Investing In Real Estate Through Your Business

[00:00:00] Welcome to The Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] Do you own a business or are you thinking of starting one in the future?

[00:00:18] If so, you may be wondering, should I rent or should I buy the space that I operate my business out of?

[00:00:25] Maybe you're in manufacturing or shipping and logistics.

[00:00:30] Or maybe you're a contractor or a tradesperson that needs more space for your growing business and your equipment.

[00:00:37] What if you have a restaurant or a bar?

[00:00:41] Or maybe a tanning salon, a dry cleaners or a law or dentist practice?

[00:00:46] Today we are diving into the world of owner-occupied commercial real estate,

[00:00:50] an often overlooked strategy that can provide unique opportunities and benefits to savvy investors and business owners.

[00:00:57] So whether you're one of those business owners who wants to invest in your workspace

[00:01:02] or you might just be looking to diversify your portfolio,

[00:01:06] understanding owner-occupied commercial properties can unlock a wealth of potential.

[00:01:13] But what kind of businesses are best suited for it and what the main benefits of using this strategy are what we're going to discuss in today's episode.

[00:01:24] So welcome back to the Canadian Real Estate Investor Podcast.

[00:01:27] My name is Nick Hill.

[00:01:28] I am a mortgage broker and a real estate investor.

[00:01:32] My name is Daniel Foch.

[00:01:33] I'm a real estate broker and investor.

[00:01:35] And over the years, we have worked with hundreds of investors across the country.

[00:01:40] And some of those people are also business owners.

[00:01:43] And we love working with investors and business owners because each deal is different.

[00:01:49] Isn't that right, Dan?

[00:01:49] It keeps us on our toes.

[00:01:51] And we are constantly looking at new investment theses, different exit strategies, and methods of scaling portfolios.

[00:01:59] I believe it's theses, by the way.

[00:02:02] Theses, thesis, theses, thesis.

[00:02:06] And again, in today's episode, we're going to be discussing something that hasn't really come up much on the show before.

[00:02:11] I think we've talked about it a little bit, but not a ton.

[00:02:14] Probably not as much as I wanted to because it's a little bit out of scope.

[00:02:17] I mean, I've done deals for these types of people who are owner-occupied commercial,

[00:02:22] who want to buy property to run their business out of and build equity into their business.

[00:02:28] But it's not something we've talked about in depth, especially from the finance lens, which is what we're exploring it in today.

[00:02:33] And that's owner-occupied commercial real estate.

[00:02:35] Yeah. So stick with us as we discuss the benefits, the challenges, the different financing options,

[00:02:41] and how financing differs from other investment strategies, as well as the power team members that you're going to need.

[00:02:48] And we have this discussion with a seasoned banker who's been in the space for almost two decades.

[00:02:54] That's Andrew Quercia. Did I say it right? You guys have an Italian thing going on.

[00:02:58] I say Quercia, why, yada, yada, come on.

[00:03:00] He is so knowledgeable in the space and really provided clarity on things like what these financial thresholds are

[00:03:09] and the different ways to apply and the different ways that lenders think about these applications

[00:03:14] and these deals and potential exit strategies for owner-occupied commercial owners.

[00:03:18] Yeah. And I think the potential exit strategies was a big takeaway for me.

[00:03:23] And the fact that, you know, there are both pros and cons to this strategy.

[00:03:28] And he was able to make that very clear and easy to understand by providing us some real life examples,

[00:03:32] because honestly, Dan, not every business person and not every business itself and not every location is suited for owner-occupied investment.

[00:03:44] So he makes it very easy for us to understand.

[00:03:47] So on that note, let's bring Andrew in.

[00:03:51] Mr. Andrew Quercia, Senior Manager of Commercial Sales at TD Bank.

[00:03:57] Thank you so much for joining us today.

[00:03:59] We're really excited to ask you some questions about owner-occupied real estate, what that means, the challenges, the opportunities,

[00:04:07] what kind of business it fits in with.

[00:04:09] But before we get into all of that good stuff, Andrew, can you tell us a little about you, your background in the banking world,

[00:04:16] the role that you play now at TD and just a bit about what you do?

[00:04:21] Yeah, absolutely. And first and foremost, thanks very much, Nick and Dan, obviously for having me on.

[00:04:26] I appreciate the opportunity to chat with you today.

[00:04:31] So as you mentioned, my name is Andrew Quercia.

