Commercial Real Estate Course PDF

AREA PD Part 1: Area PL Practice - Commercial Real Estate 2.0 UN IT 1: IN TR ODUCTION , GLOSSAR Y & CALCULATOR TUTOR IAL Course Introduction Course Glossary Financial Calculator Tutorial Conclusion UN IT 2: IN TR ODUCTON TO COMMER CIAL R EAL ESTATE Introduc...

AREA PD Part 1: Area PL Practice - Commercial Real Estate 2.0 UN IT 1: IN TR ODUCTION , GLOSSAR Y & CALCULATOR TUTOR IAL Course Introduction Course Glossary Financial Calculator Tutorial Conclusion UN IT 2: IN TR ODUCTON TO COMMER CIAL R EAL ESTATE Introduction Comparison of Commercial and Residential Practice Types of Commercial Real Estate  Market Research Ownership of Commercial Real Estate Conclusion UN IT 3: MAN AGIN G LIAB ILITY Introduction Sources of Liability Managing Liability Conclusion UN IT 4: COMMER CIAL SECTOR S Introduction The Of ce Leasing Market The Retail Market The Industrial Market Investment Properties Land Development Sustainability in Commercial Real Estate Conclusion UN IT 5: R UR AL PR OPER TIES Introduction Rural Construction and Service Systems Permitting in a Rural Environment Greened Properties Environmental Stewardship and Conservation Other Considerations Conclusion UN IT 6A: LAN D USE, EN VIR ON MEN TAL, AN D CLIEN T- R ELATED CON SIDER ATION S Introduction Land Use Considerations Subdivided Land Unsubdivided Land Environmental Considerations Considering the Commercial Client Agent Obligations Conclusion UN IT 6B : B UILDIN G AN D CON STR UCTION Introduction The Construction Process Service Systems Structure and Construction Conclusion UN IT 7: TH E COMMER CIAL B R OKER AGE Introduction The Commercial Brokerage Selecting a Brokerage Getting Started at the Brokerage Conclusion Lesson 1 of 47 Course Introduction AREA PD Congratulations on taking this next step in your real estate career! The commercial real estate market is full of countless opportunities for any licensee motivated to hone their practice in this diverse and challenging eld.  In this course, we will focus on commercial skills and knowledge with particular regard to acceptable standards of consumer protection and the major areas of commercial practice, including of ce, retail, industrial, multi-residential and vacant land. The units in this course include discussions of key concepts, industry examples, case studies, and knowledge check questions covering a comprehensive range of commercial real estate topics. The industry examples and case studies are used to maximize your industry learning with real-life applications. Some examples are drawn from actual errors and omissions claim experiences of the Real Estate Insurance Exchange (REIX). Financial calculations are essential in listing and selling commercial properties. Investment analysis plays a vital role in the selection, screening, valuation, acquisition, and disposition of commercial real estate. You will use the HP 10bII+ Financial Calculator to review charts and tables and complete exercises within this course. A tutorial follows shortly. Working through these units and completing the exercises and knowledge check questions will prepare you for the commercial licensing exam and the further challenges of practicing in commercial real estate. A commercial real estate career takes time to develop but can be very rewarding. Continuing education, practice, and experience beyond this course will help you build the advanced knowledge and skills required to be successful in the commercial sector. C O NT I NU E Lesson 2 of 47 Course Glossary AREA PD Using proper terminology is important to communicate effectively with your clients, other real estate professionals, and those you will work with in the commercial real estate industry. Keep in mind that there are often several words or names for the same things. Listen carefully and ask questions to detect different uses of terminology and avoid misunderstandings. You can return to this topic any time as you progress through the course to look up or reference a term. A Activity Report - See mortgage amortization schedule. Additional Rent - The amount owed by a commercial tenant that represents the proportionate share of operating costs as de ned in the lease. Sometimes referred to as CAM (common area maintenance) or TMI (taxes, maintenance, insurance). CAM is usually speci ed when dealing with commercial space, while TMI is more commonly applied to industrial space. Adjusted Net Operating Income (NOI) - The calculation of the net operating income (NOI) minus the property’s capital expenditure reserve and other expense items not related to the actual operation of the property. This provides a view of the NOI including projected expenses. This is called Stabilized Net Operating Income, rather than just the NOI for a speci c period. After-Tax Cash-on-Cash Return - A measurement used for analyzing an investment. It is similar to the cash-on-cash return but includes an adjustment for the impact of income taxes during the rst year. It is calculated by dividing the cash ow after taxes (CFAT) by the initial investment. Annual Property Operating Data (APOD) Form - A worksheet used to describe property income and expenses, develop an operating statement, and determine cash ow before taxes. The APOD statement can also include proposed or existing nancing terms. Appreciation - An increase in value brought about by any factor. Authorization Letter - An authorization letter grants a single individual the authorization to act on behalf of a group of shareholders of a corporation. Authorization could be granted by a corporate authority to an individual giving them the authority to sign documents on behalf of, or otherwise bind the corporation. Often, in cases where board authority is required, this authorization is granted by a resolution of the board of directors. B Base Rent - The rent per square foot or per square meter payable by a tenant under a lease. C Capital Cost Allowance (CCA) - The portion of the capital cost that may be deducted from income as a claim for depreciation under the Income Tax Act. CCA acknowledges the loss in value over the life of an asset and the ability to offset income in relation to the cost of that asset. Capitalization Rate - Also known as a cap rate. A factor expressed as a percentage of the rate of return of a real estate investment property. This value is based on the net operating income (NOI) that the property is expected to generate after taking into consideration the operating costs that generally would be associated with the speci c type of asset class. Or, the rate of return that would be expected if an investment property was purchased for cash. Capital Expenditure Pass-Through - Additional rent that involves sharing capital costs incurred by the landlord proportionately among tenants. Capital Stack - The capital stack is the nancial structure of a real estate investment, and is used to evaluate the risk factors, probability of cash ow, and overall feasibility of the investment. The two types of capital that make up the capital stack are equity (ownership interest) and debt. Leverage—usually in the form of a traditional bank loan, or nancial loan from another type of company that provides debt for real estate acquisitions—can help to amplify returns for the investor. Alternatively, stack planning addresses the use of space within a building. In this case, the “stack” refers to a complete collection of oor plans showing every level of a building with each oor's distinct features. A stack will show which groups occupy what space, where open spaces are, and oor plan capacities. Cash Flow - A nancial term. In real estate, cash ow is income generated by an investment property after subtracting all expenses and nancing or mortgage costs, including principal and interest. Commercial practitioners and appraisers have attempted to more accurately de ne real estate investment cash ow (called cash ow before taxes or CFBT) as the net operating income generated by an investment property less debt service. Cash-on-Cash Rate of Return - A measurement used for analyzing an investment. It is calculated by dividing the cash ow before taxes (CFBT) by the amount of equity invested. CAM - Common Area Maintenance - See Additional Rent. Clear Height - The unobstructed distance from the oor to the bottom of the under joist of the ceiling. Clear Span - The amount of oor area that is clear of interference from columns and support walls. Compound Interest - Interest that is calculated on the principal and on the interest earned and left on deposit. Compounding - The amount by which an investment will grow over a given number of time periods, including the accumulation of interest. Compounding and discounting represent the basic methods to determine the time value of money, although compounding is less frequently used than discounting in investment analysis. Corrective Maintenance - Maintenance that must be done to the property to correct or x a problem that currently exists; for example, faulty equipment or anything that would require immediate repairs for the proper functioning of the property. D Deferred Maintenance - Maintenance that needs to be done but has been deferred to a future time due to budget constraints or lack of funds. Design Fit Test - A test conducted by architects to determine if a space will accommodate an organization’s needs and requirements. Disposition - Disposition is the act of selling or otherwise disposing of an asset. The use of market and investment analysis play a vital role in developing a strategy for disposition (or acquisition) of an existing real estate asset. The decision will be based on economic conditions; nancial considerations including cost and tax implications; and highest and best use considerations of the asset and any nancial investment alternatives. Discounted Cash Flow (DCF) Analysis - Forecasting the cash ows a real estate asset will generate and discounting those cash ows to determine their current value. Discounting - The process of converting future sums into present value. Discounting and compounding represent the foundation for assessing the time value