building before they could submit an offer. Yet board members are typically high-level executives with busy schedules; trying to align them all for one tour can be next to impossible. This slows the process, perhaps critically and imposes an unnecessary burden on tenants, who wind up enduring multiple tours and disruptions. All this before knowing whether buyer and seller are aligned in terms of price and conditions.
| Issues to avoid | Notes |
|---|---|
| Long subject periods | Aim to have all your due diligence completed in a matter of days or weeks. |
| Not understanding the debt structure | Offer with a firm understanding of your debt structure and back-up plan. |
| Absence of consultants | Offer knowing your consultants availability to tour. You will need to have one day where they can all inspect the building at the same time. |
| Too many cooks | Agile decision-making ability is critical. |
| Analysis paralysis | An ever-evolving list of requirements puts undue pressure on the process. It’s crucial to create a ‘must have’ list, and to match it with the reality of the condition and construction of the old rental stock that is available in your price range. Once you have narrowed your search, ensure an internal process and checklist is completed and followed. |
Government inducements often entice unprepared players who see the opportunity of what they think is free money and jump in without a prudent strategy. A buffer of government money is no substitute for a hard-nosed business plan. Rather, the extra funding might increase market pressure – and risk. Ensure you have a path to success before exposing your organization to a misuse of time and resources. As always, please reach out to our group to discuss your commercial property needs.