[00:04:33] I'm a Senior Manager of Commercial Sales with TD Commercial Banking.

[00:04:37] I've worked for TD Bank, I want to say just almost shy of 17 years now.

[00:04:43] Most of that has been in a commercial lending, commercial banking capacity.

[00:04:49] I started my career in downtown Toronto, sorry, started my commercial banking career in downtown Toronto just about 12 years ago.

[00:04:58] Basically, I did all your commercial banking roles there.

[00:05:02] You start out as an associate where you learn how to underwrite, how to assess various commercial lending opportunities for various industries.

[00:05:13] Moved to our Missaga office right at the beginning of COVID.

[00:05:17] I was a credit manager in that capacity for about the last four years.

[00:05:23] And I joined our Vaughn office here at Keelan Steels just about a year ago in the commercial sales leadership capacity.

[00:05:32] Awesome. Yeah, that's fantastic.

[00:05:33] I think I want to start at the very beginning here.

[00:05:36] We'll take it back to the basics.

[00:05:38] Can you maybe tell us what is, I mean, I know it's kind of sounds obvious it's in the name, but what is owner-occupied commercial real estate?

[00:05:47] And maybe provide some examples and some context around that.

[00:05:50] Absolutely.

[00:05:51] So owner-occupied real estate, generally speaking, is any kind of situation where you have an owner user who requires, obviously, a piece of real estate to operate out of for various reasons.

[00:06:06] They seek to own that real estate, so they want to own it.

[00:06:09] A lot of them want to complete capital improvements on the property.

[00:06:12] They don't want to have to deal with, say, a landlord or manage through tenant inducements, et cetera.

[00:06:19] So generally how the banks or how TD would be an owner-occupied piece of real estate would be kind of your minimum occupancy, your occupancy of the space has got to be 50% of the gross floor area.

[00:06:32] So there is a little bit of a kind of call it a mathematical view to that.

[00:06:37] So it's got to be majority kind of majority-occupied.

[00:06:40] It's not to say that you can't consider something less than, say, 50% of gross floor area occupation as owner-occupied.

[00:06:49] It really has to do with the full story.

[00:06:51] So a lot of what we do obviously involves making sure we know our clients and understand what their needs are.

[00:06:58] Occasionally, you'll see cases where a customer maybe doesn't have a need for, say, a full occupancy of that piece of real estate.

[00:07:07] They want to kind of start small, but they want to do that in an ownership capacity.

[00:07:11] So they might occupy, say, less than 50%, but with an intention to, say, scale.

[00:07:18] Or even in some cases where they may acquire a property and actually it's subdivided into, say, four or five units, and there may be a need or a need to accommodate the tenants that are there currently for the end of their lease.

[00:07:32] And then they'll look to scale up down the road.

[00:07:35] But at the end of the day, it really involves there's an intention to occupy at some point in time, whether it's immediately upon close or shortly thereafter, kind of this entire building or the majority of this building.

[00:07:49] Interesting.

[00:07:50] When you talk about that, what seems to be the most common types of businesses that are using this type of strategy?

[00:07:56] We talk a lot about people using real estate as a wealth building tool, but I think it's also a way, seems to be, for businesses to kind of forego rent, forego the opportunity cost of rent and potentially build asset wealth into the business.

[00:08:10] Is there a type of business that is the best fit for this strategy?

[00:08:13] And is there a type that you seem to see using it more commonly than others?

[00:08:17] Yeah, absolutely.

[00:08:18] Like generally, you know, obviously, where I'm located in Vaughn, it's, you know, there's a lot of industry, you know, generally in Vaughn and around the GTA.

[00:08:27] I'd say most owner operator type users, you know, would generally be, you know, your type of manufacturing businesses or some businesses that have some kind of product or something that's, you know, physically needs to be stored, or there's an operation that they need to, you know, conduct out of this property.

[00:08:48] You know, generally, like e-commerce businesses can get away with like third party logistics or warehousing through third parties.

[00:08:55] And, you know, there may not necessarily be a need to have owner operator real estate.

[00:09:00] But generally what I see the most of is there's some capital requirements.

[00:09:04] So there's a need to put in say overhead cranes, there's a need to put in, you know, assembly lines.

[00:09:09] And a lot of these are capital improvements that are built into the building.

[00:09:12] So they kind of become this cost that gets rolled up into say the book costs or the book value of this building.

[00:09:20] And to do that on a lease rented premises, you know, there might be some sunk costs.

