Canadian Apartment Magazine

CANADA’S NATIONAL PUBLICATION FOR APARTMENT OWNERS AND MANAGERS

VOLUME 12 / NUMBER 4 / OCTOBER 2015

www.REMInetwork.com

Annual Finance Issue A viable solution to the affordable housing crisis

STAKING OUT PM#40063056

THE WEST Mainstreet’s Bob Dhillon embraces the mid-tier market

Tips and trends for apartment building managers

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Editor’s Note

Renting is the New Owning

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Rental housing has been a hot topic this fall, with both affordable housing shortages and the trickle effect from the oil crash dominating the conversation. In Western Canada, economic uncertainty is driving demand for rental property, as home buying has slowed and prices have declined in Alberta’s largest cities.

According to CMHC, average rents in Calgary are set to rise two percent to $1,350 from where they were last year. This is good news for our Calgary-based Industry Influencer, Bob Dhillon of Mainstreet Equity Corp. I had the pleasure of meeting with Mr. Dhillon and learning about his impressive business model, which focuses, simply, on buying and renovating mid-tier apartment buildings in Western Canada. His positive spirit and passion for the industry were infectious, and given Mainstreet’s unrivalled success in that niche market, it’s clear his leadership has paid off. Please enjoy my interview with the charismatic and outspoken CEO on page 26.

As for the affordable housing crisis, could there be a possible national solution looming on the horizon? According to a team of problem-solvers at Greenwin and Verdiroc, yes there is. Read our feature article on page 16 and get the scoop on their proposed viable, market-based solution that has government officials listening up.

As usual, our knowledgeable contributors have a lot of input to help landlords, both large and small, effectively manage their apartment buildings. We hope you enjoy the issue and look forward to hearing your thoughts. Please connect with us via www.reminetwork.com and our various social media channels.

Editor

Erin Ruddy

Associate Publisher

Senior Designer

Mitchell Saltzman

Designer

Jennifer Carter

Production Manager

Rachel Selbie

Annette Carlucci

Production Coordinator Karlee Roy Contributing Writers

aula Gasparro, Derek Lobo, P Jessica Green, Richard Vilner, Chaim Rivlin, Andy Schwartze, and Chris Seepe

National Sales

Sean Foley, Stephanie Philbin

Digital Media Director

Circulation

Steven Chester Maria Siassina

For sales information call (416) 512-8186 ext. 248 Canadian Apartment Magazine is published six times a year by:

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Requests for permission to reprint any portion of this magazine should be sent to Melissa Valentini

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CONTENTS COVER STORY 26 Industry Influencer

Mainstreet Equity Corp’s Bob Dhillon takes us inside Western Canada and the mid-tier apartment market

FEATURE 16 An Affordable Remedy to a National Crisis

By Erin Ruddy

By Erin Ruddy

COLUMNS 10 Transactions GTA Cap Rate Hits New Benchmark Low

By Lorenzo DiGianfelice 12 CMHC Understanding Canada’s Housing Needs

By Paula Gasparro 18 Opinion Canada’s Rental Housing Shortage

By Chris Seepe 22 Portfolio Your Property, Your Investment

By Derek Lobo 38 Management Taking it to the Bank

By Jessica Green 40 Insurance Liability Insurance Revisited

By Andy Schwartze 42 Marketing Maximizing Your Digital Strategy

By Chaim Rivlin

DEPARTMENTS 4

Editor’s Note

14 Ask the Expert 38 Smart Ideas

COLUMNISTS Paula Gasparro, Jessica Green, Derek Lobo, Andy Schwartze, Richard Vilner

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Technology set to change construction With technology advancing faster than ever, it’s no wonder the construction industry is starting to see rapid changes every year. With this exponential rate of change, the time between a technology being born and its practical application will continue to become shorter and shorter.

With the federal election fast approaching, party leaders have been busy unveiling plans to tackle what is now readily known as an “affordable housing crisis.”

FROM THE GREEN BIN

Canadian GRESB results lead the larger pack The sustainability benchmark is gaining influence in real estate investment decisions. Despite standout performance, Canadian achievement is somewhat obscured in the bigger picture of the 2015 Global Real Estate Sustainability Benchmark (GRESB) survey.

Accommodating mental illness in condos Accommodating mental illness in a condominium setting is no trifling obligation. Just like physical disability, both the courts and the Ontario Human Rights Tribunal require that mental illness be accommodated up to the point of undue hardship.

This is, by all accounts, an onerous standard.

What does sustainability mean to the building sector?

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Transactions

GTA Cap Rate Hits New Benchmark Low

By Lorenzo DiGianfelice

The average cap rate in the GTA for the third quarter of 2015 (Q3’15) hit its lowest level in the last 30 years. The cap rate in Q3’15 stood at 3.75 percent, down from 4.2 percent in Q2’15 and down almost 50 percent from the 6.3 percent posted in Q3’10.

The average price per suite in 2014 was about $140,000. So far in 2015, the price per suite has averaged just under $200,000.

This increase has to do with the rise in prices and the higher calibre sales we’ve been seeing so far in 2015. The average price per suite in Q3’15 was $191,000—down slightly from the previous quarter.

Number of sales In Q3’15, there were a total of 15 apartment building sales, down from 25 in the previous quarter and 23 one year ago.

Overall the pace of the number of sales in 2015 is comparable to that of 2014.

In 2014, about $900 million in apartment transactions were completed in the GTA. Looking at year-to-date figures in 2015, it appears that this year will surpass those levels being that we are already over the $1 billion mark.

Cap rate compression The major reason for the compression in cap rates has been the decrease in lending rates over the past year. In late 2014, the bond yield was around 1.9 percent and this has fallen to just under one percent in the fall of 2015. This, along with the imbalance between supply and demand, has pushed cap rates down.

The big story, of course, is the low interest rates, which has created an environment that has pushed cap rates lower.

10 www.canadianapartmentmagazine.ca

We are at the point today that no one can foresee negative interest rates. The conclusion is that rates will stay low for the short- to medium-term, or that rates will need to go up. If interest rates go up by even one percent, soon cap rates will follow. The issue is that when you have really low cap rates, say four percent, and they move up by one percent, then the building has lost 25 percent of its value. This could be the reason that some long-term holders are selling today.

Top GTA transactions Homestead was the largest purchaser in Q3’15 with the acquisition of two buildings, totaling $94 million. Akelius was a close 2nd with $91 million, buying four buildings. The next two largest buyers were deals completed through Commercial Focus Realty Inc. Times Group purchased 55 Broadway for $44.5 million, and Cromwell acquired 117-127 Broadway for $36.8 million. Both of these deals were purchased for redevelopment.

Lorenzo DiGianfelice is a member of The Apartment Group and Broker of Record and Commercial Focus Realty Inc. and can be reached at ldigianfelice@cfrealty.ca

Q3 Industry News Bites In October, Killam Properties Inc. announced that it will be reorganizing into a real estate investment trust to be named Killam Apartment Real Estate Investment Trust.

The reorganization will be accomplished by way of a plan of arrangement and, among other approvals, will be subject to shareholder approval at a special meeting to be held on or about December 8, 2015.

The low oil and gas prices eroding office space demand in energy sector hubs like Calgary and Houston have had measurably less impact on multi-residential rents, vacancy rates and investment activity. CBRE Research’s recent analysis of five North American cities where energy prices hold greater sway over commercial real estate reveals continued strong apartment fundamentals.

Notably, Houston, Dallas and Denver rank in the top five U.S. cities for apartment completions over the past year, collectively adding 27,000 new units.

New & Notable Transaction 2323 Eglinton Avenue East Located on the south side of Eglinton Avenue East and west of Kennedy Road, the property is improved with a six storey apartment building containing a total of 75 units. The building was constructed in 1962.

The building was purchased for a total consideration of $10,280,000, representing a price per unit of $137,067.