of money. In real estate, most emphasis is placed on discounting, given the frequent need to compare and value investment properties based on forecasted cash ows. E Effective Rate - The interest rate when compounding is taken into account. Effective Gross Income - The scheduled rental income, less a vacancy and credit loss gure, plus any other income (e.g., laundry facilities, parking charges, or advertising billboards). This represents the total cash ow of the property available to pay operating expenses and cover the annual debt service. Enterprise Value (EV) - Enterprise value (EV) measures a company's total value, and is often used as a more comprehensive alternative to equity market capitalization which calculates only the company’s market capitalization through the value of shares traded in the equity market for that company. Included in an EV calculation are the company’s market capitalization numbers, as well as both short- and long-term debt and any cash or cash equivalents on the company's balance sheet. EV is often used to assess the nancial ratios by which a company’s performance is measured. Environmental Stewardship - Developing an ongoing awareness of and knowledge about preserving the natural environment and reducing our environmental footprint in the spaces where we live and work. F Fee Agreement - In commercial real estate, it is not uncommon for brokerages to use a fee agreement to secure their fee upon the conclusion of a successful transaction on behalf of the client. The Real Estate Act states that written service agreements should be used for commercial transactions, but that they are not mandatory unless the brokerage makes this a speci c of ce policy. Fenestration - The arrangement of windows and doors on the elevations of a building. Fixed Return Investment - An investment whose rate of return is established at the beginning of the investment and is committed for a speci c period. Examples include government treasury bills and guaranteed investment certi cates. (See Variable Return Investment). Floor Area Ratio (FAR) - The total oor area of a building divided by the total land area on which the building is located. Floor Load - The ability of a oor to support a live load (the cumulative weight of people, equipment, furnishings, and stored materials). Floor Plates - The space within a building available for a given tenant to occupy. Floor-to-Ceiling Height - The distance from the top of one oor to the top of the next. The oor-to-ceiling height is measured to the underside of the oor above. If there are exposed oor joists, the clear height will be less than oor-to-ceiling height. G Gross Building Area - The total gross oor area of a building based on external measurements, excluding any unenclosed areas. Gross Floor Area - The sum of each above and below-grade oor in a building or structure. Measurements extend from the outside walls or the mid-point of common walls. Deductions are made for internal areas taken up by parking, mechanical rooms, stairwells, washrooms, and elevators. Gross-Up Factor - A calculation allowing the landlord to increase each tenant's proportionate share of operating expenses to cover any space used—but not occupied—within the property. Gross Leasable Area - The measurement of the total oor area designed for the occupancy and exclusive use of tenants in a building. Gross Operating Income (GOI) - Refers to the scheduled rental income plus any other income (e.g., laundry facilities, parking charges, and advertising billboards), less a vacancy and credit loss gure. It represents the total cash ow of the property available to pay operating expenses and cover the annual debt service. Gross Rent Multiplier (GRM) - The investment price divided by the scheduled rental income. The GRM is used as a multiplier with the scheduled rental income of an investment property to determine approximate market value. The GRM factor that is used is derived through analysis of comparable sales in the market area and therefore changes as the market changes. H Hurdle Rate - The minimum rate of return that an investment must generate for the investor. I Income Statement - An income statement (or pro t and loss statement) evaluates the performance of a business by matching the revenue earned during a speci c period with the expenses incurred in obtaining that income. The income approach to property valuation is based on the business's income statement. Internal Rate of Return (IRR) - For real estate investment analysis, the IRR represents the yield on invested capital in a property; it is most often represented as an annual rate. The IRR provides a comparative method for analyzing different investment projects based on their internal operations and net cash in ow. Investment - Refers to the purchase of a property with the expectation of future pro t. Although investment opportunities traditionally involve income-producing properties, properties that are held for an appreciation in value are also termed investment properties. IRV Formula - A basic and essential formula in investment analysis: the investment, capitalization rate, and value (IRV) formula. The three measured elements of an investment represent the acronym: I = Net Operating Income, R = Capitalization Rate, and V = Value. In this formula, Income = Rate x Value. L Lease Abstract - Leases should contain a lease abstract. A lease abstract is a written summary of the document that is presented clearly in easy-to-understand language. Leverage - The use of borrowed funds for investing in real property to realize a pro t in addition to monies necessary to pay for the borrowed funds. Licence - While a lease gives an individual the right to control a property, a licence gives an individual (licensee) permission to conduct an action on the owner’s property. Liquidity - The ease by which assets can be readily converted to cash. Funds held in chequing accounts, savings accounts, and short-term guaranteed investment certi cates are generally viewed as highly liquid, as opposed to long-term bonds, mortgages, and real estate ownership. Live Load - The cumulative weight of people, equipment, furnishings, and stored materials. M Market Rent - For rental properties, the income received from rent may not be equal to the going rates on the open market. Therefore, consideration must be made for the market rent indicated by rent being paid for comparable properties as of the analysis date. Market Characteristics - In real estate, the space market deals with physical capital (usage of real property), while the asset market deals with nancial capital. Mortgage Amortization Schedule - Used to reconcile the total amounts of principal and interest due and paid within a speci ed period of time for internal and external audit purposes. In order to accomplish this, the report breaks down each payment into its principle and interest components, including running balances over the various time periods. Municipal Taxation - Property tax is calculated by multiplying the assessed value of a property by the current and applicable municipal and provincial tax rate or rates. Normally, the municipality bill for and collect the provincial property tax amount on behalf of the Province of Alberta. Annual property tax bills cover the period from January 1 to December 31. The municipal tax sale is a public auction of properties on which the property taxes remain unpaid for more than one year. The tax sale process occurs In accordance with the regulations of the Municipal Government Act. N Net Effective Rent - The rate the tenant pays when all discounts, incentives, and adjustments to the rent are paid. Net Operating Income (NOI) - The income derived from a real estate investment after deducting all xed and variable expenses from gross operating income but before deducting annual debt service and tax liability. O Occupancy Permit - An occupancy permit is a document issued by an authorized governmental agency to certify that a building is in compliance with the building codes and suitable for occupancy. Such permits may be required after new construction, a physical alteration or modi cation to the structure of an existing building, or a change to the occupancy of the building. Off-site Levy - An off-site levy is a tool intended to assist a municipality in recovering capital costs incurred for infrastructure improvements to accommodate new development. Off-Market Property - A property that sells without ever being publicly marketed for sale. The seller either advertises privately to a select group of potential buyers and agents, or negotiates with the buyer directly without ever advertising the property on a public listing service. Operating Costs - The expenses associated with running a business. These expenses include TMI (taxes, maintenance, and insurance) and CAM (common area maintenance). P Potential Gross Income (PGI) - The maximum income a real estate asset can produce. Pro Forma Statement - A set of nancial projections or forecasts for a real estate asset that is used to estimate either the value of the asset or a potential return from purchasing the asset at a certain price. Pro forma statements take into account the current year and future years for projecting future value. Present Value - The current value of future cash ows discounted by a speci ed rate of return to determine present-day value. Public and Private Markets - The key difference between public and private markets is that on a public market, such as the Toronto Stock Exchange (TSX), stocks and bonds are often traded and reported simultaneously, while on the private market, nancial assets are traded between entities, and the price and volume are less easily determined. R Rent Roll - The rent roll is a document that provides pertinent information about the tenants of a commercial property. It will usually record their monthly and annual rents, terms of lease, and the square footage of each rental unit. The rent roll is used to estimate the income potential of a rental property. Rentable Area - The usable area of the leased space, plus an allocation of common areas (e.g., lobby, janitorial