[00:09:24] And in some cases, you know, having things like an overhead crane, et cetera, may actually positively impact, you know, the valuation of a building.

[00:09:33] You know, if again, if there's an end user looking for that.

[00:09:38] Yeah, totally.

[00:09:39] So I guess what I'm hearing, Andrew, is that let's say you've got some kind of manufacturing, whether it's food processing or tool and dye or creating some kind of widget or something like that.

[00:09:51] And you need to go and actually spend money on these unique manufacturing tools.

[00:09:57] That's really where it makes sense, right?

[00:09:59] Instead of just having like, hey, you know, we need to store this stuff.

[00:10:03] You know, should we go buy a hundred thousand square foot warehouse?

[00:10:06] I guess the answer would be maybe not in that sense.

[00:10:09] But if you, I guess, plan on being there for quite a while and in commercial real estate, you've got that relationship with your the landlord and the tenant where you get, you know, TI, which is tenant improvement allowance.

[00:10:20] And from there, I guess most landlords aren't giving the tenants, you know, the ability to go spend hundreds of thousands, if not millions of dollars on specialized equipment.

[00:10:30] Am I right to think that?

[00:10:32] Yeah, exactly.

[00:10:33] Right.

[00:10:34] It's, you know, a lot of customers, you know, will look at, you know, an owner operator piece of real estate and saying, you know, I have the freedom to modify the property.

[00:10:43] I have the freedom to kind of invest in the property and not having to deal with a landlord or even the potential to your point that I may have to move all this equipment at some point in time, which obviously comes at, you know, a cost to them.

[00:10:55] Yeah, I guess on a smaller scale outside of the larger manufacturing types, can you provide maybe some examples or some businesses that you've seen that are maybe a bit more of the, let's say, you know, small cap investor style that this would, that the strategy would make sense for as well?

[00:11:16] In terms of, so just in terms of like an owner operator looking for, say, a smaller footprint, like industrial or like occasionally what we'll see, you know, is say, you know, a common one would be medical offices, right?

[00:11:32] So you have kind of doctors, lawyers, dentists.

[00:11:35] Those are obviously businesses that, you know, for the most part, there's an in-person element to them.

[00:11:41] It's kind of at the center, obviously, of what they do.

[00:11:44] And so there's a need for space, right?

[00:11:47] And, you know, generally they'll look for, call it, you know, commercial condo type buildings, retail plazas, anywhere, or in some cases, you know, small office properties, or even, you know, even seen doctors occupy residential houses where zoning permits that use, right?

[00:12:04] So, again, for a dentist, you know, for example, there's an opportunity to, you know, generally leasehold improvements are required to put in, you know, your chairs, your operatory rooms, et cetera.

[00:12:19] And there's a capital investment, you know, affiliated with that, that they need to do.

[00:12:24] So they, again, are, you know, what I've seen in the past, end users looking to acquire some space for their own.

[00:12:32] I guess on the flip side, where doesn't it make sense if you are a business owner?

[00:12:39] Where does it make sense to be a tenant in some of these spaces versus, and I know this is kind of the opposite of what you do because you help people own or occupy these commercial residential or commercial residential retail and industrial type properties.

[00:12:55] But for people that have a business and also want to invest in real estate or maybe considering, you know, do I buy this building or whatever, where would you say that maybe that's not the best idea or not the best use of capital?

[00:13:09] You know, it's really, it's tough for me to say, you know, because at the end of the day, you know, business owners, you know, see opportunities in ways that, you know, I definitely may not as a banker, right?

[00:13:22] And, you know, it never ceases to amaze me, you know, the skill of the entrepreneurs and their ability to unlock opportunities and identify, you know, opportunities that others may not.

[00:13:33] And I think any individuals or any company situation, it's very situation specific, right?

[00:13:41] You know, a lot of companies will assess, you know, there's so many things to consider when you're looking at, you know, acquiring, obviously, a piece of real estate.

[00:13:51] And generally, you know, what we see is obviously the initial capital cost, you know, the down payment, the ongoing, you know, kind of cost to maintain.

[00:13:59] If a customer is looking at taking out a loan or mortgage on that property, what are the costs to service that?

[00:14:06] You know, what is their kind of interest rate risk involved, depending on, you know, things like interest rate volatility and, you know, how long they're looking to hold that piece of property and how that might impact them at, say, initially at acquisition or future.

[00:14:21] You know, refinancing.

