LBD3300 Advanced Real Estate 002 Real Estate Case Studies Prepared for: LearnByDoing

1. LBD3300 Advanced Real Estate 002 Real Estate Case Studies Prepared for: LearnByDoing.ca By: @ProfBruce Date: September 2012 Create the Future

2. Professor Bruce Murray Firestone • B. Eng. (Civil), M. Eng.-Sci., Ph.D. • Founder Ottawa Senators, Ottawa Senators Foundation and Scotiabank Place Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa • Executive Director, Exploriem.org • Novelist, Quantum Entity Trilogy • Writer, Entrepreneurs Handbook II • Columnist, Ottawa Business Journal • Broker, Century 21 Explorer Realty • Follow him on Twitter at @ProfBruce • Read his blogs at www.EQJournal.org and www.DramatisPersonae.org • Current motto: “Making Each Day Count”

3. Residual income from yr PB4L? • Minimal work? • Low management intensity? • Not really, unless you have several million dollars in GICs or T-bills • Every biz, even PB4Ls, require some level of care and attention • And it takes time to develop a great biz (7 to 12 years according to Sir Terence Matthews)

4. Terrace Investments Ltd (An Example of Bootstrap Capital) • Bought from group set to retire • Asking price: $350k • First offer (October 1982): full price offer, rejected • Second offer (February 1983): full price offer (coldest day of the year), accepted • $10k down, STB 5 years, 0 interest w/ principal pmts every yr • Fully paid off < 2 yrs • “Why should we sell to you, Bruce?” • “Because I’ll actually pay you and you trust me.” • “Where did you get to $10k?” • “I borrowed it!”

5. 1025 Merivale Road (An Example of Trading Behaviour) • Plaza part of the TIL package of assets, valued at $185,000 • End of 25 year lease with IGA at $1.87 per s.f. • Seen as a huge problem—plaza soon to be100% vacant • Actually huge opportunity to BUY LOW/SELL HIGH (trade!) • Lipstick renovation with architect Barry Hobin: $120,000 • Sub-divide space: $14.00 (Beckers), $6.85 (Active Components), $5.00 (Martial Arts) • Sell for $1.1 million 18 months later

6. 1025 Merivale Road (An Example of Trading Behaviour)

7. Bob Campeau (An Example of Stand Your Ground) • TIL partner Admiralty Enterprises goes bankrupt • Campeau Corp buys 80 properties from Receiver including 5 TIL/Admiralty warehouses • TIL had right of 1st Refusal clause • Invoke rights • Campeau invokes “Principal of the Greater Good”

8. Bob Campeau (An Example of Stand Your Ground) • Andrew Jacob: “What do you want for your half, Bruce?” • “$2.1 million.” • “But we’re getting Admiralty’s half for $400k!” • “Why don’t you want to be partners with the great Bob Campeau?” • Larger, better capitalized partner can kill you “He (or She) who has the Gold, rules,” Anon

9. Bob Campeau (An Example of Stand Your Ground) • They can make $$$ by leasing space to tenants in bldgs they own 100% • Empty out 50/50 buildings • Then come to weaker partner and do them a ‘favour’ • TIL might lose their ½ share for 0 or even negative dollars < 2 to 3 yrs out • Hard to argue for the ‘greater good’ when you are still getting your interest for 43% than FMV • 10 minutes < court hearing, “How much do you really want?” • “$2.1 million.” • 5 minutes before: settlement for $2 million, cash

11. Brookstreet Resort and the Marshes Golf Club (An Example of Trading Behaviour and Bootstrap Capital) • Bought 62 acres of industrial land in 1994 for $365k • Tough recession • Industrial land in Kanata had gone down by 90% + • Actually huge opportunity to BUY LOW/SELL HIGH (trade!) • Two investors put up 100% of capital • Loaned Bruce the $$$ for his 1/3 interest at 8%, capitalized • Sold in 1997 to Sir Terence Matthews for $2.2 million • Investors each get $725k • Their IRR is 57% p.a.

12. Brookstreet Resort and the Marshes Golf Club (An Example of Trading Behaviour and Bootstrap Capital) • Bruce’s IRR? • Infinite • Sell for $1.1 million 18 months later • Why wld investors loan Bruce the $$$ to co-invest? • Asymmetric information + operational and sales experience (Use IRR to calculate yr real returns: Cap rates are simply a ‘rule of thumb’. www.dramatispersonae.org/IRR/IRRPowerOfLeverageGoalSetting.htm)

14. Stittsville Bungalow (An Example of Asymmetric Information) • REALTOR puts Seller and Buyer clients together • Not on MLS • Seller wants to sell with 0 showings • Seller wants to sell/lease back so his elderly parents-in-law can remain in situ for up to 3 yrs • Sale is ‘handicapped ‘ as a result • Buyer is investor with limited budget • Buyer requires co-investors to complete • Co-investors want in on project because: purchase of home for $40k < FMV, 3 yr leaseback at rent > FMV, Tenant pays all utilities, stable/predictable cashflow, paydown of mortgage by Tenant, increase in value over time, bungalows in increasing demand