Date of Sale: September 11, 2015 Sale Price: $10,280,000 Capitalization Rate: 4.2% Total # of Units: 75 Price per Unit: $137,067 Brokers: Rock Apartment Advisors

The Primecorp Group of Companies completed the sale of a 23-property, 1,685 unit multi-family portfolio in Windsor, Ontario. The sale consisted of a mix of highrise and low-rise apartment buildings and townhouses, featuring 1,685 residential rental units and six commercial units strategically located within Windsor and Tecumseh.

CAPREIT completed the acquisition of a portfolio of 19 apartment properties in the Greater Vancouver Area totaling 919 residential suites. The purchase price of $170.0 million (excluding transaction costs) was funded with CAPREIT’s Acquisition and Operating credit facility.

Pure Multi-Family REIT announced the successful closing of the Brackenridge at Midtown, a multi-family apartment community in San Antonio, Texas, for a purchase price of US $51,000,000. Brackenridge was constructed in 2014 and consists of 282 brand new luxury residential units averaging 852 square feet.

This transaction was brokered by Rock Apartment Advisors. In the month of September, there were a total of thirteen transactions that sold for over $1,000,000 in the Greater Toronto Area. These transactions amounted to a total dollar volume of $108,656,900.

One of the tallest wood buildings in the world will soon be constructed at UBC, providing housing for hundreds of students. When completed, the 18-storey residence building will stand 53 metres tall (about 174 feet) and cost approximately $51.5 million.

New & Notable Transaction provided by RealNet

Send us your industry news for a chance to be featured in Canadian Apartment Magazine and The REMI Network: erinr@mediaedge.ca October 2015 11

CMHC

Understanding Canada’s Housing Needs

Market Tools and Analytics to Help Build Informed Solutions No two markets in Canada are the same, which is why CHMC holds a Housing Outlook Conference in every major market across the country, gathering industry experts to share information, predict trends, and build on new ideas to help improve the specific housing needs of those regions.

Since the mid-90s, CMHC has been providing research and market analysis to conference participants, helping them find answers to their business questions and needs. CMHC’s Market Analysis Centre continuously tracks housing market information for local, regional, provincial, and national markets. The Centre forms the research backbone of the corporation in delivering accurate and unbiased knowledge in each market region.

Every region also has a dedicated MAC analyst that focuses on a particular market. Using data CMHC collects from housing surveys, industry meetings and research, analysts are able to deliver their outlooks for the markets at the conferences to help housing-industry professionals make sound business decisions.

12 www.canadianapartmentmagazine.ca

2015 Housing Outlook Conferences Attendees to the conferences include lenders, realtors, builders, developers, planners, building suppliers, appraisers, construction services professionals and manufacturers. The purpose is to help those who participate to: • understand new trends in the market place • identify new markets and investment opportunities • determine consumer housing preferences • make business decisions or plan your business strategy • earn education credit

CMHC In short, providing current and accurate information can lead to better housing solutions. Accurate forecasts and succinct information leads to informed decisionmaking. Informed decision-making can result in a strong and flexible housing market which can lead to proper solutions that cater to all needs of Canadians, developers and homeowners alike. Informed solutions are what also lead to the better economy.

Upcoming regional conferences: Vancouver — November 2, 2015 Toronto — November 3, 2015 Ottawa — November 5, 2015 Victoria — November 13, 2015 Edmonton — November 19, 2015 Québec — November 24, 2015 Calgary — November 26, 2015 Montréal — December 3, 2015 Housing Market Information Portal CMHC’s Market Analysis Centre recently unveiled the Housing Market Information Portal, a dynamic, web-based tool that gives users quick and easy access to CMHC’s wealth of housing market data—from the national to the neighbourhood scope—all in one location.

Interested real estate professionals can find the Portal on CMHC’s website, and there is no cost to use it.

Additionally, CMHC has developed the House Price Analysis and Assessment (HPAA) framework as a new tool for analyzing markets.

It is rooted in economic literature and has been tested vigorously, examining specifically: • Overheating of demand in the housing market • Acceleration in house prices • Overvaluation in house prices • And, over-building in the housing market.

Low income apartment solutions More than just a service for housing-industry professionals, CMHC collaborates with provincial governments and housing associations across the country to deliver support to low-income households and developing affordable multiunit complexes for those that need it most.

As Canada’s only mortgage insurer to multi-unit properties, CMHC offers apartment building solutions to affordable housing owners and developers by providing the flexibility and security to invest in new multiunit complexes.

The investments from these buildings lead to accessible and affordable units. The higher the flexibility of a unit’s affordability, the more flexible the mortgage of the multi-unit complex becomes. This flexibility is coupled with a yearly investment of over $2 billion in housing so that housing needs across the country are accounted for. Ideas and solutions can be put into action so that all Canadians can have a place to call home. This is CMHC’s dedication that is put forward to providing solutions to the housing needs of all Canadians.

To take advantage of CMHC’s Mortgage Loan Insurance or to learn more about CMHC resources, contact Paula Gasparro, Manager, Business Development, MultiUnit Mortgage Insurance at 416-250-2731, via e-mail at pgasparr@cmhc.ca or log on to www. cmhc.ca/mult-unit.

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Ask the Expert

Financing Capital Improvements

Darryl Bellwood, Assistant VP First National Financial LP

Be Practical About your Needs and Proactive in your Efforts Most owners of apartment buildings have either had to, or are currently contemplating capital improvements to upgrade building quality. While many owners consider building improvements, there is often uncertainty about how to finance those upgrades. Darryl Bellwood, Assistant VP at First National Financial LP, has worked with many different types of owners to help them figure out the best financing options for their impending capital improvements. While many financing alternatives are available, owners need to understand and consider the severity of the issue.

“There are two main categories of severity,” says Bellwood. “Safety is one category. For example, unsafe balconies demand urgent attention. Integrity of the property is the second category. If there are holes in the roof or the underground parking structure is deteriorating, it’s important to address those issues as well.”

Financing approach: what makes the most sense When Bellwood sits down with clients, the financing approach is usually the first topic of conversation. They discuss whether financing out of pocket or drawing equity out of the property makes the most sense.

Owners that choose to finance out of pocket must be able to access the money from their own source of funds. Drawing equity out of the property can mean taking out a second mortgage on the unused portion of the equity in the property.

“Most property owners are aware of their responsibilities to undertake capital improvements. If they have properties in a high-demand location, it’s basically a necessity to maintain the building’s level of income,” says Bellwood.

14 www.canadianapartmentmagazine.ca

Assessing borrowers for financing: the lender’s perspective Bellwood has helped many owners obtain financing for capital improvements.

In some cases, mortgages were maturing, and the owner was able to refinance the property and draw equity out. Others chose second mortgages to complete upgrades on balconies, parking garages or roofs.

As a lender, Bellwood structures financing based on the diligence of the owner.

“When I’m refinancing, I place a lot of weight on whether the borrower has been proactive or not. Track record certainly impacts my decision making.”

Owners that take initiative to contact engineers, arrange assessments, get quotes and even start with preliminary work are more likely to receive their funds up front.

However, owners with urgent needs that haven’t taken advance action can usually expect a hold back on the funds.

“If the owner is proactive and diligent, I feel more confident about their desire and commitment to complete the capital improvements on time and on budget,” says Bellwood. “However, there are occasions with certain owners where I hold back funds until they complete the work.”

Be practical and be proactive If you’re looking to secure financing for capital improvements, it is important to evaluate your needs honestly and determine whether your focus is safety or integrity. It is also critical to take initiative and demonstrate a strong commitment to executing and completing the capital improvements in a timely, efficient manner.

“Track record makes a difference when it comes to financing capital improvements and assessing the associated risk. Ultimately, my goal is to work with owners to support them in maximizing the value of their assets. Owners that are investing significant effort toward that same goal make my financing decisions a lot simpler,” says Bellwood.