[00:14:23] So there's so many factors that go into the decision based on what I've seen for, you know, business owners to buy or not to buy.

[00:14:32] And generally, again, they'll be guided by that.

[00:14:34] And, you know, what I always encourage customers to do is, you know, work with your banker, you know, talk to your banker.

[00:14:42] And, you know, a lot of bankers, you know, want to help their clients as best as they can and will, you know, you know, run calculations for them and help them kind of arrive at that decision to be able to say, you know, make an educated decision on, hey, is this something that, you know, I want to acquire?

[00:14:57] You know, I know what the cost involves.

[00:14:59] Here's what it would cost me to say, for example, take out debt on that property and, you know, what's my ability to kind of service that debt over time?

[00:15:09] Yeah.

[00:15:09] I know Dan's got a good question lined up next.

[00:15:12] I just I want to just provide a personal anecdote in regards to a family member of mine who actually owns who bought a bunch of, I guess, kind of industrial type of manufacturing type of real estate in Richmond, B.C.

[00:15:26] And they owned a food processing plant.

[00:15:29] So literally prime example, right?

[00:15:31] They went in, they knew what their specific business needs were.

[00:15:35] They knew that they had all this very specialized equipment that they were going to invest in and bring in.

[00:15:41] And these would be kind of, you know, semi-permanent to permanent fixtures within that building.

[00:15:46] Now, they've since sold that company, but they have maintained ownership of the real estate and are now able to rent that out to that new owner of the company.

[00:15:57] Yeah, I think you see it almost as like a combined strategy, right?

[00:16:02] Like in the fullness of time, even like handoffs from businesses, like one of the largest industrial portfolios that I've ever consulted on.

[00:16:09] And the guy just built up enough real estate that like that he needed for his business.

[00:16:14] And then in the fullness of time, the business actually like because of globalization and things moving to different places and a lot of like businesses and at least in our area in that sector, we're kind of running as like zombie companies almost just like existing to pay the owner's salary.

[00:16:33] He felt, you know, okay, it's time to probably shut the company down, but would have had nothing to sell at the end of the day.

[00:16:38] You know, it would have just done what he described, paid his salary for his whole life and paid a bunch of other people's salaries, but there was no wealth in it.

[00:16:46] And then at the end of the day, he had, you know, over $100 million worth of industrial real estate to sell.

[00:16:51] On that note, what seemed to be like the main benefits and the main things that attract business people to this strategy from your perspective?

[00:16:59] Yeah, I think, again, you know, it's there's so many reasons and it's and it's unique to kind of the company or the individual behind the company that's looking to acquire, you know, the real estate, you know, whether it's, you know, desire to kind of build up equity over time and obviously acquisition of an asset, which, you know, you know, they'll eventually have, you know, paid in equity and own.

[00:17:22] But also, it's the control and it's the ability to, you know, scale their business and operate their business kind of freely out of that property without kind of having, you know, tenant landlord relations interfering or whatnot.

[00:17:39] Yeah, I guess on that note, Andrew, what would be the main challenges that you see?

[00:17:45] Because obviously, you know, we I think we've all agreed and all understand that this this strategy isn't right for for every business owner.

[00:17:52] Right. But but it seems to be very right for some.

[00:17:56] What are some of the main challenges that you see, you know, even for those people that it does make a lot of sense for?

[00:18:01] What kind of challenges are they running into?

[00:18:03] And, you know, how are you helping them them through these challenges?

[00:18:07] Yeah. You know, like like anything, you know, an asset requires maintenance over time.

[00:18:12] Right. So, you know, you know, generally when companies look to acquire property, there's a lot of consultants and advisors that support them, you know, in the acquisition of those properties, be it environmental consultants, be it structural mechanical engineers.

[00:18:30] You know, which obviously bring a ton of value.

[00:18:34] You know, it's like anything you're making a large acquisition.

[00:18:37] You know, it's going to cost a lot of money.

[00:18:39] It's good to engage the right professionals to make sure, again, you're informing yourself, you know, as well as you as well as you can.

[00:18:48] And so oftentimes, say, you know, you'll get a structural mechanical report.

[00:18:51] It'll say, hey, you know, the roof has got a useful life of maybe five years or beining.

[00:18:55] You know, it's going to cost X dollars to to replace.

[00:18:58] Right. So, you know, you know, again, that's that's a cost that the the owner operator would have to factor in, you know, replacing that roof.

