Posted by: Tarun Gupta | Posted on: November 1st, 2012 | 1 Comments
Q: My building has 12 retail units at street level and 10 large apartments on top, at a busy location, with several high rise apartment buildings and condos nearby. Due to age, there are increasing maintenance issues. After inheriting the property, about 30 years ago, I had a lot of work done to make the units attractive and livable. Since then, I've put off any major renovations to mechanics so as not to disrupt my tenants, and managed to pay off the loans involved. I now hesitate to take on debt for the necessary upgrades, but what's my alternative?
A: Your choices boil down to these three: renovation, obsolescence, or redevelopment. Many a landlord with aging property has had to spend tens of thousands of dollars to upgrade mechanics like plumbing and wiring, replace roofs and windows, and/or remove substances like asbestos or mould. Otherwise, their property risks falling into obsolescence, eventually losing more in value than might have been gained through upgrades. When it comes to renovation versus obsolescence, the choice is clear: improve it or lose it.
A Developer's Dream?
Since your property already boasts a high-traffic location, a more feasible alternative to investing large amounts of capital or acquiring new debt for upgrades may be found in redevelopment. In fact, considering your location, and that there are already neighbouring high rise apartments and condominiums, your property may be ideal for redevelopment.
There is a growing movement gaining popularity in commercial real estate that brings a dynamic downtown feel and service core to outlying areas and suburbia with new mixed-use structures offering apartment and condominium dwellers an array of shops and services a mere elevator ride away. Much like your building's existing units, but multiplied by the hundreds and boasting modern appointments; the trend is a boon for neighbourhoods as it cuts down on the local population's need to shop online or to travel to distant shopping centres in order to obtain goods and services, so saves fuel and reduces traffic congestion while, perhaps even more importantly, promoting localized economies and socialization.
Determining Redevelopment Value
When considering selling to a developer, the sale price is not based on property income and cap rates, but more on location and zoning. The land value of your property becomes maximized by its potential for a much higher density.
An effective commercial real estate broker is your most essential asset for obtaining the highest possible price in this type of transaction because they have access to multiple developers who buy properties like your own. Highly skilled agents will generally arrange an Exclusive Listing for this type of property, and then approach multiple developers without a specific price, stimulating interest and competitive offers in ways that owners, more often than not, are highly unlikely to achieve.
Joint Ventures May Add Desirability
Your real estate broker may also consider forming a joint venture with neighbouring properties in order to further entice developers. Often times, adjacent properties all face the same landscape of renovation versus redevelopment and so, weighing overall costs, may wish to achieve their own upgrade without financing it, through redevelopment. Typically, in this scenario, a bank, cinema or major retail interest, for instance, may sell in tandem with neighbouring properties, stipulating that they become the main, anchor tenant in the new complex, once built. In this way, they may acquire additional, more suitable space for their enterprise, which often may include new office space above as well, and so it becomes a win-win situation for all parties.