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Feature

An Affordable Remedy to a National Crisis Greenwin and Verdiroc join forces on a turn-key solution that could solve Canada’s Affordable Rental Housing woes

By Erin Ruddy

Affordable housing shortages for working Canadians have hit critical levels in most major cities across Canada. For years, grim statistics of growing waitlists far outpacing the number of affordable rental units under construction have made headlines nation-wide. Despite the alarming numbers, not much in the way of viable, sustainable solutions have been presented.

Take Toronto, for example, where 91,000 families are currently on waitlists for affordable rental housing. Toronto is a city that’s expected to grow by about 30,000 people each year; a third of whom are renters (approximately 10,000), and a third of those (approximately 3,300) are from lower-income households. These 16 www.canadianapartmentmagazine.ca

are households whose combined family incomes are generally in the range of $50,000-$60,000 per year and lower.

In Toronto, a family of four living on $60,000 a year is considered at or below the poverty line.

“Currently, the government’s gross capital input into the construction

Feature of affordable rental housing in large urban centres is $150,000 per unit,” says Cary Green, Chairman of Greenwin Inc. and Executive Vice President of sister company Verdiroc Development Corporation. “This non-repayable grant is a very high cost to the taxpayer.”

After subtracting the overhead and the fees, Green points out that the $1.25 billion allocated for the next four to five years will only allow for the construction of 1,500 units across the country per year.

And that’s only if all the money goes into new construction, which is not the case, as some of the funding is allocated to rent assistance and renovations—both

of which are badly needed. This level of capital, all experts agree, is nowhere near enough to address the extent of the growing need.

A viable, sustainable solution For the past two years, Greenwin and Verdiroc have been quietly working with the lending community, the Federal, Provincial and Municipal Governments, as well as numerous industry stakeholders, to develop a fiscally responsible solution that could reduce the affordable housing problem nation-wide.

Rather than a grant, their proposed solution is that the federal government

COMPARISON CHART: EXISTING GRANT -BASED PROGRAM

raise capital via 35-year Development Bonds. This would be raised over three or four years, in three or four tranches of $1.5 billion to $2 billion each, for a minimum total of $6 billion in capital.

“The 35-year bonds would be secured by the fully developed and leased rental housing properties that will be built using the funds,” explains Hanita Braun, Verdiroc’s Executive Director of Project Management, Planning and Development. “Similar to the CMHC limited dividend rental bonds of the 1950s and 1960s, these would be secured by the equivalent of a first mortgage on any new rental property.”

PROPOSED DEVELOPMENT BOND CAPITAL FINANCING INITIATIVE

$150,000 gross cost/unit including overhead and fees, to leverage the construction of Affordable Rental Housing.

$72,784 gross average cost to the Government under the proposed Development Bond Initiative (including overhead and administration fees). This is on average a 51.48% savings over the current program costs to the Government.

Currently the $1.250 Billion gross investment in housing leverages at best the construction of about 9,000 housing units for all of Canada over six years (at the rate of about 1,500 units per year), if all money goes into construction, which is not the case.

$6 Billion Development Bond capital invested over three-four years in repayable loans and mortgages to build new Affordable Rental Housing will generate 28,570 new Affordable Housing units over the first six to seven years at a yearly average of about 4,400 new Affordable Rental Housing units.

10,750 jobs over 6 years in construction and related industries (at the rate of almost 1,800 full time jobs per year) can be created if all the current program funds go into leveraging new construction, which is not the case.

$6 Billion Capital from 35-year Development Bonds invested in new Affordable Rental Housing Construction will generate 64,500 new full time jobs in construction and related industries over the first six to seven years, or yearly about 10,000 jobs.

Under the current program, the average Net Cost per year to the Government is $60,378,800 to leverage construction of a maximum 9,000 Affordable Rental Housing units and the creation of 10,750 full time jobs, if all the funds go into construction, which is not always the case.

The average Net Cost to the Government will be $59,412,500 per year over the term to generate 28,570 Affordable Rental Housing units and 64,500 full time jobs. This is three times the number of units and six times the number of jobs, while reducing the per unit cost to the Government by more than 50%, down to $72,784/unit.

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Feature

Simply put, the bonds would be interest-free for the first twenty years while the capital is repaid. For the remaining 15 years, both the principle and interest payments (at the same rate of the development bond) would be paid, meaning that the full principle is repaid.

“This solution would solve a real problem that exists with the current system,” Braun adds. “That problem

is the lack of affordable capital. The Development Bonds would leave in place the existing provincial and municipal structures, as well as CHMC’s parameters on yearly applicable rents.”

If launched as a Pilot Project, Green says the raising of the first $1.5 billion in capital could happen immediately, and that the benefits would be vast and direct. One big benefit is that the cost per unit to the government

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would be considerably lower—just $72,784 versus the current $150,000. The proposed capital to be raised would generate more than triple the number of units compared to the existing program—about 28,750 compared to 9,000—and six times the number of jobs, up to 64,000 from roughly 10,000, according to the proposal.

“Aside from these benefits, this would be easy to implement and open to all interested builders, developers and providers of affordable housing who meet the criteria for these loans,” Green notes. “Anyone who’s applied for a grant under the current system has experienced the drawbacks of having to wait for limited funds to become available. The current lack of affordable capital makes the uncertainty of funding even greater. This solution reduces those drawbacks.”

Gaining momentum and favour According to Green, this proposal was endorsed by the City of Toronto’s Affordable Housing Committee, the Carpenters Union, the Greater Toronto Apartment Association and numerous politicians and ministers in both the Provincial and Federal Government.

“More than 30 elected politicians from all three levels of government were consulted, and of that 30, only one or two were not supportive,” he says.

Given the current unattractive alternatives and their extraordinary costs to taxpayers, it’s no wonder the Development Bonds are gaining such favour. For those not fortunate enough to find affordable rental housing, the last resort often includes one of the following options: Shelter Bed: Cost to taxpayer: $100-$150/night Night in Jail or Prison: Cost to taxpayer: $2,000-$2,500/night Hospital Bed: Cost to taxpayer: $3,000-$3,500/night An affordable rental apartment built under the proposed affordable rental housing Development Bond plan would cost less than $11 per night to the taxpayer.

18 www.canadianapartmentmagazine.ca OPMG_CAM_September_2015.indd 1

2015-10-15 9:50 AM

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With the election imminent and the whole country focused on awaiting those results, this affordable rental housing solution is primed and ready to be implemented by whichever government takes hold. “We’re excited to see this move forward and finally start once again to seriously tackle the affordable rental housing crisis in Canada,” says Green. “These Development Bonds will open new doors and opportunities for the creation of much needed affordable rental housing in our country.”

THE PROCESS, FROM BOND SALES THROUGH TO PAY-BACK: .

Asset Transformation

Federal Government sells Development Bonds

Consulting Engineers Project Managers Materials Testing & Inspection Existing

DAVROC

Lending Institutions, subject to

criteria, become responsible for lending this capital

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Builders and developers that meet the criteria, borrow the money to build affordable rental housing Upon occupancy, the loans and mortgages are paid back to the lender monthly, over 35 years according to the preagreed lending terms

Lender collects the paid back loans and mortgages and holds funds in interest bearing account Bond holders are paid back

For more on the affordable housing crisis, visit

20 www.canadianapartmentmagazine.ca

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Opinion

Canada’s Rental Housing Shortage A Perspective on What Underlies Affordable Housing Need

By Chris Seepe

In June, 2015, the Federation of Rental-housing Providers of Ontario (FRPO) published a report titled, “Removing Barriers to New Rental Housing in Ontario.” The report outlines, quite accurately, the dire state of our current affordable housing stock and the action steps government could take to address the growing need.

