In This Issue...

April 2009 Altus InDepth – Vancouver

In this issue of Altus InDepth, we highlight some key current construction cost, property assessment, and valuation issues.

1. Commodity prices, especially steel, aluminum, copper, and lumber are all at 6 year price lows.
2. Generally, labor costs are holding steady, but productivity is improving. Profit expectations at Contractor and Sub-Contractor level are falling.
3. Overall construction costs are down between 7.00% and 15.00% from their cyclical highs in Q3 2008, and are still falling. Actual reduction is dependent on building type , size, and location.
4. Time is no longer as critical, and “fixed price construction contracts” dependent on full design drawings is back in vogue as a more cost efficient way to procure.
5. With a number of projects stalled or cancelled, many trades are unpaid and strapped. Care must be taken with lowball tenders, and trade bonds are recommended.
6. With multiple tenders being put forward by trades, bids have low profit levels.
7. Change orders and claims for Change Orders will become the norm.

1. Since the municipalities still have full discretion to shift tax rates according to their budgets (most of which are increasing 6-10% this year) the winners of the new legislation are anyone whose “unfrozen” 2009 assessment would have increased higher than the average for its area & property class. Conversely, if your unfrozen 2009 assessed value would have been lower than the average increase you will likely pay more taxes due to the freeze.
2. The province has reduced the school tax rates by 50% this year for class 5 taxpayers. This will increase to 60% in 2011. Historically, in most cities class 5 is taxed higher than class 6 (business/other). With this new tax break, it is advantageous in most cities to have your assessment in class 5. If you have any tenants that have manufacturing facilities on site or use their premises for transportation of products you should have Altus review to see if they are being classified fairly to take advantage of this new legislation.
3. In Vancouver, several developers have converted vacant future development sites into community gardens. The tax implications are significant, as these sites are reclassified from class 6 (business/other) to class 8 (non-profit/recreational). The tax rate of class 8 is approximately 30% that of class 6. However, the City has made noises lately that it is considering closing this loophole.
4. We have recently been successful in obtaining full property tax exemptions for several properties owned by non-profit, charitable organizations. There are several qualifying factors relating to use of property, mandate of organization, occupier(s) of property, etc. that need to be met before exemption can be granted. If you are involved with a non-profit organization that owns real estate & pays property tax, we are interested in speaking to you to see if you may be a candidate for whole or partial exemption.
5. Quite often a purchaser will pay more for a property because they have a special interest (eg: they own adjacent property) in acquiring the property. We recently won an Appeal Board case that will ensure BC Assessment does not consider adjacent lands owned by one taxpayer any different than adjacent lands owned by different property owners. In other words, value to owner is not taxable. If you own adjacent properties we can review your assessments to make sure you are not being treated any differently as a result of this.

1. Year 1 NOI yield, overall cap rates, terminal cap rates, and IRR’s are all up from the peak last year. Although actual evidence is limited, adjustments of greater than 100 basis points for certain property types can be expected. Secondary properties are affected to a greater extent.
2. Widening bid / ask pricing spread on assets offered to market. Overall, there are fewer potential buyers, and those who are active are cautious.
3. It appears that more emphasis is being place on the valuation of properties based on income in place vs. future projected income growth potential (Discounted Cash Flow Method), although both methods are still being utilized and considered. Cash flow stability / occupancy risk is now driving investment decision.
4. Will BC continue to lead nationally in terms of pricing given change in investment market?
5. Concentration shifting back to traditional core markets. Slight rebound in residential re-sale activity to start the spring may assist in illuminating core locations for commercial investment.
6. Commercial mortgage rates still are at reasonable levels given low bond yields, although availability stills remains elusive for new commercial mortgages. In particular, loan amounts over $20 Million are difficult to obtain; this circumstance will impact pricing on larger scale assets. Some lenders though reporting slightly greater activity than the Q4 2008. Debt service coverage requirement has nonetheless increased. Impact: for debt expiring in the near term, leveraged returns likely to decline.
7. For retail tenant operations requiring large inventory or other debt reliance, it will important to monitor business conditions and their impact on tenant operations.
8. A good number of current sales include below market financing conditions (i.e. lower mortgage rates / VTB), although loan-to-value (LTV) levels need to be attractive for in-place financing to be beneficial.
9. Completing thorough Due Diligence on both disposition and acquisition fronts even more important in today’s market; timing & information availability is critical. Conducting tenant surveys will be very important in understanding occupancy and cash flow risks.
10. IFRS is coming; REITs & Public Corp’s likely to be more pro-active in dealing with underperforming (or performing assets) as they relate to their balance sheet and share price. Introduction of IFRS may assist in providing additional velocity for transaction activity.