Buying office property

General information, not tax or legal advice. Rules and rates change, and every situation is different. Talk to your lawyer and accountant before you act on anything here.

Owner-user or investor?

Many buyers of small offices are professionals who want to stop paying rent. Others buy for the income. Know which you are, because it changes what you’ll pay and what you check.

What I look at

• Who’s in the building and when each lease ends. A lot of leases ending in the same year is a risk.
• Vacancy in the area, and how long similar space takes to lease.
• Building systems: HVAC, elevators, roof and electrical. These are big costs.
• For strata: the bylaws, minutes, depreciation report, contingency reserve and any special levies.
• Parking, transit and how the building shows to a new tenant.

Costs to budget for

Property Transfer Tax, GST on most commercial purchases (a registered buyer usually self-assesses), legal fees, inspections and lender fees.

Office property in detail

What drives value

• Tenant quality and the weighted average lease term left across the building.
• Rents in place against market rents, and how much space rolls in the next three years.
• Building class, age, elevators, HVAC and how efficient the floor plates are.
• Transit access and parking ratio. In Vancouver, being near SkyTrain matters to tenants.

Typical lease structures

• Most multi-tenant office leases are net: base rent plus additional rent for operating costs and property tax. Some smaller buildings use gross or semi-gross rents.
• Terms of three to ten years, often with free rent and a tenant improvement allowance up front.
• Area is usually measured to a BOMA standard, so rentable area includes a share of common space (the load factor).

Due diligence

• Rent roll, every lease and amendment, and estoppel certificates from tenants.
• Two to three years of operating cost statements and year-end reconciliations.
• Building condition report, roof, elevator and HVAC age, and any capital plan.
• Strata documents if the office is a strata unit: bylaws, minutes, depreciation report and Form B.

BC and Vancouver specifics

• Office is assessed as Class 6, business and other. See BC Assessment property classes.
• Strata office units are common in Vancouver and Burnaby, and owner-users buy many of them.
• Check zoning on the Vancouver zoning map; many central areas are zoned for mixed commercial use.

Questions to ask

• When do the biggest leases expire, and what are their renewal terms?
• What will the next tenant improvement and leasing commission bill look like?
• Are operating costs fully recovered from tenants?

GST. The sale of commercial property is generally subject to GST. If the buyer is registered for GST, the buyer usually self-assesses instead of paying it to the seller. See the CRA guidance on real property and GST/HST and talk to your accountant.

Buying the systems along with the building

Elevator modernization, HVAC replacement and code upgrades all come out of your returns. Get the age and maintenance costs of each major system. Then think about who the ideal tenant is for these floor plates, because that tells you how easily the space will lease.

For what tenants look for, see office space in Vancouver.

Run the break-even number

Before you buy, work out the occupancy the building needs just to pay its bills. Add the yearly operating costs to the yearly mortgage payments, then divide by the rent the building would collect if it were fully let at today’s rents. That gives you the break-even occupancy.

The lower that number, the more room you have if a tenant leaves. Multi-tenant office tends to lose tenants in waves when the economy turns, so a building that only works when it’s nearly full is a risk. More equity, net leases and tenants with staggered expiries all bring the number down. I run this with you before we write an offer.

Plan for more than one leasing outcome

When one or two leases make up a big part of the income, model what happens in each case: the tenant renews at market rent, the tenant renews only with a discount, or the tenant leaves and the space sits empty while you re-lease and build it out. If the deal still works in the weaker cases, you can buy with confidence. If it only works when everything goes right, you’ll know before you commit.

Office systems to check before you buy

• Slabs. Post-tensioned concrete limits where tenants can core drill for plumbing and cabling. Scan before anyone drills.
• HVAC hours. Find out the building’s standard hours and what after-hours heating and cooling cost tenants. High after-hours charges make space harder to lease.
• Telecom. Ask where the providers’ service stops. Often it ends in the basement, and getting it up to each floor costs extra.
• Life safety. Sprinklers, fire alarm, exit stairs and accessibility. Older buildings often need upgrades once a permit is pulled.

Each of these has a known fix. Price them before you remove subjects and I’ll help you get the quotes.

Questions people ask

Is GST charged on an office purchase?

Generally yes for commercial property. If you’re GST-registered, you usually self-assess instead of paying the seller. Ask your accountant.

Should I buy a strata office for my business?

It can make sense if you plan to stay a long time. Compare it with leasing over ten years, including the cash you’d take out of the business.