The report states, “It’s been hard to find affordable housing in the past; it is hard to find it now; and it looks to be even harder in the future. There is little new affordable housing being built; current stock is in need of major renovation; and finances are of heightened concern for all parties.”

All these factors are true for most of Canada.

In the report, seven action steps aimed at government are outlined. They include: introducing housing agreements to create new homes; reducing costly development charges; preserving the 1991 rent-increase exemption; eliminating expensive municipal licensing schemes; and creating a portable housing allowance initiative.

All these action steps are valid, however, what the report failed to do, is address the critical issues—all government-driven—that led to the housing crisis in the first place.

The Recoverable Capital Cost Allowance (RCCA) and Capital Gains tax are huge disincentives for aging owners to sell their rental properties to new operators who statistically spend the most on upgrades and repairs. While a great vote-winning tactic among the large tenant electorate, the 2.5 percent annual rent increase cap exacerbates existing property neglect, lowers tenants’ quality of life, and discourages industry investment.

What other industry or business in Canada (or the world) prevents operators from passing on true operating costs to their customers? Electricity costs alone increased about 65 percent in the past 22 www.canadianapartmentmagazine.ca

five years and are forecasted to do so again in the next five.

Tenants can have their disputes addressed within 24 hours using free government services but landlords must undergo Landlord-Tenant Board processes for four-to-twelve months, with little recourse to recover their often substantial lost rental income after a hardwon judgement. 67 percent of all LTB applications are to evict tenants for nonpayment of rent.

The Ontario Residential Tenancies Act comprises 34 of 43 provisions that uniquely benefit tenants. No provisions uniquely benefit landlords—not even the right to collect rent.

Rental housing typically has disproportionately higher property taxes, which tenants ultimately pay when the unit becomes vacant. Rent control is the government’s answer to preventing the real world ‘market forces’ from correcting the housing shortage that the government created.

The trouble with rent control The Concise Encyclopedia of Economics states, “Economists are virtually unanimous … that rent controls are destructive.” It also cites a 1990 American Economic Review poll of 464 economists, in which 93 percent of U.S. respondents agreed that, “A ceiling on rents reduces the quantity and quality of housing available.” Another study reported that over 95 percent of Canadian economists polled also agreed.

Nobel laureate Gunnar Myrdal, an architect of the Swedish Labor Party’s welfare state, said, “Rent control…may be the worst example of poor planning by governments lacking courage and vision.”

Swedish economist Assar Lindbeck asserted, “…Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Few other industries in Canada are more constrained by short-sighted government interference than rental housing. Every other type of real property has been built in abundance—condominiums, office towers, hotels, warehouses, retail—many with notable vacancy rates.

Until these huge disincentives are re-evaluated and new incentives are developed, government will continue to resort to building a massive bureaucratic subsidized housing organization to inefficiently undertake with a large chunk of the public purse what thousands of available private sector experts could accomplish for a fraction of the cost, in a fraction of the time.

Chris Seepe is a commercial real estate broker and broker of record at Aztech Realty in Toronto, specializing in income-generating and multi-residential investment properties, retail plazas, science and technology related specialty uses and tenant mandates. (416) 525-1558 Email cseepe@aztechrealty.com; website: www.aztechrealty.com.

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New wave of apar Debt and equity raise experts After the meltdown of 2008, many lenders scaled back significantly, and there was not a lot of creativity in financing (i.e. interest only, longer amortizations, non-recourse structures etc. were not available). From 2012 to 2013 and especially over last two years, the market saw an exponential growth both in terms of supply and flexibility of loan metrics. For example, non-recourse loans or loans with burn-offs are more common now, and there are several new lender entrants to the market including multiple commercial mortgage-backed securities (CMBS) and foreign lenders.

Who are the new lenders?

AMAR: We classify the lending market in Canada into eight or nine different lending buckets (banks, pension funds, CMBS, foreign lenders, credit unions, trust companies, etc.).

Within each bucket, lenders have somewhat similar levels of lending criteria and pricing.

Through our active involvement with CRELA (www.crela. ca), we are tracking a total of 110 lenders in Canada. There are 25 to 30 foreign lenders active in Canada, from the U.S., Europe and Asia. Credit unions and trust companies along with pension funds are also very active. Some of these lenders have branch offices in Canada, while others are working remotely. We have been very active at JLL last year and advised over $1 billion in debt transactions. In our experience, these lenders like stability of Canadian financial system compared to other global jurisdictions.

STEVE: Our borrowers love dealing with us as we are able to bring new lenders to them and expand their lender pool. This is great from a diversification standpoint as they do not rely that heavily on one or two lenders.

Which capital pools do you see being very competitive?

AMAR: There are seven CMBS lenders in the market right now. It is imperative for a borrower to check with all of these entities to find out their level of interest on any given deal as their product can vary a lot depending on timing of their pooling process. CMBS lenders can offer a 30-year amortization with a non-recourse structure often times in a secondary market or maybe even in a tertiary market – depending on asset quality of course.

CHAD: Foreign lenders are also very aggressive on pricing and loan structure with a bias toward major markets.

However, depending on the time of year and their allocations, we sometimes see a huge swing in the kind of loans offered.

tment financing How can a borrower benefit with such an abundance of capital?

AMAR: If borrowers approached just one of these lenders, they would be disserving themselves. It’s imperative in today’s market to check with multiple lenders. We are often times able to take a deal out to the market to as many as 50 lenders if the need be. Borrowers are pleasantly surprised to see how we are able to get much better deals than their “home bank” for example.

CMHC vs conventional action CHAD: Given the sheer amount of supply of debt capital, the spreads on conventional mortgage have now compressed to as low as 150 bps over the GOC compared to 100 bps over the GOC for CMHC insured business.

GARRET: However, the delta between a CMHC and conventional mortgage coupon still is large enough. So, it makes more sense on five-year mortgages to take conventional deals but not so much on longer than five-year

Amar Nijjar Senior Vice President & Practice Lead B.Eng, MBA

Chad Gemmell Vice President MBA LEED AP

Garret MacGillivray Analyst B.Comm

deals. But there is a trade-off because with CMHC you pay a big premium up front. Conventional financing for apartments is becoming more meaningful because it offers higher leverage than CMHC loans. There is no up-front fee and rates are only slightly higher.

Is all apartment financing more of a commodity, or is there an art in underwriting which influences results?

AMAR: There are more than 50 lenders in the apartment financing space today, and they all have slightly different underwriting models and viewpoint. Unlike most of the shops out there, we at JLL have in-depth research capabilities to back up the data, cap rates, rents, absorption, availability stats etc. Smart advisors understand the story behind the deal and will be able to package it effectively. This is critical when going to market in front of lenders. A good package will have the right level of back-up data to substantiate underwriting versus going out with a poor package to the lending community – which is akin to a panhandler simply asking for whatever can be obtained!

Steve Giagkou Associate Vice President MBA, CFA

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Industry Influencer

CORNERING THE MID-TIER MARKET With double-digit growth in earnings for the 19th consecutive quarter, not even a recession can stop Bob Dhillon’s Mainstreet Equity Corp Bob Dhillon is a man who knows what he wants, and right now he wants to be right where he is: in Western Canada buying up mid-tier, add-value apartment buildings.

Listed as a Top 10 gainer among all TSX-listed companies in 2011, Mainstreet Equity Corporation has been consistently leading the Canadian REITs and real estate corporations in shareholder returns for the past decade. Publically traded since 1998, the growing portfolio worth 1.3 billion has just over 9,300 units all concentrated in oil-driven economies like Calgary, Edmonton, Vancouver and Saskatoon.

But not even the oil crash can hamper Dhillon’s enthusiasm for the markets he calls home. In fact, he’s all revved up and steadfast in his plans to stay put exclusively on western soil, at least for the foreseeable future.