areas, washrooms, electrical room, etc.). Return on Investment (ROI) - The measurement of an investment's performance. Represents the return on an investment expressed as a percentage per annum of the amount invested. (See also Yield). Request For Information (RFI) - A formal process for gathering information from potential suppliers of goods or services. RFIs are typically written by customers and sent to potential suppliers, and may address pricing, delivery, and/or any other product speci cations or options available from the supplier. Reversionary Value - Reversionary value is the value of a property calculated at the end of a lease term, or at the end of the property's economic life. For example, at the end of a 15-year lease a landlord estimates that their property will be valued at $280,000; therefore, the reversionary value—or, in other words, the value when the property reverts to the landlord—will be $280,000. In the context of property ownership, if an industrial building has an economic life of 60 years, then its future asset value when the building is no longer economically viable may be estimated in the present. Risk - Refers to an investment's nancial uncertainty, chance, exposure, and vulnerability. Risk in real estate centres on uctuations in the income stream and vulnerability to external forces such as market trends, availability of nancing, and overall economic conditions. S Simple Interest - Interest calculated on the amount of principal only. Secondary Rental Market - The secondary rental market consists of rented single detached, semi-detached, row and duplex housing; rented condominiums or accessory apartments (separate dwelling units located within another dwelling); or buildings with one or two apartments representing one part of a larger commercial structure. Stabilized Net Operating Income (NOI) - A stabilized NOI accounts for variations in income by reviewing the current and historical expense patterns for the property and other similar properties. This is useful when the income has been disrupted due to items such as unexpected renovations or repairs. SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis - A SWOT analysis is a framework for the development of strategic planning. SWOT analyses examine internal and external factors and employ a deeper understanding of these advantages and disadvantages in the consideration of current and future potential. T TMI (Taxes, Maintenance, Insurance) - See Additional Rent. U Usable Area - The area within the exterior walls of the tenant space. V Vacancy and Collection Allowance - This is the estimated amount by which gross scheduled rent should be reduced to take into account vacancies or any loss of revenue due to bad debts or uncollectible rents. It is usually set as a percentage of the gross scheduled rent. Vacancy and Credit Losses - A factor of revenue estimation of income lost due to vacancies in rental units and uncollectible rents from tenants. These losses are estimated based on the existing market conditions for the type of property being evaluated. Variable Return Investment - An investment whose rate of return varies according to the performance of the investment, for example, real estate investments and stocks. (See Fixed Return Investment). Y Yield - The measurement of an investment's performance. It represents the return on and the return of an investment expressed as a percentage per annum of the amount invested. (See also Return on Investment (ROI)). Additional Terms - The Construction Process During the pre-construction phase, bidding is the process by which the contractor submits a tender to the client as a proposal to undertake or manage a prospective construction project. The request for bids will identify the scope of work, timeframe for completion, and any penalties associated with failure to complete the project within the proposed period of time. The client then awards the bid to a subcontractor, and it becomes a commitment. This enables rms and companies to hire contractors to begin the work. In construction, commissioning is the process of evaluating whether a building is ready for service. As a quality assurance test, the commissioning process starts with design and continues through operations. Much like shipbuilding, commissioning involves a series of documenting, scheduling, and testing processes with techniques and procedures to inspect every operational component of the project— from its individual components—such as instruments and equipment— up to more complex elements like building systems and subsystems. C O NT I NU E Lesson 3 of 47 Financial Calculator Tutorial AREA PD There are several tools available for the nancial analysis of commercial real estate investments. This course is written for use with the HP 10bII+ nancial calculator. You can either use the physical calculator or download your preferred version of the calculator app below. Download the app for Android. ANDROID Download the app for iOS. IOS Download the app for Windows Desktop. WINDOWS DESKTOP If you are using the app, the keys and screen displays will differ slightly from those shown in this tutorial. Working through the keystrokes on the calculator in this tutorial will help you understand the mechanics of each calculation included later in the course. Keypad Every key on the HP 10bII+ has two to three functions, except for the orange and blue shift keys. The primary function is noted in white. The secondary function is noted in orange. Some keys have a tertiary function in blue, but this course will only use the primary and secondary functions. To use a primary function, simply select the appropriate key. To access the secondary function, select the orange shift [↓], then select the appropriate key. When the orange shift key is active, a small shift status indicator will appear in the lower-left corner of the screen. The following diagram illustrates the locations and primary functions of the HP10bII+ keys used to complete the necessary calculations for this course. Select the markers to view relevant secondary functions.        Payments per year [xP/YR], interest conversion [NOM%] [EFF%], amortization [AMORT].   IRR per year [IRR/YR]   Beginning/end of payment period [BEG/END]   Off   Display Keystroke Tables This course uses the following table format to guide you through performing calculations. The table shows which keys to select, what should appear on the display, and any clarifying comments.  Input Display Notes What appears on Steps and Keys to select. the screen. clari cation. Next selections. Operations For this course, you should be comfortable with the following operations when using the HP 10bII+ calculator. On and Off To turn the calculator on and off: Input Display Notes Displays 0.00 or the last number in ON 0.00 the memory before it was turned off.  Input Display Notes Turns the ↓ [OFF] Blank calculator off. After several minutes of inactivity, the calculator will automatically shut off. The calculator has a continuous memory, and turning it off will not erase any stored data. Decimal Places The calculator is accurate up to 12 digits to the right of the decimal place. It can also be programmed to display different numbers of decimal places. For this course, all examples and required calculations will be in two decimal places. To determine the current setting for the number of decimal places displayed: Input Display Notes 5555.5555 5,555.5555 Enter any number. = 5,555.56 The number is rounded to the number of decimal places the  Input Display Notes calculator is currently set to. To change the number of decimal places from two to four: Select Display Notes The decimal place ↓ [DISP 4] 5,555.5555 is set to four. To change the number of decimal places from four to two: Input Display Notes The decimal place ↓ [DISP 2] 5,555.56 is set to two. Entering Negative Numbers (Cash Flows) It is important to treat cash ows correctly when performing nancial calculations. The cash ows you receive are expressed as positive numbers; the cash ows you pay out are treated as negative numbers. The use of the sign convention is important in nancial calculations, and if not used correctly, you may experience a “no Solution” display on the HP 10bII+ calculator. To enter a negative number: 1 Input the number. 2 Input +/-. For example, to enter -57: Input Display Notes 57 57 Changes the gure +/- -57 to a negative number. Clearing Entries Before performing a new calculation, you should clear all previously stored values. To clear a single entry:  Input Display Notes The calculator is C 0.00 cleared. To clear all stored values in the calculator: Input Display Notes 1 P_Yr or 12 P_Yr 1 P_Yr may appear ↓ [C ALL] or depending on the 12 P_Yr time periods per year setting. Display 0.00 automatically changes to 0.00 Setting Time Periods Per Year The calculator comes pre-set at 12 periods per year, assuming calculations are done every month. In nancial theory and practice, calculations often use one period per year. The HP 10bII+ calculator has a P/YR key and an xP/YR key. Make sure you are using the P/YR key when setting the number of time periods per year. To check the current time periods per year setting: Input ↓ [C ALL]. The display will show the current setting for periods per year. To change the calculator setting from 12 periods per year to one period per year: Input Display Notes Sets periods per 1 ↓ [P/YR] 1.00 year to one. Con rms the setting. Display ↓ [C ALL] 1 P_Yr changes to 0.00 after a short time. Recall Setting Values To retrieve the value of a setting you have previously entered: Input RCL Input the variable to recall. For example: Input Display Notes Last value entered Displays 0.00 if no RCL I/YR for interest per value was year. previously entered. Last value entered Displays 0.00 if no RCL for the number of value was payments. previously entered. Beginning and End Modes The beginning and end mode indicates whether payments are made at the beginning or end of a time period. In this course, the calculations are performed in the end mode unless otherwise noted. To set cash ow to the beginning or end of a time period: Input Display Notes Calculator is set to ↓ [Beg/End] BEG beginning mode. Calculator is set to ↓ [Beg/End] No indicator. end mode.  