• Kirill Perelyguine

Quit your day job with commercial condo conversion!

There are many ways to create an investment portfolio while working on a job with a stable paycheque – you know exactly how much you can put aside for the down payment and how long it will take you to get there. However, if you are running your own business and do not have a predictable income every day of the week, it is hard to create an investment plan, let alone plan a retirement.

This strategy won’t be for everyone, it will be more fitting to someone running his own business and looking to create an investment strategy to comfortably retire from said business in 5 to 10 years. The idea is simple – we are using the power of the business (credit history, stream of revenue, business plan etc) to invest in real estate to produce income. Your business will create an investment portfolio for you! A word of caution, however, this strategy will work best for a business that has been a couple of years in operation, showing a positive Net Income on a financial statement and not afraid to scale up and relocate.


Condo Life

This is, probably, one of the most complex yet most rewarding strategies to achieve comfortable retirement through commercial real estate – turning a commercial property into a condominium. As always, subject to due diligence with regards to provincial policies and planning departments among many. Your lender must be onboard with your plans as well.

In general terms, with the help of your trusty commercial broker, you will source an underperforming commercial property (industrial or retail plaza, small office building etc) with high vacancy, low rents and/or something else that can be fixed. This property should be zoned for your business’ operation, as your business could occupy the property for the duration of the process (sometimes up to 2 years). Given the financial/physical state of the property, we should be aiming to buy it at 50-70 cents on the dollar (50-70% of the market price). If the property requires repairs, their estimate should not increase the property cost above 80% of the market value. The area of the property should be anywhere from 10,000 to 20,000 SF to keep it manageable for the first project. The property is then broken down into smaller units, and registered as a condominium.

I will keep the description as general as possible, as this approach works for retail, office, mix-use or industrial properties. Prices and fees will be an average for the Golden Horseshoe region.

Step 1. Assembling your team and finances

As with any commercial project, the professionalism of your team will be the key factor for success of your project. To better prepare yourself for success, you need to know all the potential costs associated with the condo conversion and planning. Have a list of professionals ready: You will need lawyers, inspectors, planners, architects, engineers, inspectors and real estate brokers. It is a prudent move to talk to each member of your future team prior to starting the project, find out their previous experience in similar projects.

To participate in such a complex commercial project you will need a working capital. There aren’t many deals with $0 down (I won’t say there aren’t any) and likely that your business won’t be occupying more than 50% of the property, thus, you need a good working capital. Today, there are plenty of commercial mortgages and business loans tailored for the small and medium businesses. You can check CSFBL and BDC websites as an example. Another possibility is tapping in your other property’s equity through a HELOC or refinance. Joint Venture partnership can also be a great alternative, especially if every partner can bring more than money to the table.


Step 2. Property search and Due Diligence

Because properties like that rarely come to the open market, your real estate broker should concentrate the search on the exclusive/pocket listings. One of the tactics would be to approach the plaza/building owners in a predefined area that aren’t doing very well.

There should be several dominating criteria in your search, with zoning as one of the prevailing factors. The property should have the most general zoning possible, allowing many different uses. This will help in the long run, when your condominium units will be up for sale or for lease, attracting a wider array of clients. At the same time, you would be better to stay within the same use ( i.e. industrial building to industrial condo). An attempt to convert an existing commercial building to a residential condominium would require a zoning amendment at very least and is restricted in many municipalities.

Another important issue is financing and not just for obvious reasons. The process of condominium conversion creates several titles to the property where there was only one. Your bank should have a procedure in place to provide you with some type of a “blanket mortgage” for the time that you possess most of the titles for the new condominium units.

Let’s say you were able to secure a property on a contract, negotiated a Vendor Take Back mortgage for a couple of years, and agreed on a 60 days due diligence period (anything less would be pressing on time). Your due diligence will consist of environmental inspection, building condition assessment, contractor’s estimates, pre-consultation meeting with the municipality and many other items. This is the stage at which the feasibility of the project is determined: if it doesn’t make sense – don’t get emotionally attached and hope that it will work out somehow – if numbers don’t work, nothing you can and should do, except going to the next property.


Step 3. Condo documents preparation

Upon closing, while your property goes through the renovation process, potentially, creating new units from the existing, your team of planners, architects and lawyers should be working in full force to prepare the condominium documents, deal with any planning issues that may arise ( i.e. parking allowance, garbage pickup, driveway widenings etc). This is the phase when the Condominium declaration is created and might be updated several times by the municipality’s recommendations. It is hard to predict the exact time required for the conversion to take place, anywhere from 9 months to 2 years is seen as an industry norm lately.


Step 4. Sales & Leases

At some point in time during the condominium documents preparation, you can start the sales of your newly built units. In my example, there are only 4 units to sell and 4 to lease, as the owner is keeping two units for his own use. It is a common practice to keep the majority of the units in possession to avoid the turnover meeting and the election of the board of directors, especially, in a newly created condominium investment property.

On a side note, when choosing a tenant for a property with your business on it, it’s a great idea to choose or attract a business that would have a complement your business. As an example, if your business does dog grooming, it would be great to have a neighbour with a pet food store.


Step 5. Repeat

Even though it is a complex process, a condominium conversion requires only one more repetition (at our numbers) to reach and exceed a $90,000 income mark in less than 5 years. Of course, this still requires months of searches and due diligence with many different properties before finding the right one. However, I doubt that someone would stop at 2 conversions and retire, as Commercial Real Estate is an interesting, challenging and very rewarding game that encourages out-of-the-box thinking.


As I have mentioned in the beginning - this strategy won’t be for everyone, however, if it would help an owner of a smaller business to start by buying a unit for his business with a little extra space to rent out and help with the mortgage, this would be a beginning of an investment that will grow in a long run. There isn’t a one-size-fit-all strategy when talking about an investment profile dependent on a risk tolerance and personal interest of the investor. The advice of a professional real estate investment broker can be invaluable to create a winning strategy!




For the first property we will consider a 10,000SF property, bought at 70% of the market price - $140 per square foot. Because we will be using this property partially for our own use, we should be able to get financing at 70% LTV, at around 4.2% amortized over 25 years.


Upon the sale of 4 units from the first conversion, we would be paying off the VTB, the working Cash Investment and the remainder will go against the mortgage amount. This way we generate enough money to add another property into the portfolio.


The second property we will be buying will be a little bigger – 15,000SF, and we should have just enough cash to close the transaction.


Following a similar pattern and paying off the VTB and the Working capital first, this time we’re selling off 6 units out of 15 to cover the expenses. This way, in several years work, we have created a comfortable net income and have returned all invested capital.


Note:

How to source your working capital:

  • HELOC from other property

  • Business loan for property purchase (if your business is occupying the property)

  • Vendor Take-back mortgage, should be interest only for the duration of the project

  • Joint-Venture

  • Private Lender

Author: Kirill Perelyguine kp@invsty.com


Commercial Real Estate INVSTY | Real Estate Services in Ontario


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