26 www.canadianapartmentmagazine.ca

Industry Influencer

October 2015 27

Industry Influencer

“The apartment building universe has two categories,” Dhillon explains. “Tall towers and smaller, three-storey boutiquestyle buildings. In my cities, 80 percent of the assets fall into that second category, and those are the assets we buy.”

It’s a straightforward business model driven by the economic principle of supply and demand. For the size of the markets in Western Canada, there is less supply than in eastern cities like Montreal and Toronto. “Calgary only has only 34,000 apartment units, Surrey only has 5,500—and these are big municipalities,” he says. “Since the oil crash in 2014, we have had more in-migration in correlation with supply, putting a tremendous amount of pressure on our rental assets. In other words, if Calgary only has a three percent vacancy rate, 28 www.canadianapartmentmagazine.ca

well now we have a tsunami of people hitting that three percent vacancy rate, too.”

A clear vision Being cognisant of supply and demand, buying low, adding value—that’s the Mainstreet vision at its fundamental core. “We identify and purchase underperforming buildings at prices well below replacement costs,” says Dhillon. “Then we make the necessary capital improvements and reposition the properties for a higherrent middle market. We are the only ones creating a quality of life for middle class Canadians.”

Unlike most real-estate stocks that focus on more established properties and give investors their cash flow through

a real-estate investment trust structure, Mainstreet is a corporation—not a REIT— and as such, it doesn’t pay dividends.

This hasn’t deterred anyone from buying its stock, mind you. According to a report by GMP Securities, Mainstreet’s overall return has outperformed its competitors on the apartment building index, and has been listed as the highest performing company on the Toronto Stock Exchange with overall returns of 1,270 percent for the last 10 years.

Dhillon, a 40 percent Mainstreet owner, says that creating value, directing earnings back into the company, is all part of the greater goal. “We have the highest margins on the TSX multifamily index. It is a fixed cost business. Every incremental increase in top-line revenue flows to the bottom

Industry Influencer

line, ensuring all value created remains in the company for the benefit of our shareholders.”

How value is created One of the factors that really separates Mainstreet from its competitors is the asset class it focuses on. “REITs chase the big apartment towers so we don’t compete against them,” Dhillon notes. “All our acquisitions are small, under-performing properties with 40 to 70 units, usually fixeruppers with lots of potential.”

But accumulating those ‘fixer-uppers’ means Mainstreet has considerable capital expenses, a process that requires a longterm strategy to make it viable. “We have direct relationships with factories in remote

villages in China where we go once or twice a year to buy our materials—things like laminate floors, kitchen cabinets and tiles.

We achieve considerable savings this way, often up to 80 percent.”

Dhillon points out that this cost-savings initiative is of huge importance to his company given that a significant portion of his portfolio is always undergoing renovations. “Some buildings require simple fixes, like fresh paint or new floors, others need a complete overhaul – new boilers, a new roof, insulation, siding, etc. We call this period of repositioning Mainstreet Value Change.”

Value change indeed. According to Dhillon, the company’s aggressive renovation program, which can sometimes occupy up to 13 percent of his portfolio at once, results in more than just nicer buildings that attract higher rents; it also brings in significant savings due to the improved energy efficiencies.

“From the siding and the insulation, to the new windows and water-saving kitchen taps—all these new features combine to create less wastage and keep operating costs down,” says Dhillon. “So you see, we were green before green was a thing.”

Roots of Mainstreet Even as a young child, Dhillon had a mind for real estate. He began buying and flipping houses at the age of nineteen in order to put himself through university; an experience, he says, that got him hooked.

“For my generation, the dream was different. Everyone wanted to be a real estate entrepreneur. Today you see all

these investment bankers and hedge fund managers. Our heroes growing up were guys like Donald Trump,” he says.

“We all wanted to grow up and become real estate tycoons. Now, that was just a dream, but the reality was, nobody would give me a job. I had no choice.”

Born in Japan to Sikh parents, Dhillon immigrated to Canada at an early age.

He got his MBA from the Richard Ivey School of Business in 1998, and has been on a steady climb to being the dominant player in Western Canada’s rental industry ever since. In fact, the only job he’s ever had has been in real estate.

“What separates me from others, I think, is that I am an immigrant,” he says.

“As an immigrant, we came here to be good Canadian citizens. And, part of the good Canadian citizen model is to be entrepreneurial, successful, and driven.

My parents lost everything in the coup of Liberia (in 1980) and so we came here as economic refugees. We saw this country as a golden opportunity.”

In July of this year, Dhillon received an RBC Top 25 Canadian Immigrant Award, an honour he downplays, brushing it aside with a joke. “That was a bad year for immigrants,” he says. “They couldn’t find anyone else, so I won out of default.”

He is also a candidate for the Ernst and Young Entrepreneur the Year Award, which will be announced at a gala sometime this October.

Woes and triumphs Dhillon’s had a colourful career path, no doubt, but that’s not to say he hasn’t been October 2015 29

Industry Influencer Mainstreet is an add-value consolidator of mid-market rental buildings; typically walk-ups with no elevators or underground parking garages.

Other mid-market characteristics: • less than 100 units • fragmented Mom & Pop ownership • owner neglect and mismanagement • greater deferred maintenance • owners have limited access to capital • higher vacancy/lower rents

Mainstreet Highlights • The company’s mandate is to acquire, reposition, finance and operate multifamily apartment buildings in Western Canada • It has been one of the best performing real estate companies on the Toronto Stock Exchange since its inception in 2000 • The Mainstreet portfolio consists of 216 buildings totaling 9,319 suites • Total market value: $1.3 billion

stung by tough economic times. The market crash in 2008 wasn’t easy on anyone, least of all the real estate community.

But Mainstreet persevered with Dhillon guiding the way—a testament, he says, to his strong business model and the fortitude of the industry itself.

“Apartment buildings are a rock solid commodity. People need them. It is a safe asset class in boom times, in recession times, in any given time,” he says. “Apartments will always be a need.”

Despite the current doom and gloom around him, Dhillon looks at the future with a glass half full. With interest rates at an all-time low and the steady rate of in-migration and low vacancy rates, his eye is on the present and the future; on maximizing current opportunities, whatever those opportunities might be.

“The recent slowdown in the western Canadian economy is going to give me an opportunity to expand my portfolio in my own backyard,” he says. “Has it become a buyer’s market? No… not yet. But I’m excited by the opportunities I see. I’m excited about interest rates dropping considerably. I’m going to take advantage of those low interest rates and improve our cash flow.

This is also a great chance for us to bulk up in our HR department.

In times of recession you can really hire some good talent.”

30 www.canadianapartmentmagazine.ca

Industry Influencer

Pursuing Paradise In addition to his real estate enterprise in Western Canada, Dhillon is the Consul General to Canada for Belize, where he owns a 3,000 acre island near the town of San Pedro. Over the past two decades, Dhillon has transformed the once-sleepy peninsula now known as “the Platinum Coast,” into a thriving destination. The master plan for Phase 2 of the development includes a gated community, high-end condos and villas, luxurious resorts, and a world class golfcourse. In 2011, Dhillon wrote and published a book, titled: Business and Retirement Guide to Belize, an introduction to living, working, and retiring in the tropical paradise he considers to be one of the world’s most undiscovered secrets, as well as a retirement and a financial haven.

As for how his stocks are faring in the current economic climate, Dhillon shrugs and says, “Obviously we are never happy when a stock drops in value.

Nobody is happy with any kind of a drop, but then my job is to maximize shareholder value. The positive aspect in all this is that it’s a great opportunity for Mainstreet to buy back its shares at a significant discount to NAV.” From the price of stocks to the procurement of materials, Dhillon’s passion for each and every aspect of his industry is obvious. In fact, it’s so obvious it shines from his face as he ponders his past journey and the challenges he faces in the days and years ahead.

“My business is just too simple—and that’s my biggest challenge,” he says. “We buy mid-tier buildings, and like a plastic surgeon, we reposition the asset. Due to its simplicity, we don’t get enough credit for the business model.”