Amortization Function Amortization is the process of dividing a payment into interest and principal. The AMORT key allows you to calculate the amount applied to interest, the amount applied to principal, and the outstanding balance after a speci ed number of payments are made. To use the amortization function, you rst need to have calculated a payment or stored the correct amortization values in I/YR, PV, FV, PMT, and P/YR. The following example illustrates how the monthly payment of a loan for $200,000 amortized over 30 years with an interest rate of 6.66% has been determined. The monthly payment can then be used to calculate the principal, interest, and outstanding balance at the end of the rst year. Input Display Notes Sets periods per 12 ↓ [P/YR] 12.00 year to 12 6.66 I/YR 6.66 Interest rate.  Input Display Notes 200000 +/- 200,000 PV 200,000.00 Loan amount. The number of monthly payments over the amortization 30 N 360.00 period (12 payments per year x 30 years = 360 monthly payments) Monthly loan [PMT] - 1285.25 payment. Payment period ↓ [AMORT] 1 - 12 AMORT PER range (Months 1 - 12) Principal paid 2,168.38 AMORT = during payment PRIN period range. Interest paid 13,254.62 AMORT = during payment INT period range. = -197,831.62 Outstanding AMORT BAL balance at the end  Input Display Notes of month 12. This number is negative because it represents a cash out ow. By entering the desired payment period range, it is possible to determine the principal, interest paid, and outstanding balance at any time during the amortization period. The following chart shows how to accomplish that at the end of six years: Input Display Notes 6.66 I/YR 6.66 Interest rate. 200000 +/- 200,000 PV 200,000.00 Loan amount. 30 ↓ [P/YR] 360.00 The number of monthly payments over the amortization period (12 payments per year x 30 years = 360  Input Display Notes monthly payments). Monthly loan PMT - 1285.25 payment. Starting month of desired payment 61 INPUT 61.00 period range (month 61). Ending month of desired payment 72 72 period range (month 72). Payment period 61 - 72 AMORT ↓ [AMORT] range (months 61 - PER 72). Principal paid 3022.43 AMORT = during payment PRIN period range. Interest paid 12,400.57 AMORT = during payment INT period. C O NT I NU E Lesson 4 of 47 Conclusion AREA PD While this tutorial ensures you are familiar with using the HP 10bII+ nancial calculator, understanding basic nancial concepts is the most important component. These nancial concepts and an opportunity to put this training to use will be part of future units in this course. Remember, you can return to the glossary and calculator tutorial in this unit at any time during this course. C O NT I NU E Lesson 5 of 47 Introduction AREA PD Many commercial licensees begin their careers with little or no background in residential real estate. Others begin in residential sales and transition to commercial practice. In either case, licensees will need an applied knowledge of real property law, land description, economics, and contracts.  Why are you interested in a commercial real estate career? Perhaps you are attracted to the prestige of high-pro le projects and the associated commissions. While these high-pro le opportunities exist, commercial trades are a signi cant investment in time. These deals are subject to extensive research and negotiation, requiring longer periods to close successfully. The rewards, while larger, can come less frequently. In this unit, you will learn about some of the differences between commercial and residential real estate practice. You might also be interested in the challenge of meeting the needs of diverse clients. Commercial brokerage activities can reach global proportions with clients investing internationally. Institutional investors and multi-national organizations routinely scrutinize and select properties based on the most advanced capital budgeting procedures. Similarly, many commercial brokerages represent the local business owners—the aspiring entrepreneur leasing retail space, the manufacturer seeking industrial property for expanding business, or the local developer reviewing a potential mall site. The commercial real estate market is made up of users and investors, like the ones described above. Users seek to occupy a property for a speci c economic purpose. Investors seek a return on invested dollars. The real estate market must offer incentives for both users and investors—stability of ownership, an opportunity for income, the foundation for a business strategy, or nancial security. In this unit, you will learn about the types of commercial real estate and the types of ownership available to your future clients. The role of commercial real estate in the Canadian economy cannot be overstated. According to a report by the Altus group, the commercial real estate sector’s building and construction spending, as well as ongoing operations generated nearly 300 billion dollars of economic activity in Canada in 2021 alone, offering a net contribution of nearly $150 billion to Canada’s GDP (NAIOP, 2022). This places commercial real estate on par with the oil and gas sector in terms of its bene t to the economy. In addition, the commercial real estate sector created and supported one million jobs in 2021, over a third of which were direct jobs, many of which were high-paying and highly skilled positions (NAIOP, 2022). As you might expect—when you consider that every nation in the world has a commercial real estate sector which generates large numbers of jobs, an enormous amount of tax revenue, and high capacity for investment both locally and internationally through multinational corporations—the net bene ts of this economic activity scale up accordingly. The value of global commercial real estate has been estimated at over 30 trillion dollars (Tostevin, 2021), and it continues to be a signi cant force for economic growth through both construction and operation, and also by its tangible use in producing, storing, and distributing goods, with the associated employment of the human resources required to make these things happen.  The Economics of Commercial Real Estate In the Fundamentals of Real Estate course, you learned about a number of key economic principles including microeconomics, which is the study of individuals and business decisions; and macroeconomics, which looks at the decisions of countries and governments. Though these two branches of economic theory may not appear to have much in common, they are, in fact, highly interdependent and mutually complementary. In this course, you will see how external factors, such as business decisions or government legislation and requirements, impact both the commercial real estate market and individual commercial real estate investment decisions. In addition, as discussed in the Fundamentals course, there is a market cycle for real estate assets that ows through four phases: recovery, expansion, hypersupply, and recession. It is important to consider the market effects of these phases as part of any planned activity in commercial real estate. Below is a brief description of each phase to help you understand how they may impact supply and demand in the various commercial sectors. Select each phase to read more about it. Phase I: Recovery During the recovery phase, prices are low due to a previous shift in demand, therefore little or no new construction is underway due to the oversupply of real estate assets on the market. As the economy recovers, vacancy rates begin to decline, and investors regain market con dence in the market as a consequence of increasing demand for property. At the same time, developers may begin to explore the feasibility of new projects. Phase Il: Expansion Prices begin to rise as demand for property increases, which drives more new construction. However it is important to note that there will be a gap before any new construction translates to available lease space or sale property. Phase Ill: Hypersupply During this phase, the supply increases, new construction projects come onto the market as they are completed. Eventually, the supply of property begins to exceed the demand for it. Phase IV: Recession As more projects are completed, further adding to the existing property supply, vacancy rates increase, making new projects unfeasible. The economy then moves into recession. C O NT I NU E Lesson 6 of 47 Comparison of Commercial and Residential Practice AREA PD There are large differences between residential and commercial practices. A licensee trained only in residential real estate would not be prepared for the complexity of most commercial transactions. The following table describes the differences in commercial and residential real estate from the real estate practitioner’s perspective. Factor Commercial Residential Projects Opportunity for a Generally smaller range of projects, properties and including high- lower prices. Less pro le ones. More activity is required extensive activity is for listing and involved in listing selling. and selling. Commission Often smaller Generally, a more accessible market. commissions as a Commissions are large portion of the normally received market involves within 30 to 90 leasing and selling days of the purchase smaller properties. agreement. Often, longer periods between commissions. Establishing a consistent income requires long-term  Factor Commercial Residential career development. Client Base Focused on users A broader scope of potential clientele. and investors. The Opportunity for sales effort is repeat business. usually concentrated on a group of specialized clients. Opportunity for repeat business since investors may purchase multiple properties over time. Client Motivation Investment Personal potential and preferences and criteria for usage. personal nancial resources. Client Decision Numbers drive the Personal Factors decision. motivation drives  Factor Commercial Residential the decision. Working with Client contact is Client contact is