15. Stittsville Bungalow (An Example of Asymmetric Information) • 2 x Dentists co-invest • They have money but no time • Managing partner has time but no money • Managing partner brings connections with REALTOR, property management skills, the opportunity to buy below market and to rent above market • Investor ROE: 6% cash-on-cash + 7% pay down of mortgage by Tenant + 1.5% r.e. inflation (~4.5% on equity) + $40k from below mkt purchase • Much better return that GICs (3.15% to 3.85%) • Managing partner gets 20% of the deal for ‘nothing’

16. Robertson Mews • Bought 11 acres for $55k per acre • Purchased adjacent 1.7 acres for $225k • Bought 1.2 acres for $35k from Ontario • Put in sewers and water mains and services for $850,000 • Sold lands for singles, condos, towns and high rise retirement home

17. Robertson Mews • Traded off four Barry Hobin towns • ‘Calling card’ for Robertson Mews

18. Robertson MewsSpreadsheet: http://learnbydoing.ca/robertson-mews.xls

19. Robertson Mews

20. Robertson Mews

21. Robertson Mews

22. Industrial Condo’s Investment Opportunity Brought to you by:

23. Thurston Drive/Auriga Drive Industrial Condos (An Example of Build and Hold + Differentiated Value) Too many investors chasing ‘shopping plazas’ or ‘res duplexes, triplexes, quads’ Buy product that others overlook/avoid the behemoths like Banks/Pen Funds/Insurance Cos et al Can purchase industrial condos in Ottawa from $165k to $350k+ Create some DV (Differentiated Value): e.g., add a mezzanine with separate entrance Can rent upper level separately from ground floor or both together

24. Thurston Drive/Auriga Drive Industrial Condos (An Example of Build and Hold + Differentiated Value) Compare industrial condos with residential rentals: INDUSTRIALRESIDENTIAL 5 yr leases (typ) 1 yr lease (typ) net/net/net leases gross or semi gross little investor competition everyone wants in low vacancy rates low vacancy rates not too management intensive medium amt of mgt requ’d few debt collection problems many debt collection probs no RTA– simple distrain RTA– evictions difficult normal wear and tear mega damage possible Tenants self reliant Tenants needy

25. Thurston Drive/Auriga Drive Industrial Condos (An Example of Build and Hold + Differentiated Value) Investors inevitably ‘chicken out’ due to unfamiliarity with product category Only want to buy when 1st class tenants are in place on long term leases and with 0 risk But remember: buy whenever everyone else is selling and sell whenever everyone else is buying/you make money in r.e. when you buy not when you sell Units become available because they are vacant– great opportunity for you! Buy in a recession– great fortunes are made in recessions (Baron Rothschild in 1871): “Buy (real estate) when there’s blood in the streets.” 

26. What is it? Industrial Condominiums are typically smaller 800 square foot to 3,500 square foot Warehouse Units. Usually consist of 7-14 Units per Building. Rent from $10.00-$14.00 per sq. ft. triple net Are in high demand in the Ottawa area

27. Where are they? There are two projects currently being offered: South (Hawthorne & Rideau Rd): West (190 Michael Cowpland Drive):

28. What is the cost? Hawthorne Industrial Condo’s: • Start at $229,000.00 • Additional parking spaces at $15,000.00 • 1,250 square feet • 32’ Ceilings • $10,000 Fit up allowance • $175/sf Michael Cowpland Industrial Condo’s: • Start at $181,500 • 860 square feet • 26’ Ceilings • $10,000 Fit up allowance • $199/sf

29. What do they rent for? Typical Rent is $10.00 to $14.00/square foot • 190 Michael Cowpland Drive: $14.00/Square Foot • $10,320/year ($860/Month) • Hawthrone Rd: $12.00/Square Foot • $15,000/year ($1,250/Month)

30. What are my Carrying Costs? • Carrying costs are the costs associated with Real Estate Ownership. • With Industrial Rentals, Tenants pay all Common Area Maintenance, Condo Fee’s, Property Taxes, Insurance, Operating Costs and Utilities. • What does that mean for you? Your only Carrying Cost is your Mortgage!