But simple business model aside, what has been the single most interesting part of his journey so far?

“For me, it’s been the capital markets,” he says.

“Real estate is fascinating, and you can really mould it, like an artist. You can create what you want to create.

But learning capital markets was like learning a new language. Luckily along the way I had some great professors, real estate Bay Street Gurus such as Frank Mayer and Jeff Olin, who later acquired 10 percent of Mainstreet Equity stock.”

Dhillon concludes, smiling, that it’s a unique and exciting time to be in real estate. “Institutional capital is consolidating the market,” he says. “And I am just grateful to be part of the journey.”

The Mainstreet ‘Value Chain’

Mainstreet identifies and buys under-performing rental units at prices well below replacement costs, then implements capital improvements to increase the asset value.

October 2015 31

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Deal Profile:

CMHC-insured financing for air space parcel Deal snapshot:

First National gets ahead of a new financing trend, leveraging its CMHC expertise and network to prove the legal viability of air space parcels and secure CMCHinsured financing.

Client objective:

The client was building a mixed-use development in Vancouver, taking advantage of the growing development trend in the city. This particular building included three air space parcels (sections embedded within buildings where ownership is broken up vertically), with one designated for rental apartments. The client wanted to retain this air space parcel and, if possible, secure CMHC-insured financing.

The solution approach:

The First National team recognized the complexity inherent in the deal and took the time up front to understand the concept and legal implications of this type of ownership structure. At the time, there weren’t other similar deals with a precedent to follow, so the team had to get creative with its approach. The goal was to build a business case for CMHC, which would enable the acceptance of financing and present the potential of this growing development trend.

Structuring the solution:

At first CMHC said no to the deal. But the First National team persisted based on the potential of this deal to be a precedent setter. The team tapped a third party legal expert to validate the air space parcel concept as a real estate entity. It also uncovered examples of other, wellknown developers incorporating air space parcels into

their developments. In researching air space parcels, the team learned that recent municipal legislation encouraged this type of construction, positioning it as a burgeoning trend. Working alongside CMHC, the First National team shared its learning and information, convincing CMHC to issue a certificate of insurance for this product.

Formula for success:

First National levered its relationship with CMHC and chose collaboration rather than aggressive negotiating techniques. The team was creative in its approach and pulled in experts from other industries to help to build a case around the relevance of insuring air space parcels.

The key idea:

With such a robust knowledge of CMHC operations, the team chose empowerment over forceful negotiations – arming CMHC contacts with the tools they needed to present a logical argument to the board. The successful combination of teamwork and persistence contributed to the positive outcome for the client, First National and CMHC. To get more profiles of successful deals and other financing insights from our experts right in your inbox, register for First National’s Commercial Market Update. Type the following into your browser: www.firstnational.ca/Market-Update/

firstnational.ca Ontario Mortgage Brokerage License No. 10514

Portfolio

Your Property, Your Investment Why Your Apartment Should Be Managed as an Asset

By Derek Lobo

For more tips and insights, visit

34 www.canadianapartmentmagazine.ca

For years, the purpose-built rental apartment industry has followed the same general practises. As building managers, developers and financiers, we tend to focus on the lease-up, the rental income, and the general operating expenses. As long as vacancies are low, the rent cheques keep turning up and the costs stay manageable, we think we’re doing okay.

Portfolio

Rethinking our attitude As a word, property describes something static. The building and the land it sits on doesn’t move. We attract tenants and passively accept their rent. We do the maintenance that is required, and we pay our utilities. Thus the property is managed.

It doesn’t change, and so it doesn’t grow in value.

On the other hand, if we view our buildings as assets, we immediately put ourselves into a different mindset. Assets are not static. They change and, we hope, grow over time. Assets are things we use to leverage financing. Assets are things we invest in. In asset management, the top priority is to ensure that your building is more valuable in the years to come than it was at the moment you bought it.

Real estate does appreciate, depending on the location, but you do not need to leave your asset appreciation up to chance. By focusing on ways to improve your asset, by using the latest technology and software to discover innovative ways to lower or offload expenses, and by identifying the best business practises to follow and the best amenities you can offer to increase your revenue stream, you can realize a substantial return on your investment.

This ignores the real advances that have been made in other industries, thanks to technology, and refined management approaches. By staying in the past, building managers, developers and financiers are leaving a lot of money on the table. The time has come to change that.

We need to view our buildings as more than just property. Last October, speakers at the Multifamily Asset Management Conference called for a change in mindset, replacing the phrase “property management” with “asset management.”

How new technology can help you To improve the value of your asset, we start by looking at the new technologies that have appeared to help you manage data, and get your message out to the wider world. Every apartment building should have a website. Every apartment building should have a Facebook page.

These features can help you in two ways: they allow you to interact with your tenants, building a sense of community. They also allow you to offer such amenities as online rent payments, or a means to open up tracking tickets for maintenance issues, giving tenants a means to see that their concerns are being addressed. These online tools will also help support your marketing campaigns. You can sell your apartments online, offering virtual tours, and booking visits by prospective tenants.

When you do this, it’s important to grab as much data as you can about your visitors, and about how they found out about your apartments, and how successful you were in turning them into tenants.

This is where the data management aspect comes in. By keeping track of all of your marketing efforts, as well as any initiative to improve your revenues or reduce your expenses, you will see which approaches work and which don’t, allowing you to focus your time on the techniques that generate the biggest returns.

More than just renters We also look for innovative additional revenue streams. Some amenities allow you to boost your rent, while others provide another source of income. Some amenities work better than others, so it’s important to investigate what’s right for your assets.

Demands that aren’t being met are an opportunity. Many property owners obtain revenues from their laundry services; how many sell rental insurance on their properties? Not enough. This is only because not enough landlords have though to do so. That’s leaving money on the table.

October 2015 35

Some apartment buildings have a convenience store on the ground floor that is much appreciated by tenants needing to quickly grab a litre of milk, but how many apartment buildings have a coffee shop? Why not? This is especially valued by Millennials who are taking up an increasing segment of the rental market.

Fine-tuning your expenses In terms of lower expenses, asset management asks you to go through your utilities and other operating costs with a fine-toothed comb. Can you find and manage the hidden costs of providing electricity? Look at multiple options. For instance, would it be better to accept a bundled electrical bill off a single meter for your entire building, dividing the cost per unit? Or would it be less expensive and more efficient to meter every unit, accepting an individual charge for each meter, but gaining a lower consumption rate?

These are just some examples to

pursue, but the approach is as important as the individual examples given. The concept of looking for innovations, and then applying them through a set of metrics to measure success have been applied in other industries—such as hotels, airlines, big box retailers and selfstorage companies to their considerable benefit. Effective marketing campaigns and improved amenities lead to faster lease-ups and lower tenant turnover.

Finding efficiencies and increasing revenues makes your building more valuable, which gives you greater leverage when it comes to your financing. This can allow you to expand your portfolio.

It is a lot to think about, but fortunately there are consultants out there with experience in managing loads of data who can give you objective advice and the research to back it up. They are more than happy to help you make the most of your property, turning it from a static plot of land into a growing asset.

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Building Science & Restoration Consultants Garage & Balcony Restoration Building Envelope Assessment & Remediation

Reserve Fund Studies Technical Audits Structural Engineering Please contact: Philip Sarvinis | Bill Gladu | Michael Pond | Jeremy Horst rjc.ca/about/people 416-977-5335 Creative Thinking Practical Results

36 www.canadianapartmentmagazine.ca

Derek Lobo is the CEO of Rock Advisors Inc., Brokerage, an Ontario-based commercial real estate company that focuses on the apartment sector. For more information call 905-331-5700 or email him at dlobo@rockadvisors.ca.

For more tips and insights, visit

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REMI is Informative, Timely and Trustworthy.