Clients usually during usually during business hours. evenings and weekends. Extensive time is spent on analysis Presentations are and research usually limited to presentations of brokerage service brokerage skills agreements. More and property types. time is spent on the Less time is spent sales process. on the sales process Marketing More reliance on Heavy reliance on commercial listing MLS® services. services, personal Emphasis on networking, and a advertising in focus on exclusive various media to listings. target markets. Units of Per the Building Residential real Measurement Owners and estate in Alberta is Managers usually measured, Association listed, and  Factor Commercial Residential (BOMA) standards contracted in of measurement, square meters, and commercial real must follow the estate is measured, Residential listed, and Measurement contracted in Standard (RMS). square feet. Commercial and Residential Real Estate for the Consumer What about the client’s needs? What are the differences between commercial and residential real estate from the consumer’s perspective? As we mentioned earlier, the commercial market hosts two different types of clients—users and investors. Keyboard Navigation Instructions  Use Tab or Shift+Tab to select a tab in the interaction. Press Enter to open the selected tab in the interaction. Use the Left and Right arrows to move from one selected tab to another. USE R S I N V E ST O R The user client type shares some of the same characteristics as buyers in residential real estate. They need a suitable property to house their business. They're concerned with the location, visibility, and prestige a property can offer. The user’s primary concern is that the property enhances business opportunities without high overhead costs. Amenities are also a consideration, such as a well-planned of ce or retail space, good lighting, and other conditions that increase the satisfaction of staff and clients.  USE R S I N V E ST O R Investors are less concerned with amenities than the rate of return on their investment. The investor's priorities lie with income generation. The investor generally looks for four criteria: 1. A good rate of return on capital investment. 2. Long-term security in the investment. 3. Potential for the investment to grow in value. 4. Liquidity in the investment. Liquidity refers to how easily assets can be converted into cash. Funds held in chequing accounts, savings accounts, and short-term guaranteed investment certi cates are generally viewed as highly liquid, as opposed to holdings in long- term bonds, mortgages, and real estate ownership. Factor Commercial Residential Location Higher traf c areas Lower traf c areas are preferred, as are preferred for they contribute to privacy, noise higher pro tability. levels, and enjoyment of the property.  Factor Commercial Residential Motivation Generating cash Amenities for ow. personal use and enjoyment. Market In uences Local, regional, Primarily local national and forces. international market in uences. Mortgaging Income generated Personal covenant. or asset-based. Type of Ownership Various options— Usually personally corporations, or family-owned. partnerships, joint ventures, real estate investment trusts (REITs), etc. Length of Dependent upon Dependent upon Ownership cash ows, personal factors investor objectives, such as suitability of use, employment, and return on family status, etc. investment. Type of Occupancy Often tenant- Usually owner- occupied. occupied. C O NT I NU E Lesson 7 of 47 Types of Commercial Real Estate AREA PD Commercial practice is sometimes called ICI practice in reference to the core areas of industrial, commercial, and investment. However, the range of specialties in commercial practice has greatly expanded beyond those categories, so the term commercial is used to generally describe the eld. In most cases, the level of specialization is in uenced by the amount of urbanization in the area. Select each of the three urbanization levels to learn more. Small Urban Centres In small centers, residential real estate brokerages may have one or two individuals working in the commercial market as generalists in addition to their residential business. Medium Urban Centres Medium urban communities may result in commercial generalists. While they work full-time in commercial real estate, they don’t usually specialize due to the lack of volume. Major Urban Areas With a greater variety and volume of business enterprises and clients, major urban areas allow high specialization. The following is a partial list of the opportunities to be explored in commercial real estate. We will continue to examine these specialty areas throughout the course. Of ce and Retail Real Estate In commercial real estate, lease transactions outnumber sales. The retail and of ce sector offers a broad scope of properties and many user and investor clients. Of ce leasing is provided for clients who need a space to work, meet with clients, or develop ideas and projects. Of ce leasing differs from retail space in that the customer may be coming to the of ce to purchase services and products, but not “off-the-shelf.” Law rms, market research, engineering, product development, nancial advisors, and business divisions (human resources, nance, accounting, etc.) may all require of ce space. Of ce leasing and sales can involve a single of ce or an entire high-rise project. Many high- pro le commercial brokerages have a dedicated of ce leasing division. Retail activities involve selling and leasing property for retail space, including downtown retail, on-street retail, strip plazas, enclosed malls, and various other property types.  Industrial Real Estate Industrial real estate involves the sale or lease of warehousing and manufacturing space for the production, storage, and distribution of products. It also includes selling raw or serviced land to developers and owners. Leasing is provided for clients who need a space to work, meet with clients, or develop ideas and display projects. Industrial sites tend to be owner-occupied, investor-owned, and/or tenant-occupied. For instance, a user may require a custom facility to be developed on a vacant site. The design-build process is the custom  development of a vacant or under-utilized site to suit the user’s speci c requirements. In this case, the land owner will agree to build a structure of size, quality, and appearance that meet the requirements of that speci c user. The owner, as the landlord, then leases the completed structure to that user—the tenant. The purchase or lease negotiations include the development of the facility, and the commercial licensee may be responsible for criteria such as site selection and acquisition to assist in design decisions and site development. From a real estate perspective, the typical design-build process involving a tenant progresses through seven stages: Tenant Qualification Establish nancial capabilities. Outline speci c needs and criteria for the site and building. Preliminary Proposal Evaluate options and strategies for the tenant. Prepare Developer Presentation Visit and review potential buildings and locations. Develop an initial proposal for the presentation to a selected developer. Developer Meeting Discuss and evaluate the business plan and preliminary proposal from the developer's perspective. Detailed Proposal With the developer and other experts (e.g., architect and lender), develop a detailed proposal along with a rental quote. Presentation—Acceptance Prepare the detailed proposal and rental quote to be submitted for acceptance. Follow Up Provide follow-up and assistance as required leading to project completion.  Property and Asset Management In property and asset management, brokerages manage industrial or commercial projects such as industrial parks, commercial plazas, or of ce projects. Although the management of commercial properties requires a separate property management licence, commercial licensees are permitted to represent commercial landlords and tenants in the leasing of commercial property. Licensees with a property management designation also work with commercial landlords and tenants but, in addition, may manage properties themselves. The main difference between property  management and asset management is that the asset manager does not provide rent collection and accounting. Investment Investment real estate produces income for investors. Income-producing real estate can include industrial, retail, of ce, multi-unit residential and other specialty properties. Investment real estate prioritizes a property’s income potential.  Investment real estate attracts many types of buyers, such as institutional, corporate, or private investors (including syndicates) within Canada or abroad. In this eld, the focus is on the investment rather than the user. As we discussed in the investor pro le, the primary consideration is the expected income ow. The physical and functional state of the land and buildings are primarily considered in relation to their impact on the income stream. Business Brokerage Business brokerage is a specialized eld dealing with the sale of businesses. When a business has no associated real estate, the sale activities do not require a real estate licence. When real estate is involved, it should be treated as any other real estate trade. The sale of businesses may also have securities law implications. Licensees should seek advice when involved in the marketing of any real estate that includes a business.  Land Sales Land sales, or land development sales, involve vacant land. Select each tab to learn about three sub-specialties included in land sales: I N DUST R I A L L A N D C O MME R C I A L L A N D R E SI DE N T I A L L A N D The sale of land zoned for industrial use and land parcels at various stages of the zoning and development approval process.  