31. So What’s My Mortgage Then? 190 Michael Cowpland Drive: • Assume a Purchase Price of $171,500 net • Assume a Interest Rate of 4.5% • Assume a 25 year Amortization • LTV: 70% ($51,450 down) • Mortgage: $664/Month 5000 Hawthorne Road: • Assume a Purchase Price of $219,000 net • Assume a Interest Rate of 4.5% • Assume a 25 year Amortization • LTV: 70% ($65,700 down) • Mortgage: $848

32. What’s the Cash Flow Look Like? 190 Michael Cowpland Drive: • Mortgage: $706/Month • Rent: $1,003/Month • Cash Flow: $297/Month 5000 Hawthorne Road: • Mortgage: $907/Month • Rent: $1,250/Month • Cash Flow: $343/Month

33. So what my return over 5 years? 190 Michael Cowpland Drive: • Mortgage Pay down: $14,576 • Cash on Cash: $20,312 • Inflation (1.25% P.A.): $13,851 • IRR: 16.2% p.a. 5000 Hawthorne Road: • Mortgage Pay down: $18,613 • Cash on Cash: $24,065 • Inflation (1.25% P.A.): $14,674 • IRR: 14.7% p.a.

34. What do these Condos look like?

35. Site Plans? Hawthorne:

36. Site Plans? Michael Cowpland Drive

37. Floor Plans

38. Other Reasons to Invest in Industrial Condo’s Owning your own real estate gives you financial flexibility Buildings don’t run out on you Get Rich Slow No Residential Tenancy Act Real Estate tends to appreciate in value Not as volatile as stocks Tenant pays your mortgage– you get wealthy Long Term Tenancies (Typically 3-5 years) No Over Holding Provision for Tenants Security of tenure Demised exactly the way you want Branded, distinctive designs Gateway real estate Highly visible signage Low vacancy rates Excellent glazing Tax advantages from real estate ownership

39. Hawthorne Description These high design industrial condos are situated on Hawthorne Road close to the heartland of industrial property in Ottawa. This is an opportunity to own your own real estate or to invest in commercial real estate affordably. These industrial condos have 32 ft clear height with a floor plan area of 1,250 sq. ft. You can combine units to form larger spaces. There is sufficient clear height for a mezzanine to be added later or on first construction—it is your choice. For the first seven industrial condos sold there is a $10,000 fit up allowance available to help you customize your unit. Each unit comes with fully glazed front exposure with excellent signage and double doors. Rear elevation includes an over–sized overhead door for easy access for equipment, shipping and receiving. Warehousing of 7-foot containers stacked four high is possible. The electrical panel is installed ready for distribution. Each unit comes with a w/c and its own HVAC systems ready for distribution. One parking spot is included with each unit and additional ones can be purchased. Truck access is excellent and zoning allows a wide range of uses. Occupancy is scheduled for February 2013.

40. Michael Cowpland Description These industrial condos are designed in a traditional manner to suit the environment in the Kanata South Business Park. This is an opportunity to own your own real estate or to invest in commercial real estate affordably. These industrial condos have 26 foot clear height with a floor plan area of 860 sq. ft. You can combine units to form larger spaces. There is sufficient clear height for a mezzanine to be added later or on first construction—it is your choice. For the first six industrial condos sold there is a $10,000 fit up allowance available to help you customize your unit. Each unit comes with fully glazed front exposure with excellent signage and double doors. Rear elevation includes an over–sized overhead door for easy access for equipment, shipping and receiving. Warehousing of 7-foot containers stacked three high is possible. The electrical panel is installed ready for distribution. Each unit comes with a w/c and its own HVAC systems ready for distribution. High speed fibre optic cable already installed on street. One parking spot is included with each unit and additional ones can be purchased. Truck access is excellent and zoning allows a wide range of uses. Occupancy is scheduled for February 2013.

41. Schedule 1. Refundable Deposit for each unit: $2,500 2. Due upon signing Reservation Agreement 3. Review of APS by Buyer’s lawyer 4. Second deposit: 5% of Purchase Price less $2,500 upon signing of Agreement of Purchase and Sale 5. Third deposit of 5% of Purchase Price due upon close-in of building 6. Occupancy: Feb 2013 (est) 7. Completion April 2013– balance due

42. Hawthorne Spreadsheet: http://learnbydoing.ca/investment-break-down-lease-20-aug-2012-res-vs-industrial-2.xlsx

43. Hawthorne Spreadsheet

44. Hawthorne Spreadsheet

45. Hawthorne Spreadsheet

46. Hawthorne Spreadsheet

47. Hawthorne Spreadsheet

48. Hawthorne Spreadsheet

49. Maple Leaf Design and Construction (An Example of Bootstrapping) Bootstrapped their way to success Source of capital (essentially supplier credit) Friendly landowner provides options on land, basically at no cost Owner gets paid by home buyer not Maple Leaf

50. Self Capitalize -why? -VC-funding is hard to get and takes a lot of time -also, you may end up losing control of your business -VC funded biz are just large biz w/ 0 revenues -power comes from having real clients/real cashflow -if you do go for financing and you do it at the mezzanine stage, you’ll have more leverage -Maple Leaf Design and Construction Brain Saumure, B. Arch (CU and SOA) Fred Carmosino, B. Com (Sprott)