[00:19:07] You know, an owner operator may approach their bank and say, hey, would you be willing to do like a leasehold improvement loan to help me finance that?

[00:19:14] And again, situation specific, you know, you know, banks would look look to, you know, again, support for clients as you know, as best as they can, you know, for financings of that nature.

[00:19:25] So it's it's, you know, really like capital upkeep is is is is is a big factor.

[00:19:32] And obviously, the bigger the building, you know, the bigger the cost to, you know, maintain it.

[00:19:37] Right. And and then obviously, there's the operating cost elements to write your taxes, maintenance, insurance and, you know, that that go into it.

[00:19:46] Right. Yeah. I guess when you when you're playing landlord and tenant, you're you're really owning both the capex and the opex.

[00:19:52] There's there's no, hey, going back to landlord and saying, I need a new roof.

[00:19:56] It's it's I you just need a new roof and you just got to go do it.

[00:20:00] Yeah. Yeah, exactly.

[00:20:02] Or risks like if it's a food service business.

[00:20:04] Right. Like there are elements of those of certain industries based on the user using the building, you know, that it's it's a non-negotiable thing.

[00:20:13] Right. You can't have a roof leak and, you know, be a provincially federally regulated industry that can have the potential for contamination or anything like that.

[00:20:23] So it's, you know, it's it's it's a lot of these improvements.

[00:20:27] They're not nice to have things that they need to have. Right.

[00:20:30] Right. Right. Excellent point.

[00:20:32] In that regard, like where it where it seems like there are some distinct differences almost in this niche category by comparison to other categories.

[00:20:41] How does this like how does finance in or for owner occupied real estate in the commercial space differ from regular commercial financing?

[00:20:54] Like, you know, if somebody is buying it to rent it out to a commercial occupier or how does it differ from owner occupied residential financing?

[00:21:02] Like what are the key distinct differences from more conventional methods of financing that are worth noting?

[00:21:07] Yeah. So so really the comparison is, say, call it owner operator, like how the banks would view an owner operator type loan versus, say, like a third party.

[00:21:20] You know, I'm just acquiring this call an industrial retail asset, et cetera, to run as a landlord and collect rent from tenants.

[00:21:27] Right. So and then when it comes to like underwriting, like if people want or if somebody is coming to do an application,

[00:21:33] like what are the things that they would need to know or produce or think about by comparison to, you know, if they're if they're going to either become a tenant or if they're, you know, if they're thinking about it from a landlord perspective.

[00:21:46] Yeah. So it's a great it's a great question.

[00:21:49] You know, we look at all types of both types of those financing.

[00:21:53] So we look at, you know, an owner operator use and then we also look at call it we call it like an investment property type use where, you know, again,

[00:22:03] the intention is to acquire the building to collect the rent and not to necessarily run their operation of it.

[00:22:09] So I'll talk first about the kind of the owner operator and what criteria is, you know, again, we would we would you know, the main the main premise for the bank is

[00:22:19] you know, if if we're being asked to provide a loan or a mortgage on on either of those types of properties,

[00:22:25] you know, where does the cash flow come from to effectively repay those loans?

[00:22:29] So in the first case where you have an owner operator, it would be the owner operators underlying business that's going to be occupying the space.

[00:22:36] So, you know, typically we'd ask for, say, like two years of two to three years of the businesses financial statements,

[00:22:42] you know, assess the profitability, the capacity, ability to support debt repayment on that property.

[00:22:49] And then that's a product of how much debt they'd be looking to take.

[00:22:53] That's generally one of one of the most important covenants, you know,

[00:22:56] bank would look at when they're structuring a deal for a client is really just kind of that.

[00:23:00] Obviously, the next piece is loan to value.

[00:23:02] So how much leverage are they looking to put up on the property?

[00:23:07] Again, generally, most banks will do, say, up to 75% of your the lesser of your your purchase price or appraised value.

[00:23:18] You know, the way the banks kind of will assess or the way, you know, we assess income, income approach is valuations really on an income approach.

[00:23:28] So it's call it your market lease rates divided by, you know, location specific cap rate to assess, you know, what is kind of the value, you know, of that property.

[00:23:41] And, you know, what what that does is it helps kind of come away from or take a more conservative lens on, you know, maybe markets that are really hot and properties are trading at a call it a higher or lower cap rate, etc.

[00:23:59] Again, we we leverage real estate appraisers to help us inform those opinions.

[00:24:04] So that's generally how we'd look at an owner operator.