I N DUST R I A L L A N D C O MME R C I A L L A N D R E SI DE N T I A L L A N D The sale of commercially zoned building lots to users, builders, and investors. Examples include the development of small strip plazas, neighbourhood plazas, regional shopping malls, or of ce projects. I N DUST R I A L L A N D C O MME R C I A L L A N D R E SI DE N T I A L L A N D The sale of raw land or land at any of the various stages of subdivision and zoning approvals, primarily for single-family and multifamily developers and builders. Specialty Activities While all of the previously mentioned specialties have well-de ned areas of practice, some areas of commercial real estate do not fall into one particular type or category. These include specialty-use properties including, but not limited to: Businesses with property, including motels and hotels; Amusement parks; Recreational facilities; Multifamily modular home developments; and Multifamily retirement developments. You must be familiar with land use bylaws for your area. Have zoning manuals and maps close at hand for reference. It is helpful to maintain knowledgeable contacts in the planning and zoning departments in the municipality as a source of information. As a commercial licensee, you will have direct contact with land division committees, committees of adjustment, site plan committees and other municipal and provincial bodies. C O NT I NU E Lesson 8 of 47 Market Research AREA PD Residential licensees generally have two main sources for market data research: MLS® records. Published records of land transfer as recorded in the Land Titles of ce. These are usually not suf cient for commercial practitioners for several reasons: A large percentage of commercial business is made up of leases, which may not be recorded at the Land Titles of ce. Commercial practitioners do not frequently use MLS® systems, leading to MLS® records re ecting less of the commercial market.  The complexity of commercial transactions can require the involvement of additional sources for market research. The sections below outline valuable sources of information for commercial licensees. Commercial Real Estate Databases Commercial real estate data is available from various websites, including property listing websites and those that collect market data. Some of these can be accessed by members of the public. Others are limited to industry professionals and require subscriptions for full access. Realtor.ca is a real estate listing website hosting commercial properties for sale or lease across Canada. LoopNet is a real estate listing website. Members of the public can view commercial properties available for sale and lease. Professionals can subscribe to access additional features. CoStar, an af liate of LoopNet, is only available to professional subscribers. Its staff regularly surveys real estate professionals, management, and owners to keep up-to-date on commercial availability and completed leasing and sales deals. Altus Data Studio offers a subscription service to view property sales transaction reports. Use these as comparables for listings available for lease and sale. Commercial Edge gives REALTORS® the option to subscribe and view sales transactions. The Network is an Alberta-based database of commercial sales, information, market listings and statistics speci c to Alberta in over 80 municipalities. Broker websites are the best source of active commercial real estate listings. The Canadian Commercial Council of REALTORS® The Canadian Real Estate Association’s Canadian Commercial Council of REALTORS® (CCC) represents commercial real estate specialists from boards and associations across Canada. The council provides a strong interactive network for real estate practitioners specializing in industrial, commercial, and investment real estate. Additional Sources of Information As a commercial real estate licensee, you will be challenged to develop contacts within professional, business, industry, and government groups rather than marketing strictly through advertising media. Good business community contacts include lawyers, accountants, appraisers, tax experts, nancial representatives, institutions, real estate-related agencies, and municipal departments. It is equally important to develop contacts and business relationships with your fellow commercial licensees. You can gain valuable information on the commercial real estate market from: Colleagues willing to exchange information.  Commercially available research reports. Real estate appraisers. Local lawyers who handle commercial business. Regional municipal of cials such as politicians, planners, and zoning of cials. Members of the business or industrial community. Builders and developers. Records of leases or sales made within the brokerage. You may nd that as you build your career in commercial real estate, others will approach you for your view on ventures in your community. These moments are an opportunity to be a resource to others while learning more about the local market. C O NT I NU E Lesson 9 of 47 Ownership of Commercial Real Estate AREA PD As you learned in the Fundamentals of Real Estate program, types of property ownership include joint tenancy, tenancy in common, and leasehold interests (i.e., individual ownership of residential properties). In commercial practice, group ownership is more common than individual ownership. We know that for commercial clients, factors that impact income streams are the most in uential. For that reason, legal and taxation considerations greatly in uence ownership options for users and investors. Of course, commercial clients should always seek expert advice regarding their investment strategies in the marketplace.  Your clients will look to you as a commercial practitioner for advice when navigating the complexity of commercial transactions. CONTINUE Scene 1 Slide 1 Continue Next Slide  What type of ownership will give me the best bottom-line benefits? CONTINUE Scene 1 Slide 2 Continue Next Slide  If I put the property in my wife's name, can I reduce my taxes? CONTINUE Scene 2 Slide 1 Continue Next Slide  If I buy through a corporation, will I have more deductions? CONTINUE Scene 3 Slide 1 Continue Next Slide  What happens if the project fails—can I avoid liability? CONTINUE Scene 4 Slide 1 Continue Next Slide  If I have a partner, can I be drawn into their financial problems? CONTINUE Scene 5 Slide 1 Continue Next Slide  If we decide to enter a joint venture, what authority and responsibilities will we have in the project? CONTINUE Scene 6 Slide 1 Continue Next Slide  Conclusion These questions reflect the concerns of most investors around maximizing return, minimizing taxation, and managing liability. CONTINUE Scene 6 Slide 2 Continue Next Slide  The topic of ownership strategy is complex, and there are no simple answers. Every circumstance, every owner, and every property will be unique. START OVER  Scene 6 Slide 3 Continue End of Scenario  Taxation and Ownership You will encounter taxation, Goods and Services Tax (GST), and associated issues when serving clients. Taxation and GST play a role in investment analysis, which affects everything from ownership options to nancing packages. Although taxation and GST do not directly impact cash ows and returns, since most nancial analysis is done prior to tax, licensees must be aware of the taxation and GST rules to ensure their clients are well informed. Don’t confuse being aware with being a tax expert. Leave that to the appropriate professionals. Nothing replaces sound advice from a tax professional. Every  real estate transaction is unique, and expert and legal advice should be sought where warranted. Types of Ownership Ownership of commercial properties can be classi ed into three categories: 1 Individual, 2 Group, and 3 Trust. Among these types, there are also hybrid forms of ownership. For condominiums, regardless of ownership, condo rules and bylaws will still apply when a property is acquired or leased. Individual Ownership Individual ownership refers to fee simple ownership. We learned in Fundamentals that fee simple is the highest estate or absolute right in real property. Fee simple is generally considered absolute ownership, subject to restrictions imposed by law. Fee simple provides the most rights with the fewest limitations—a high degree of control and personal involvement, exibility in disposition during life, and exibility in designating a bene ciary. Taxation and Individual Ownership Taxation issues for individuals owning real property involve the reporting of investment income, GST, and capital gains and losses. Rental income from property owned by small investors is generally not considered business income but income from property. Expert advice is always required as criteria and factors vary. Relevant expenses may be deducted from gross rental income, such as accounting expenses, routine maintenance and repairs, mortgage interest, real property taxes, and utilities. Non-deductible expenses would include the costs of acquisition, prepaid expenses (expenses for years other than the current year), the principal portion of mortgage payments, and personal labour costs relating to the property. Certain expenses are considered direct, which means they are deducted from that year. Capitalized costs, however, are amortized over a longer period. Capital gain is pro t gained when a property or asset is sold at a pro t. The Canada Revenue Agency (CRA) applies certain rules to determine what counts as income versus capital gain. Considerations include frequency of transactions, the intent of purchase, length of ownership, and the owner's occupation. These three formulas are involved in calculating capital gain: Group Ownership Group ownership refers to any form of ownership beyond a single individual, including joint tenancy.  Joint tenancy might be a suitable option for some investment properties. However, because joint tenancy involves passing interest to the surviving owner or owners, it is generally less practical for investors in real estate. Before we get into the categories of group ownership most commonly found in commercial practice, select each tab for three important de nitions. UN L I MI T E D L I A B I L I T Y L I MI T E D L I A B I L I T Y UN DI V I DE D I N T E R E ST A liability to pay all the debts incurred by a business. For a partnership, the owner’s liability is not limited to the amount the owner has agreed to invest. All debts of the business must not only be paid out of business but also, if necessary, out of personal assets (Oxford, 2022). UN L I MI T E D L I A B I L I T Y L I MI T E D L I A B I L I T Y UN DI V I DE D I N T E R E ST Condition under which the losses that owners (shareholders) of a business rm may incur are limited to the amount of capital invested by them in the business and do not extend to their personal assets (Britannica, 2020).  