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Taking it to the Bank Budgeting Tips for Smaller Landlords

By Jessica Green

As any successful business owner will tell you, a big part of getting the best bang for your buck is meticulous and prudent budgeting. Though oftentimes laborious, budgeting is a necessary step that will help keep your business in the black and out of the red.

38 www.canadianapartmentmagazine.ca

Management

For many landlords, particularly those with smaller portfolios and minimal manpower, finding the time to work budgeting into the dayto-day grind can be difficult—or even downright daunting. To help kickstart your budgeting efforts, here’s a sampling of helpful techniques and software programs available to landlords today.

Budgeting software Whether you’ve got a single property or a small portfolio, the first step in setting a budget is to make one that works. If you’ve never created a budget before, take advantage of free or inexpensive software, like Quickbooks or Mint, which are both user-friendly with intuitive stepby-step instructions. They’ll tell you when you’ve missed a step or made a mistake, giving you peace of mind and confidence that your budget is accurate.

Yardi’s Multifamily Suite offers a variety of more sophisticated software options targeting property managers, and can combine financial and property management information in a single, centralized database.

More than just budgeting software, it offers mobile access to execute leasing, provide resident services, view dashboards, and complete tasks from smartphones and tablets.

Landlords going it alone without the regular assistance of an accountant will benefit greatly from budgeting software, whether it’s free or something more advanced. That said; working with an accountant is highly recommended—especially when it comes to calculating taxes.

Furthermore, once a budget for the year is created, don’t assume it won’t change for each subsequent year. As with any business, there will be ups and downs in your money flow, and landlords will need to ensure they account for all this fluctuation.

Accounting for vendors Keeping meticulous records of your yearly, monthly and/or weekly expenses is a great way to help plan for future budgets. These costs can run the gamut from yearly HVAC inspections to weekly cleaning fees. But the good news is— once you know what expenses will be recurring, it is much easier to plan in advance and budget for your vendors in the future.

Speaking of vendors, never underestimate the power of forming a great business relationship with a particular vendor or service provider.

From plumbers to electricians, when you know who you’re working with, you can better estimate the time required for repairs. Knowing your vendors results in more cost competitiveness, especially if and when the unexpected comes up. Property managers benefit from maintaining strong relationships with their suppliers in many ways—for starters it pays to have a vendor who knows your building inside and out and can make repairs quickly and efficiently since they are already familiar with the history of the property.

Those dreaded unforeseen costs…

Random acts of Mother Nature can wreak havoc on any building, sometimes when you least expect it.

From falling trees and floods, to fires and hail storms, will your budget cover emergency restoration if disaster were to suddenly strike? By creating a reserve fund for just such incidents, those unforeseen expenses will no longer keep you up at night. Having a restoration service on contract may also bring you some peace of mind.

Money mixing It is typically recommended that smaller landlords have three separate bank accounts that should never be mixed: an account for rent deposits; an account for security deposits and a personal account.

Keeping these funds separate will not only help you easily identify your profits and losses, but when you mix something like a security deposit with regular rent payments, you may be tempted to use them to pay for your monthly expenses. In reality, that bank account should never be touched except to put in a tenant’s security deposit or to take it out.

Further, if you find that you are needing to dip into the security funds account to make payments, it will give you a strong indication that you need to modify your budget in order to meet your expenses.

Better communication Having a clear budget picture not only gives you, the landlord, peace of mind, but it does the same for your tenants. When an emergency repair comes up, you will be able to more accurately explain what exactly needs to be done and how long the repairs will take to complete. If you’re needing to scramble for the cash, you won’t be able to have such open communication lines with your tenants, resulting in a higher turnover rate.

Remember, the advice in this article is just that: advice. We hope you have found it helpful for getting you on the right path to financial freedom and security—but never hesitate to contact an accountant or lawyer if you are in need of professional advice.

Jessica Green is the founder of Cursive, a Toronto-based communications consulting firm that specializes in brand messaging with an emphasis on digital media strategy.

October 2015 39

Insurance

Liability Insurance Revisited How Economic Realities Impact Risk Management

By Andy Schwartze

Unlike life insurance companies, which can draw from a reliable statistical foundation to predict demand on their policies, property/ casualty insurers are more at risk of unforeseeable events. As a result, investment portfolios must be highly liquid because at any point an unpredicted mishap could cause a sudden drain on their reserves.

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Insurance

Weather is the most notorious culprit, but by no means the only bad guy lurking in the shadows. Knowing this, the regulators review these portfolios often to ensure that the reserve requirement is not tied up long-term, thus risking significant costs in the event of an unexpected unwinding. We do not need to ruminate on current interest rates—they offer the property/casualty insurance nothing but miserable returns.

Life insurers have it a bit better, being allowed to go longer in their investment strategies, which is why they like to be in the mortgage space (a space that has its own set of issues, at times).

So, what does that mean for the typical corporate insurance buyer? What is a business owner with a nice clean claims record to think, particularly at a time when insurance rates are firm (in the real estate sector) and carriers are still trying to squeeze a bit more money out them?

Very simply put, insurance companies will generate returns whether we like it or not. They will look at any number of options in order to protect the strength of their balance sheets (insured replacement values are the current favourite) and there is nothing that is going to stop them from doing so. Regulators force them to be in a financially healthy condition, so that sudden unexpected catastrophes can be met with sufficient funds to make good the damage that their policyholders have suffered. If that “risk exposure” goes up and interest rates can’t be used to generate the additional capital needed, then underwriting is forced to find ways to raise additional premium dollars.

Liability insurance policies In recent years, the topic of “liability” insurance policies and the handling of claims when multiple policies exist, has become a focus of interest—and a source of confusion. Very simply put, if you have purchased two homeowner policies on your residence, you do not get to collect twice. You have wasted the second premium needlessly and, in the event of

claim, both policies will respond. Two premiums will have been paid to collect exactly the same that a single policy would also have delivered.

Just recently, I met with a property manager who was very upset at having received an unexpected additional premium invoice on his corporate liability insurance policy. The explanation was simple: because this liability insurance was written in such a manner as to render it exposed to slip/falls on a managed site, the insurer wanted to charge for that exposure.

Someone in underwriting clearly understood the new reality—that if more than one policy can respond to a claim they have an obligation to do so.

If the exposure is real, then the insurer will want money for it. Who can blame them? Litigation has brought us to this point.

History has taught us to enter into contracted relationships by insisting that each of the parties carry liability insurance. We’ve been doing this for years, and by providing one another with a certificate of liability insurance we are comforted that we will not be impacted by the “other guy’s” negligence. Today, the reality is that both policies can be called to respond to a single event. Insurance brokers will be obligated to disclose the existence of other insurance policies, if they are asked. That means both insurers will have to dedicate resources to one claim—therefore, both insurers will want their premiums to reflect this. The result is that two premiums are being paid for one exposure; a nice bonus for the liability insurers, but double the cost for building owner/property manager partnerships.

We’re going to have to accept this new reality, which came about in Ontario in 2013. During the course of a management contract negotiation between owner and manager, an important decision will have to be made. Who is going to buy and pay

for the liability insurance policy that will protect both parties with regard to claims occurring on the site? We all know that statements of claim will be filed against both. Do we want just one insurer handling the matter for both parties, or do we want two insurance companies jostling for position, and trying to influence one another as to fault and settlement? The claim costs, in the second case, are significantly higher and will come back to us in the form of higher premiums.

It is going to become a very important negotiating point between manager and owner as to who looks after the liability insurance for both. A number of insurers already recognize the importance of this, some are reflecting it in their premiums while others have closed the door on rental real estate insurance deals, preferring to avoid some of these complexities. Either way, as we move forward in our business relationships, the purchase of liability insurance should reflect the “deal” and cover all who are part of it, rather than the more expensive way of having everyone do his own thing. In the world of construction, for example, we have “wrap up” liability policies, and they do exactly that—everybody is insured by one policy. Watch for this concept to gain traction in other business relationships.