[00:24:07] And in both situations, you'd still want to obtain kind of your call it your structural mechanical reports, your environmental reports, again, depending on the size of of of kind of the mortgage that's being looked for and how much leverage is being put on the property.

[00:24:23] There may be others, some other, you know, specific situations you want to consider, like outside recourse, etc.

[00:24:30] Again, a lot of it is situation specific about the property, the bank, you know, our bankers would want to go out and, you know, see the property and, and kind of do a quick walkthrough and see the operating business.

[00:24:42] In the case of investment property, you know, a lot of those valuation methods would be similar, looking at it from an income approach.

[00:24:51] But now the caveat is your debt servicing is really coming from third party tenants.

[00:24:58] So you'd be conducting more of a lease analysis on these things.

[00:25:01] So how, you know, what's the property's kind of history of vacancy, you know, what's, how long are the leases kind of in place?

[00:25:10] And you may want to assess, you know, contract term relative to, you know, if you've got a bunch of leases that are maturing, you know, in a year and there's potential for vacancy, you know, that those things could play into.

[00:25:20] So just like an investor would look at a property for, you know, their investment potential and, you know, how much they'd be, you know, keen to, to, to, to buy this property, the banks would, you know, look at it from the, you know, from the perspective of, hey, you know, like if there's long-term leases, there are AAA tenants, you know, that would, you know, that would be a positive, you know, to a deal of, of, of that nature, you know, long-term stable cash flows, etc.

[00:25:49] To kind of affirm the ability to, to, to, to pay back the mortgage on a, on a property like that.

[00:25:55] I think also on investment properties, you know, there's a keen focus on operators experience.

[00:26:01] So is this kind of like the first property they've owned and managed?

[00:26:06] Do they have experience owning and managing properties of similar size and scope?

[00:26:12] You know, where's the market that it's located in, you know, and how easy would it be to attract tenants, you know, to that.

[00:26:19] Property, if it did become vacant and say, if a manager or owner operator doesn't have experience, again, do they have the professionals around them?

[00:26:27] Like a, you know, property management firm that will, you know, kind of be running and managing and dealing with that.

[00:26:34] Yeah.

[00:26:35] Really interesting stuff.

[00:26:36] I guess hearing all of that, you know, we, we talk a lot about when, with, with our investors, Andrew, we talk a lot about the importance of having that power team.

[00:26:45] Right.

[00:26:45] And, you know, you and I are, are loosely in the same world.

[00:26:48] I'm a mortgage agent.

[00:26:49] Right.

[00:26:49] So we both, we both provide financing for, for our clients.

[00:26:53] And obviously, you know, that is, that is cardinal in, in what, what you need and person on your power team, whether it be a banker, a private lender, a mortgage agent, whatever that may be.

[00:27:05] What other people are involved?

[00:27:08] Right.

[00:27:08] I heard you mention appraisal, obviously, you know, there's, there's some kind of structural engineer or engineers involved.

[00:27:15] There's obviously a commercial real estate agent.

[00:27:17] There's, you know, the appraiser.

[00:27:19] So who, who else is involved in something like this?

[00:27:22] And, and is whose responsibility is it to have those contacts, have those relationships and manage them throughout this process?

[00:27:30] Yeah, it's, it's a great question.

[00:27:32] And, you know, a lot of times, you know, it is also, you know, situation specific and, you know, depending on the nature of the property.

[00:27:40] I think you covered most of the kind of the key, you know, the key professionals that are involved, you know, in, in these types of deals.

[00:27:47] You know, occasionally you'll see, you know, architects go in, like if there's a potential for, you know, a large, you know, you know, occasionally you'll, you'll get, you know,

[00:27:56] a business that will want to kind of improve the property substantially may involve, you know, requirement for an architect to go in a general contractor to assess kind of what the cost would be.

[00:28:06] You know, city officials to assess, you know, like permitting and stuff like that.

[00:28:12] So, you know, really at the end of the day, it goes down to, you know, the business owner.

[00:28:18] And, you know, again, working with a lot of, you know, advisors around them, be it mortgage agents or their bankers, you know, generally they'll be guided by the requirements of, you know, obviously the bank and what the bank would be looking for, but also their own due diligence, right?

[00:28:34] Like it does kind of fall on, you know, the business to do their due diligence on their property for, again, for whatever the intended use is, whether it's to own as an investment or whether it's to run, you know, run their business out of it.