UN L I MI T E D L I A B I L I T Y L I MI T E D L I A B I L I T Y UN DI V I DE D I N T E R E ST In group ownership of property, owners with an undivided interest own a part of the whole asset. They do not own a private portion of the property. Here are the six categories of group ownership. Select each category for more information. Tenants In Common Tenants in common is a form of ownership between two or more people. Unlike joint tenancy, the interest of a deceased owner passes to their estate as an asset rather than to the other owner or owners. Corporate Ownership A corporation is a legal entity existing separately from its owners. Ownership of the corporation is represented by shares. A person, business, or group who owns shares of the corporation is a shareholder. General Partnership A partnership is a legal form of joint ownership between two or more owners. The partnership exists as a separate entity from the owners. Partners pool their nancial resources together and share both the pro ts and losses. Limited Partnership A limited partnership is a partnership arrangement involving: General partners, and Limited partners. General partners manage the operation and assume unlimited liability for all debts. Limited partners are investors. Their liability is limited to the amount of their investment, and they do not in uence the management of the partnership. In real estate development, the general partner is usually the developer who brings in other limited partners to provide funding. A limited partner must be a passive investor as their income is declared under personal income. Certain tax bene ts can be passed to the investor, such as business losses, property losses, and selected investment tax credits. Loss is a complex topic and requires expert advice. Joint Venture A joint venture is an arrangement between two or more individuals or corporations who agree to pool resources such as goods, services, and capital to a common commercial enterprise (CRA, 2004). It is a more informal, temporary arrangement than a partnership. A joint venture is almost always con ned to a particular de ned business venture. Syndication In real estate, syndication is co-ownership through a group of investors who fund the purchase, operations, and eventual resale of an income-producing property (FirsttuesdayJournal, 2022). Syndication draws millions of dollars of equity funds into the commercial marketplace. Syndication methods differ. Usually, a lead individual or company known as the promoter markets a speci c project to attract passive investors. This form of syndication differs from blind pool syndication (a term coined in the United States), where equity investors pool funds before decisions regarding speci c projects. This table summarizes the characteristics of each of these six types of group ownership in terms of their operations, capital, liability, and taxation: Operations Capital Liability Tenants in Used by small Owners Owners Common investor pool assume  Operations Capital Liability groups to avoid resources. unlimited the expense of liability corporate regarding the setup and pooled administration. investment. Corporate The Owners Shareholders Ownership corporation is transfer assume registered on money, limited title. property, or liability; they Ownership is services to are not re ected the responsible through the corporation for the proportion of in exchange corporation's issued shares for shares debt. Income which can be (CRA, and loss bought or sold. 2006). incurred are Shareholders absorbed by have little the control over corporation. corporate decisions. General Established Partners Each partner Partnership through a pool their assumes  Operations Capital Liability partnership resources unlimited agreement. and assume liability. Structure and an operations are undivided decided interest in through joint investment. decisions. Limited Falls between a Limited One general Partnership partnership partners partner must and a invest. have corporation. Pro ts are unlimited passed liability. directly to Limited the partners investors in have limited proportion liability to to their the extent of investment. their investment. Joint A group of Owners Partners are Venture owners form a contribute liable for  Operations Capital Liability partnership resources, their portion regarding a services, of expenses. speci c and capital business and own an venture. undivided interest. Syndication Promoters A common The select, fund, method of promoter and manage funding assumes attractive involves unlimited capital the sale of liability. projects. shares to Investors Investors place individual assume their investors. limited con dence in liability, up the expertise to the extent within the of their syndicate to investment. deliver expected returns.  Trust Ownership A trust is a legal relationship in which assets are placed under the control of an authorized person or entity for the future bene t of another person. In real estate, it is speci cally a written relationship by which a settlor gives property to a trustee for the bene t of the bene ciary. Trust Ownership Terminology Select the tab below for de nitions of these terms. Settlor Person establishing the trust. Trustee A person or legal entity who holds legal title to the property and is responsible for its management for the bene t of another party or parties. Bene ciary The person for whose exclusive bene t the trust is held and administered. Tax Planning Often used as an investment strategy to provide returns to bene ciaries while retaining their anonymity and providing certain tax advantages. Estate Planning Creates continuity in estate planning and management. Family Trust Relates to a trust arrangement used for tax and estate planning under which a company (or other assets) owned by the family are placed in trust for the bene t of children. The term is not referred to in the Income Tax Act. Historically, a property title was put in the name of an owner who would hold the property for another. Presently, trust ownership has expanded to address diverse purposes. The use of a trustee in real estate ranges from family trusts to complex real estate investment trusts, which are further discussed in this section. Real estate licensees may also encounter the concept of trust when a person wishes to avoid unwanted liabilities. For example, a buyer may indicate in an offer that the property is "purchased in trust for a corporation yet to be formed" or simply "in trust." This is an attempt to remove liability. We will not go into the legal merits of a trust, but know that, when attempting to remove personal liability, the language used and the actual existence of an intended bene ciary will be critical to establishing the legality of the trust. Real Estate Investment Trust (REIT) A real estate investment trust (REIT) is a real estate company. Using investor money, REITs buy and manage properties and distribute a share of income back to investors. They function much like a mutual fund that only deals in real estate investments; investors purchase shares of the REIT and earn a proportional share of the pro ts as the value of shares appreciates. REITs are formed through a process called securitization. Securitization is the creation of a nancial instrument by combining other nancial assets and then marketing them to investors. REITs that focus on property ownership are referred to as equity REITs. An equity REIT may manage a variety of property types or specialize in certain areas of real estate, such as healthcare buildings, hotels, of ces, etc. REITs specializing in mortgage nancing are called mortgage REITs. When offering a combination of both equity and mortgages, they are known as hybrid REITs. REITs receive special tax considerations and appeal to investors with high yields and a liquid method of investing in real estate. REITs do not fall under real estate legislation, and anyone considering this type of investment should obtain expert advice. For more information, visit Alberta Securities Commission.  Check Your Understanding Manpreet (she/her) has been a residential real estate licensee for about five years. She is now looking to get into commercial real estate. What are some of the changes she should anticipate when making the switch from residential to commercial? Select all that apply. Longer periods of time between commissions. More time spent preparing presentations. More client contact during evenings and weekends. Client decisions based on numbers. SUBMIT C O NT I NU E Lesson 10 of 47 Conclusion AREA PD Commercial real estate is a highly specialized eld that differs from residential real estate in several ways. Commercial clients all share a common goal of pursuing and maximizing their investment objectives. As a commercial licensee, you must understand the unique advantages of investing in commercial, industrial and investment properties, the basis of investment decision-making, and the ownership options available to buyers and sellers. Ownership of commercial real estate can take several forms. The correct ownership option will vary with the investor's needs. The investor will select an option using a strategy to maximize return, minimize taxation, avoid liability, and establish authority. Commercial real estate licensees can provide their clients with guidance around these options. However, advice on taxation should always be sought from an expert.  