For more insurance tips, visit

October 2015 41

Marketing

Maximizing your Digital Marketing Strategy How to Use Today’s Technology to Attract and Retain Tenants

By Chaim Rivlin

Being a landlord isn’t what it used to be. Not only has the online world drastically changed, providing people with quicker access to the products and services they want, but so have the needs of customers.

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Marketing

Whether it’s procuring small, daily necessities or buying a big ticket item, today’s web-savvy millennials are working longer hours and using the internet to speed up the purchasing process. It’s no surprise renters would rather see the exact details and layout of a property remotely before scheduling an appointment and taking the time to view it in person.

With technology advancements making online experiences safer and better, many forward-thinking landlords and property management firms have already transitioned into the digital space, directing more dollars toward sophisticated websites that are responsive and mobile-friendly, offering 3-D floor plan layouts, videos and other great marketing tools—all of which result in units renting faster.

Statistics show that 91 percent of apartment searches today begin online.

Landlords and property managers who are ahead-of-the-curve are benefitting from an earlier investment in their web and digital marketing strategies.

Building a successful digital strategy Almost all landlords today know that they need to advertise their real estate online, but many are confused about how to maximize their strategies and budgets.

While there is no universal answer for every landlord or company, there are certain variables that can impact overall strategies.

Those variables include: 1. Size of the company 2. Amount of properties requiring advertising 3. Having defined goals and objectives – which can range from generating traffic, converting website visits to leads, and / or reputation management, to name just a few.

It’s always good to start with an outline of your company’s marketing requirements (or “must-haves”) before adding complementary components to that list. This will help keep everything in perspective, and give the ability to move forward with a clear objective in mind.

Web marketing “must-haves” 1. A user- and mobile-friendly website with search functionality Having a responsive, user-friendly website is the most important tool every landlord and company should have.

Almost all research and searching is done on the web today and companies that don’t have an up-to-date website are losing thousands of potential customers every day.

For landlords and property management companies with multiple properties, having an intuitive and search-friendly website is the only way to go, as it allows users to search for a property by location, price, and bedroom type and contact owners instantly.

Also, when developing a website, be certain the web-developer is knowledgeable in best SEO practice ensuring content is optimized for search engines using keywords associated with your company.

Depending on your marketing budget and the amount of properties you need to drive traffic to, having a PPC (pay-per-click) strategy can be another great way to help drive more traffic (i.e. customers) to your website. And, the great thing about PPC campaigns is that you choose the keywords and you only pay when a customer clicks on your “AD” (link).

Setting up a PPC campaign is relatively simple and you should only pay the search engine you are advertising on (i.e.

Google or Bing). Many companies offer to manage PPC campaigns but charge hefty “management fees” for overseeing this effort. Be wary of these companies, and do your research. In some cases, paying a management fee is necessary since it does take time to set-up and manage a well structured campaign.

However, these fees should be clear (and understood) prior to signing any contracts. A good general rule of thumb is to either work out a flat monthly fee for the management or a percentage of the campaign spend (i.e. 10%).

2. Social media marketing Twitter, Facebook, YouTube, Pinterest, Linkedin… By now we all know that social media is a critical component of any successful digital strategy. FORBES recently compiled the following Top Ten list identifying the key benefits for businesses: 1. Increased Brand Recognition 2. Improved Brand Loyalty 3. More Opportunities to Convert 4. Higher Conversion Rates 5. Higher Brand Authority 6. Increased Inbound Traffic 7. Decreased Marketing Costs 8. Better Search Engine Rankings 9. Richer Customer Experiences 10. Improved Customer Insights If your company is not on social media, quite simply it should be. Not only does social media offer all the benefits listed above, but almost all social media channels today have built-in advertising tools allowing companies to advertise and promote posts to targeted audiences— which is a great way to reach out to potential customers.

3. Video marketing By 2017, video will account for 69 percent of all consumer internet traffic, according to Cisco. Take YouTube for instance, which receives more than one billion unique visitors every month. Here are some more amazing video stats provided by YouTube: October 2015 43

Marketing • Every day, hundreds of millions of hours are watched on YouTube generating billions of views.

• The number of hours people spend watching YouTube each month is up 50 percent year over year.

• 300 hours of video are uploaded to YouTube every minute.

• 60 percent of a creator’s views come from outside their home country.

• YouTube is localised in 75 countries and available in 61 languages.

• Half of YouTube views are on mobile devices.

4. 3-D floor plans Offering floor plans has many advantages.

Most importantly, they provide prospective renters with superior visualization of the unit allowing them to imagine their furniture and make measurements in advance. 3-D floor plans also exhibit great pictorial illustrations that help generate leads and interest.

What’s more, floor plans can be used in a variety of ways for advertising. They can be included on websites and shared on social media; they can be used in print advertisements or even printed-out and given as hand-outs when a prospective renter (customer) visits the property. Quite simply, they are an integral part of any good marketing strategy.

• Most customers will find your property using some sort of search and in most cases, while doing this they will come across popular apartment finder websites, like rentseeker. ca and Kijiji. If you’re not advertising on those platforms, you’ll be missing thousands of potential customers daily.

• An important factor for organic rankings on search engines (*not paid ADs or PPC) are inbound links, which provide search engines (i.e. Google and Bing) with signals that show that your website is relevant, informational, and important. Most apartment finders and classifieds will provide links back to your website, which will in-turn help your own website’s rankings in search engines.

• Another way to increase your own website’s authority and organic rankings is to reach out to local places, for example colleges or universities. Ask them to link to your website to help students searching for rental housing – this will in turn provide you referral traffic from their students as well as increase your website’s authority and in-turn your website’s rankings on search engines.

Videos are naturally engaging, and in an age of information overload, it’s vital for businesses to offer content that is easy to digest. If Third party advertising not, consumers will simply move on. Video While all the components listed above are marketing does this very well. Put another way, “must-haves” for setting up your digital if a picture paints 1,000 words then one minute marketing strategy, there is another equally of video is worth 1.8 million, or so say Forrester’s important component, which provides extreme researchers. value: advertising on other relevant websites. A By incorporating property videos onto few reasons why this is important to your overall your website and within your advertising web marketing strategy, include: on ILSs and social media, this will not only increase traffic to your website PeoplesTrust_CAM_February_2015_FINAL.pdf and Real Estate Marketing and lead conversions, but also provide RentSeeker.ca is Canada’s Leading Online Apartment Finder Company, offering Landlords a full suite of marketing services. higher qualified leads and customers. ®

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October 2015 45

Smart Ideas

LIGHTS & LOCKS

Technology has come a long way, and now even apartment dwellers can enjoy some of the cool new gadgetry once reserved only for home and condo owners.

Apartments with a Twist Twist is a new LED light-bulb speaker designed for apartment renters, making home automation ultra-simple. For just $249, a bundle will get purchasers three bulbs, one of which is also a speaker, and a dimmer to control them. Each bundle is designed to completely outfit a room. The three LED bulbs can be controlled with a dimmer, or the Twist app, and automatically adjusts throughout the day from a cool blue to a warm yellow to replicate the natural progression of daylight. The AirPlay-integrated speaker/light streams music over Wi-Fi from any Apple device. Twist will be available in 2016.

Smart Locks New “smart locks� allow users to use their cellphones instead of keys. Safe, secure and convenient, there are many brands on the market today, including Kevo. Kevo includes patent-pending intelligent positioning technology that detects whether an authorized user is inside or outside the home before granting access. Kevo features auto-calibration that automatically enables this technology and adjusts Kevo continuously to the best security. Encrypted Keys are also offered, allowing tenants to give their guests unrestricted access for a 24 hour period. If an eKey is not used within the allotted time, it will expire.

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