Is your $500,000 condo really worth a million dollars with Meg Cooney

Who is Meg Cooney and how did she start her career in commercial real estate?

I started in real estate in 2012 in the presale residential market. I worked there for three years before moving into commercial real estate. I focus on land and development in Vancouver. The flatter market back in 2012 helped me hone my sales skills.

What is happening in Vancouver’s commercial real estate market right now?

Similar to residential, interest rates are driving this market. There’s a pride in ownership and we’re seeing a lot more owner-occupiers which is driving up the price per square foot for strata units and buildings. And as you’ve heard, industrial is very hot right now. No more land is being made so every listing that comes to market is competitive.

What is a strata wind up?

A strata wind up is the dissolution of a strata. It’s the process of getting all the owners of a strata together and agreeing to sell as a package, rather than as individual strata units. It happens for a variety of reasons, usually to do with zoning regulations. For example, townhomes may become a highrise site, which would multiply their land value. You also see buildings that would need major repairs pursue strata wind ups. If those repairs would be too costly, strata owners may opt to sell on a land use basis.

Why would a condo be worth more as a development site?

It comes down to highest and best use. A building that may have been considered high density in the 80s and 90s, like a townhome, may be on land where a developer could put a 20-30 storey building. So the developer is paying for the land and the strata owner gets a proportional cut of that land value.

How do we know how much a strata unit is worth in a strata wind up? 

When we do valuations, we can do a comparison approach based on a strata or a residual approach based on land value. We want to know which approach will give you the most value. So a comparison approach might say that you deserve more because your kitchen is nicer than your neighbour’s, but the residual approach is often more valuable. Developers look at forecasting to presales and the costs to build. They do their calculations to see what they can pay for the land. Because that number is so high, it pushes up the value of your strata unit.

What happens if someone in a strata wind up doesn’t want to sell?

In 2016, Bill 40 was introduced. It used to be that 100% of the members had to vote to liquidate a strata and they amended that to only 80% with Bill 40. That gives the majority of owners more opportunity and flexibility. The process is longer but the value-add far exceeds what you would get in appreciation in that same timeframe.

We’re seeing more strata presidents coming to us because they know the time is worth the value they’ll be getting.

How many owners have to be interested in selling in order to start the strata wind up process?

Just 50%. We will take a look to see what the objections are before going to market, because we don’t want to waste anyone’s time. But it’s only a 50% vote needed to take it to market. We then need 80% for the transaction to go through. Once the offers come in and they’re stellar, it’s a great incentive for the remaining 30-50% of owners to jump on board.

What is the process of a strata wind up?

After we go to market, present the offer and get the 80% on board, we’d then employ a lawyer who is experienced with strata wind ups. We then go to court and anyone who objects has a chance to plead their case. Objections are usually based on an owner not wanting to move, not thinking the offer was high enough, or a procedural error. Procedure is so important; you don’t want to be rejected on a technicality. So you need the right team to take you through the process.

How many strata wind up cases get approved by the court? 

It’s probably close to 90% that get approved. If there’s only one owner who’s objecting, the court is likely to push it through since almost everyone wants it. Our job as realtors is to get a good offer and make it appealing for everyone. If there isn’t much of a lift – for example, if a four storey building is only becoming a six storey building because the owners are forced to sell for whatever they can because the needed repairs aren’t worth it – that may not get approved by the court.

Do strata wind ups only apply to residential buildings? How do strata wind ups work in commercial real estate? 

For commercial buildings, you would need 100% of owners on board.

Can you invest in a condo ahead of a strata wind up? 

We saw that a lot when Bill 40 was introduced. It has become a strategy to buy into a building that you think has potential for a major lift in order to be part of a strata wind up. However, there are no guarantees. You may have to deal with levies and increasing strata fees, so there’s a risk. My recommendation would be to become the strata president to push the wind up forward or reach out to an experienced realtor, instead of waiting for it to happen.

What areas have a higher chance of being rezoned? 

Skytrains tend to be the number one thing to look for. 29th Avenue and Nanaimo stations are areas of focus for Vancouver. You need to read the OCPs (Official Community Plans) and meeting minutes to see where the city’s next initiative will be. Anything surrounding infrastructure, such as areas around hospitals and schools, are places where the city wants to see more density. You can look into it yourself and/or partner with a realtor who is doing their homework.

As a safeguard, you should always buy near infrastructure, even if it’s for residential purposes instead of investing. You will see value increase. If it does get rezoned for density, you’ve really won. If this is your primary residence, you won’t pay capital gains. So you could see a large lift, tax-free, at a low entry price, to help you get into your dream home.

Where are a lot of strata wind ups happening in Metro Vancouver?

New Westminster has a lot of older condo product. Port Moody is another area with older condos and density incentives.

What formula do developers use to make an offer on a strata wind up?

The price per square foot of buildable area is directly related to how much revenue a developer will get. So let’s say there will be 80,000 square feet of new building and the developer thinks they’ll get $1000/square foot. They then add in their construction costs ($350-500/square foot), add in any other expenses, and then they’re left with the land value. The land value is divided by the buildable area, which gives us the price.

So if the developer will have 80,000 square feet in their new building and can get $1000/square foot, that’s $80 million in revenue. Subtract construction costs of, say, $40 million ($500/square foot), which leaves the developer with $40 million to pay for the land. That $40 million is divided proportionately to the owners depending on when the building was built.

How much do owners get in a strata wind up?

If the strata plan was filed before 1974, the proportion each owner would get from the developer would be based on the unit entitlement. Unit entitlement is your proportionate share of the strata fees and obligation to the strata. It’s your unit plus your percentage of the hallways, entryways, etc.

If the strata plan was filed between 1974 and 2000, the proportion is based on the interest upon destruction. Interest upon destruction is how the insurance company would look at the building, should it be destroyed in a fire or something like that.

And for any plan filed after 2000, the proportion would be relative to the assessed value of the unit. You add up the BC assessments and take your percentage of the total value to find your proportionate share.

Why is the commercial real estate market so hot? 

Interest rates are affecting both the residential and commercial real estate markets. Investors can purchase more compressed cap rates, they’re looking long term, and there’s opportunity to increase the net operating income.

There’s also the underlying land value. It’s a good buy if rates continue to go up and if there’s an amendment to the OCP, you may have struck gold.

What should we be buying today in commercial real estate?

My previous answer would’ve been industrial but it’s now taken off. There are a lot of owner-occupiers really bidding up the price in industrial. I would look further east at strip malls and low-rise retail where there are still opportunities. Covid has softened the retail market but I would target a strip mall where you can reposition and grow your income over time. Knowing that some tenants want to leave and when you can increase rents is a good opportunity, versus a more juiced up and fully tenanted property where you have a lower cap rate.

Advice for people interested in commercial real estate:

Commercial real estate tends to feel quite daunting. Reach out to an advisor who can guide you through the market and break down what your needs are. They can help you navigate this tight market.

• Meg Cooney