References Britannica, T. Editors of Encyclopaedia. (2020, August 20). limited liability. Encyclopedia Britannica. Canada Revenue Agency (CRA). (2004, December 1). Establishing a business in Canada. Canada. Commercial Real Estate Development Association (NAIOP). (2022). Economic impacts of commercial real estate in Canada. FirsttuesdayJournal. (2022). Real estate syndication, explained. Oxford Reference. (2022). unlimited liability. Tostevin, Paul. (2021, September). Market Trends: the total value of global real estate. Savills. C O NT I NU E Lesson 11 of 47 Introduction AREA PD As a real estate licensee, you can be found liable—legally responsible— for issues that arise during transactions. Errors can include: Unreliable documentation used to support listing information. Inaccurate representations made orally or in advertising. Incorrect information about electrical capacity, re code requirements, HVAC capacity, business equipment, building speci cations, etc.  Failure to do the research required to provide information that would be deemed necessary to properly assess risk. The consequences of negligence can range in severity, but sanctions are always preventable. Managing liability and preventing claims requires diligence, professionalism, and attention to detail in the commercial sphere. Each sector of real estate practice has its own potential liabilities. If you compare commercial real estate to other real estate sectors, you will nd major differences in the type and range of properties. The bulk of commercial is conducted in three major elds: Industrial—warehousing land and buildings, manufacturing plants, etc. Commercial—hotel, retail facilities, shopping centres, of ce space, etc. Investment—any of the described types as well as apartment blocks and of ce buildings. Due to the complexity of some commercial transactions, and because each area of commercial real estate varies, commercial licensees are exposed to greater potential liability. Knowledge in one area of commercial real estate does not guarantee pro ciency in other areas. You must carefully analyze each individual transaction in terms of the type of property involved, the nature of the transaction, and the unique requirements of the client. Whether your brokerage is large or small, exclusively commercial or offering a combination of residential and commercial practices, commercial transactions often require both clients and licensees to obtain expert advice. In this unit, you will learn about potential sources of liability in commercial real estate practice. You will also learn about how to manage liability through professionalism and due diligence. C O NT I NU E Lesson 12 of 47 Sources of Liability AREA PD Each type of commercial real estate has unique complexities. The more complex a real estate transaction, the more potential for liability. The following table describes some hot spots for liability found in commercial real estate. Hot Spot: Examples: Misreading source Zoning manuals, tax bills, information: building location certi cates, existing contracts, income. Incorrect cost estimates: Property repairs, cost of services, heating. Chattels and xtures: Inaccurate description. Failure to identify whether included or excluded.  Hot Spot: Examples: Tenants: Details of existing tenancy agreements, rent control issues, and pending rent disputes. Age of improvements: Incorrect information about replacement data. Inaccurate estimate of age. Condition and quality of Building utility, defects, and improvements: latent defects not identi ed or disclosed. Size: Incorrect lot or building dimensions. Mortgages: Failure to check details regarding the ability to mortgage discharge and any related penalties. Title: Failure to identify and verify easements, restrictive covenants, location of improvements in relation to the property line, and any related problems. Agency: Unclear roles. Lack of adequate  Hot Spot: Examples: disclosure. Oral agreements. Goods and Services Tax (GST): Failure to check if GST is payable. Confusion about when GST is payable and by whom. Case Study: GST Wording Background You may have come across the term ow-through, with regards to GST. In a real estate transaction where GST is applicable, GST ows through to the federal government as follows:  1 The buyer pays the GST to the seller. 2 The seller is responsible for paying the GST to the federal government. 3 The buyer submits their input tax credit (ITC) and receives the applicable refund from the federal government. In the case outlined below, this process is disrupted. The Case A commercial associate acted as a dual agent in a real estate trade. They used AREA's Commercial Real Estate Purchase Contract in the transaction. Clause 2.3 of the contract form indicated the buyer would pay the purchase price "plus GST, if applicable." However, the parties agreed to change the wording to read: "including GST." The buyers signed the agreement, intending to be responsible for the GST. Clause 2.4 of the contract stated the seller would collect GST from the buyer, and the seller would remit the GST to the government. However, this clause was not changed. The buyers later contested this agreement and advised they would follow the precise wording of clause 2.3, which indicated the GST was included in the purchase price. Therefore, they would not pay any additional GST to the seller. Per clause 2.4, the seller was still obligated to pay the GST to the federal government. Therefore the seller sued the associate. In court, the associate's oral evidence was that the parties had made an oral agreement that because they each had GST numbers, there would be a ow-through of GST. Therefore, neither party would be required to advance the GST funds immediately. A Court will rarely consider oral evidence over a written contract. In this case, the parties added to the contract, in clear writing, "including GST." To the Court, this indicated an action taken by one party. The contract also indicated that the other party had accepted this change. As a result, the oral agreement was not considered over the document's plain wording. The associate lost the case. Summary In preparing the purchase contract, the associate made an error by changing the pre-printed wording from "plus GST" to "including GST." If the associate claimed the intent was for the GST to ow through, then the standard wording in clause 2.4 would already provide for that purpose. To protect the parties, and the associate, the wording on the contract must clearly state whether GST is payable and, if so, by whom. Real estate licensees should not attempt to offer advice on GST matters. Further, they should not change the pre-printed wording on standard forms unless all parties to the transaction have received expert advice on GST. Watch out for these two potential sources of GST issues: 1. Pre-printed contracts designed for residential properties (typically no GST payable) being used for commercial transactions (typically GST payable). 2. The sale of a residential property (typically no GST payable) where there is a home occupation use (typically GST payable). For example, the sale of a residential acreage property where a portion is leased out for a business interest, such as a cell phone tower, gas line metering station, etc., will have GST applicable to the leased portion. C O NT I NU E Lesson 13 of 47 Managing Liability AREA PD This overview of commercial real estate risk issues does not attempt to cover every possible problem. Conducting yourself professionally and paying attention to the basic rules of good real estate practice are the most important factors in avoiding claims. You should also know when to reach out to other professionals for assistance, and what to look for in terms of research, inspections, and clauses. Professional Competencies As a commercial licensee, you must have some knowledge of setting up and running a business. This requires familiarity with: Ownership types and their advantages and disadvantages. Methods of setting up active companies. Accounting practices. Income and expense statements return. Investment. Valuation techniques. Property and business taxes.  Tax implications on the sale of real estate. While you should have a foundational knowledge of business, your client should always receive expert advice for any area outside of your expertise. If you are involved in the sale and development of land, you must have a thorough knowledge of the development and subdivision process, zoning, and the development appeal process. Many claims in real estate result from incorrect measurements. Of particular concern is measuring commercial rental space as it directly affects a tenant’s rental rate. The Builders Owners and Managers Association (BOMA) Standard of Measurement distinguishes between rentable areas and core areas such as elevators, washrooms, stairways, duct shafts, electrical rooms, and janitorial facilities in of ce and retail space. Leasing is the largest general eld in commercial real estate. Speciality elds for leasing include of ce, retail, industrial, land, and multifamily. Any type of property can be leased, and a leased property can be sub- leased. Additionally, any property for sale may come with existing leases associated with commercial tenants, parking areas, vending machines, and equipment. Lease documents must be drafted with care. Speci c elements are required for a lease to be valid. Check every offer to lease for the following items: Names of all parties. Legal description of the property. Date of the lease. Term of the lease. Amount of rent and additional rent. Default provisions. Option to renew. Use of the property. Any other terms that materially affect the lease (restrictions, additional nancial obligations, covenants, etc.) Any questions regarding the terms of a lease agreement should be settled before signing the lease document; otherwise, they can become an issue that may lead to a claim against you, as the licensee. Here are some questions you should ask to spot potential lease issues:  Is there anything in the lease that will affect calculations? Are there outstanding obligations under the lease? Who is absorbing the cost of unrented space? Is GST or other tax applicable? If so, what is the arrangement for payment? Lease arrangements in regional sho