[00:28:50] You know, the, the onus is really on them to, to ensure that, you know, they've done all their due diligence.

[00:28:55] They've engaged all the relevant professionals for, for what they're looking for.

[00:28:59] And again, like, again, some guidance will come from, you know, their banks and the other professionals around them to, to further either engage additional specialists or professionals, depending on what's needed or, or what would be needed, for example, for financing.

[00:29:12] Awesome.

[00:29:14] What's the magnitude of this like opportunity or like, what are the deal sizes that you're seeing in this, in this type of space right now?

[00:29:22] I mean, does it range from kind of like your small owner occupied, like I'm thinking like a last mile delivery group doing like the commercial condo.

[00:29:29] Or are we talking like large fabricators?

[00:29:32] Is it everything?

[00:29:34] Yeah.

[00:29:34] So we like in, in, in business banking, like generally, you know, our, our loan sizing would, would, would start kind of small and you'd call, you know, your, your, your small business type operations where it's maybe one or one or two, you know, employees who, you know, to your point would, would have a requirement for, you know, a small space, whether it's a, you know, a retail condo.

[00:29:56] Or, or, or commercial condo, call it like a thousand square feet, or it could be, you know, a large hundred thousand, 200,000 square foot industrial space.

[00:30:07] You know, so that, so the, the, the kind of the dollar values, you know, there's, there's quite a range, right?

[00:30:13] There's, there's, there's quite a range, you know, that they fall in, you know, generally, if you're talking, you know, real estate in, in the GTA, it's, you know, generally, you know, on, on, on, you know, it's generally costly.

[00:30:26] Right. So, you know, we, we go as low as, you know, call it half a million and as high as, you know, anywhere around 50 million, say it really, again, it depends on, that's just the broad range, but it really depends on, you know, the size of the property, the cost, et cetera.

[00:30:43] The client's needs, et cetera, the size of the business and operator, et cetera.

[00:30:48] And, and sorry, that's referring to, to owner operator.

[00:30:51] Yeah. Yeah. That makes sense. I guess, and I know we've lightly touched on this, but I'm curious from your experience, Andrew, you know, we always, obviously real estate is, is a long-term play, regardless of you're investing in, you know, a duplex or an apartment building or an owner occupied commercial industrial space.

[00:31:12] We always like to think, even though we, we like to hold for, you know, five, 10, 20 years per se, we always like to be aware of exit strategies and, and to have a couple of those exit strategies kind of in our back pocket.

[00:31:26] Can you maybe speak to what you've seen as some successful exits where there can be some kind of liquidity event or, or maybe the asset still held and, and, you know, it's sold to then a tenant that's going to operate that business.

[00:31:41] Can you elaborate on that just with what you've seen over the years?

[00:31:45] Yeah, definitely. I, you know, the number one thing, you know, as, as, as a banker is we always, you know, advise our clients, you know, bring in the right professionals to give you.

[00:31:56] Advice, right. The best advice. Obviously there's, you know, in, in full disclosure, I'm not a tax professional. I, you know, you know, I'm not an accountant.

[00:32:06] That makes, that makes three of us. Don't worry.

[00:32:09] Right. So, you know, the best thing is to always bring in the professionals to advise them. Right. So if, if, if somebody is looking to divest the building, obviously, you know, there, there most likely be tax implications to that.

[00:32:23] So, you know, you know, we would always encourage our clients to, you know, work with your tax professional and, you know, work with them on whatever strategies are involved in doing what you need to do to, to, you know, either divest or, or, or transfer ownership, you know, et cetera.

[00:32:41] Like, obviously, you know, popular one of recent memory was the capital gains tax that came through obviously in, I want to say in June 25th there, there, you know, you know, there's a lot of maneuvering that need to happen or, or, or, or that people were seeking, you know, to, to, you know, to obviously manage different changes in, in, in, in tax rules. Right.

[00:33:07] So, you know, you know, a lot of that involved working closely with their accountants, et cetera, other bankers and determining how best to, you know, adjust and, and engage in all parties.

[00:33:16] And, you know, I always say, you know, communication is, is super important to, you know, if, if, if, if borrowers are looking to restructure ownership and, you know, it's always important to communicate with your bank.

[00:33:27] And, and, uh, because obviously there's, there's, you know, if there's, if there's leverage on a property, there's considerations to make there too, and into how to restructure and, uh, re-securitize, you know, et cetera.

[00:33:38] So, you know, you know, in terms of strategically, why would, you know, or clients that are seeking to divest or change ownership, you know, that's, again, kind of unique to their situation.

[00:33:52] And, um, you know, in some cases clients may say, you know, I don't, you know, maybe I'm, I'm retiring and I'm selling my operation, uh, the underlying business, but I'd like to hold the real estate or, or maybe the company acquiring my business doesn't want to acquire the real estate due to the high capital costs.

[00:34:10] So, you know, I'm happy to, uh, basically become a landlord and, you know, now lease that space to the, uh, individual or to the business that's going to be, you know, operating out of my premise.

[00:34:21] Um, again, that's a unique, uh, situation and it's kind of contingent on, on that business owners kind of risk appetite plans, intentions, succession planning, et cetera.

[00:34:34] Yeah.

[00:34:35] Interesting notes.

[00:34:35] I think the changes in regards to capital gains probably created a bit of an interesting environment for you guys in that regard.

[00:34:41] Like you were, I think alluding to there.

[00:34:43] Um, I mean, I guess from, uh, because there's a business involved, it probably is a much more comprehensive strategy for you to like organize with their tax team, their lawyers, et cetera.

[00:34:56] Right.

[00:34:57] Is there anything that, uh, that we, I just want to be mindful of your time here.

[00:35:00] Is there anything that we missed in this conversation that you feel needs to be included, um, in the discussion around owner, owner occupied commercial financing?

[00:35:08] You know, the only, the only, again, the only thing I would say is, you know, I always encourage business owners to, to talk with your bank.

[00:35:15] And, and obviously if you, you know, if, you know, if, you know, if, if you don't, you know, have relations, uh, with your current bank, you know, we're always happy to, to help.

[00:35:24] You know, we work with a lot of businesses across the, you know, the GTA and not necessarily just within the bond market, but, you know, always happy to help and, and, and provide, you know, a look at, you know, at their strategy and, you know, and, and see if there, you know, if there's a need for, you know, say things like, you know, mortgage, et cetera.

[00:35:43] You know, we're always more than happy to, to look at that and, and, and, and, and provide them the best advice that we can.

[00:35:49] You know, I, I feel that, you know, you know, banks owe that to, to their customers, right?

[00:35:55] They owe that to their potential customers and to work with them and, uh, you know, to kind of start that dialogue with, with your bank is always a, is always a good thing.

[00:36:03] You know, the earlier, the better too, right.

[00:36:06] Um, you know, I've seen in, in the real estate market in the past, you know, again, tight closings and, you know,

[00:36:13] people stepping into say commercial real estate for the first time, you know, it's not like a residential real estate transaction for, you know, for obvious reasons, there's more complexity, there's more time involved.

[00:36:24] Uh, so it's always better to be, you know, start that process early, especially with, with your bank and give yourself as much time to bring down the stress.

[00:36:32] Even if there's pressure, say, to, to close on a, on a tighter timeframe, you know, if the bank's been working with you for a, you know, longer period of time, you know, it's generally it's,

[00:36:42] it would, you know, be able to kind of work with you a little faster when the time comes.

[00:36:47] And if you're looking to say, pull the trigger on an acquisition in, in, in, in short order.

[00:36:54] Awesome.

[00:36:54] Yeah.

[00:36:55] Really appreciate it, Andrew.

[00:36:56] Thanks a lot for your time.

[00:36:57] If anybody wants to reach out to you with questions, like you just mentioned, where should they, should they do that?

[00:37:03] We'll include it in the show notes as well.

[00:37:05] Yeah, absolutely.

[00:37:06] Uh, so what best place to reach out would be my email, andrew.quercia at td.com.

[00:37:12] Awesome.

[00:37:13] Amazing.

[00:37:14] Okay.

[00:37:14] Thanks so much.

[00:37:15] Thanks, Andrew.

[00:37:16] Thank you, gentlemen.

[00:37:17] Have a great day.

[00:37:19] The Canadian Real Estate Investor Podcast is for entertainment purposes only, and it is not financial advice.

[00:37:25] Nick Hill is a mortgage agent with Premier Mortgage Center and a partner in the G&H Mortgage Group.

[00:37:32] License number 10317.

[00:37:35] Agent license M21004037.

[00:37:40] Daniel Foch is a real estate broker licensed with Rare Real Estate, a member of the Canadian Real Estate Association, the Toronto Real Estate Board, and the Ontario Real Estate Association.