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Legal pot spurs demand for commercial real estate, particularly in Alberta

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TORONTO — Industry players say Canada’s impending legalization of marijuana is spurring demand for commercial real estate, particularly for retail shops in Alberta, where the government is selecting private operators to conduct over-the-counter sales.

Real estate consultancy JLL says its phone has been “ringing off the hook” as cannabis companies look to secure space to cultivate the plant and seek retail space to sell the final product.

Research manager Gaurav Mathur said during a panel discussion at an industry conference in Toronto that commercial real estate prices haven’t “seen a major bump yet”, but he expects that to change after legalization, expected later this year.

“It’s on an asset by asset basis, not prevalent throughout the industry just yet,” he said at the Land & Development conference on Tuesday.

Mathur also expects “offshoots” of the domestic cannabis industry, such as supply and accessories shops, to drive demand for commercial real estate going forward.

Canada is preparing for the legalization of cannabis for recreational use later this year, but has left it to the provincial or territorial governments to decide how to distribute the drug. Provinces such as Ontario, Quebec, Nova Scotia and Prince Edward Island have tasked their provincial liquor boards to handle retail sales of marijuana. But other provinces such as Saskatchewan and Newfoundland and Labrador have said the private sector will handle retail sales.

Alberta, however, is an attractive province for cannabis retail as the Alberta Liquor and Gaming Commission has not put a cap on the number of licenses that will be issued, but stipulates that no one person or entity can hold more than 15 per cent. The province expects to issue roughly 250 licenses to private operators in the first year. Saskatchewan, for comparison, only plans to issue 51 retail cannabis permits in 32 communities, and qualified applicants will be put into a random selection process, similar to a lottery. Newfoundland and Labrador says its most recent round of applications for potential cannabis retailers was for up to 41 licenses.

Canopy Growth’s vice president of stakeholder and government relations Jeff Ryan told the panel that the firm recently shifted focus towards retail as it aims to set up shops in provinces such as Alberta, Newfoundland and Labrador and Saskatchewan. Ryan said in an interview after the discussion that the licensed producer has encountered stiff competition for retail space in urban centres in Alberta.

Mark Goliger, the chief executive officer of National Access Cannabis Corp. which has signed an agreement with coffee chain Second Cup to convert some of its coffee shops into weed dispensaries, said the competition for retail space in Alberta is “absolute insanity.” In addition to NAC’s existing network of medical clinics and pharmacies, the company is aiming to open recreational cannabis dispensaries in provinces where legal under its newly-launched Meta Cannabis Supply Co. brand.

Alberta’s cannabis retail licensing system has big players and mom and pop shops alike vying for prime spots and submitting applications, he said.

“Everybody is trying to get retail locations, and that of course is driving up the price and driving up the terms,” he said in an interview.

He said NAC has encountered bidding wars, with other parties “spiking the market with overly aggressive terms” such as double the asking price per square foot and very aggressive termination clauses.

“They’re just going in there and throwing lots of money and being aggressive with landlords, and its creating an out of balance scenario,” Goliger added.

However, some landlords are still hesitant about leasing to cannabis companies amid lingering stigma.

Lisa Borsook, executive partner of law firm WeirFoulds LLP, said in its work on leases for the Ontario government entity created to handle sales and distribution of recreational pot in the province, she has seen pushback.

“That’s in Ontario where we’re having a government laid-out store… And yet it’s been my experience that landlords, nonetheless, have qualms about having cannabis in their centres,” she said during the panel.

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How the New Tax Law Affects Your Real Estate Business

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Tax reform should have a positive impact on the real estate sector. Make sure your business is prepared for these major changes.


4 min read


The Tax Cuts and Jobs Act (TCJA) brings big tax changes to the real estate sector, the likes of which haven't been seen since the Tax Reform Act of 1986.

Fortunately, the impact on real estate businesses should be mostly positive. That said, there are some crucial changes that business owners and entrepreneurs in the real estate sector should look out for moving forward.

Related: The New Tax Law Has Made It a Great Time to Invest in Real Estate. Here's How to Get the Most From Your Investment.

Pass-through entities

You have probably heard about the 40 percent reduction in the corporate tax rate to 21 percent under the TCJA. However, if you operate as a sole proprietor, or in a pass-through entity such as a partnership, LLC or S Corporation, the TCJA also contains a significant change to how you will be taxed.

A deduction of up to 20 percent of qualified business income is now permitted. This deduction is limited to the lesser of:

  • 20 percent of qualified business income
  • The greater of 50 percent of W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified depreciable property

Congress and the IRS need to issue new rules to further clarify and explain some of the nuances of this provision, but real estate businesses should clearly benefit from it.

Related: How to Avoid the Common Pitfalls of Real Estate Investing

Depreciation

Real estate depreciation rules were already favorable, but the TCJA improved them even further. Qualifying property — including, for the first time, used property — acquired after Sept. 27, 2017 is eligible for 100 percent bonus depreciation in the year it is placed in service.

Eligible assets are those with a depreciable life of 20 years or less. This encompasses personal property, and was intended to include "qualified improvement property" defined as work done to the interior of a commercial building excluding costs related to enlargement, elevators and escalators or the internal framework. Because of a drafting error, however, it was not assigned the correct class life, so this is an important provision requiring Congressional remedy.

Remember that bonus depreciation will begin to wind down in 2023. The rate will drop by 20 percent per year beginning in 2023 until it is eventually eliminated in 2027.

Additionally, Section 179, which permits the expensing of assets for commercial properties, has been expanded. The annual limitation has increased from $500,000 to $1 million, with a phase-out beginning at $2.5 million for qualifying assets. For the first time, this provision now includes roofs, fire protection and alarm systems, HVACs and security systems.

Related: 5 Reasons Why Real Estate Is a Great Investment

Limitations on business interest and losses

The way the losses and gains from your real estate business are taxed is also impacted by the new law. For example, debt-financed real estate operations should note that any business with more than $25 million in average annual gross revenue over the prior three years will be limited in its interest expense deduction to interest income plus 30 percent of adjusted taxable income. Rental property owners and others in real property businesses can, in some cases, opt out of this rule and claim the full interest deduction, but that comes with certain trade-offs.

If you're on the opposite side of the scale with an overall tax loss, a new loss limitation rule allows only $500,000 for joint filers ($250,000 for single) to be used to shelter non-real estate income such as wages, interest, dividends and capital gains. These provisions will likely have the largest impact on qualifying real estate professionals.

Related: Sell a House and Pay $0 in Taxes With This Tip

Final points

There are many other pieces of the tax law that could affect real estate companies and investors. Section 1031 like-kind exchanges for real estate (but not for personal property) remained intact, but the taxation of carried interests, doubling of the estate and gift exemption and changes to some popular tax credits could affect your real estate holdings, taxes and financial planning.

In order to ensure you're getting the most out of your corporate and individual taxes — in real estate and elsewhere — make sure to work with a tax professional well-versed in these changes. The sooner you review these changes with a professional, the less likely you will be caught off guard when the 2018 tax filing season rolls around.

Opinions expressed by Entrepreneur contributors are their own.

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Ottawa real estate firm Minto looks to create real estate trust

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One of Ottawa's biggest landlords is looking to convert to a real estate investment trust, a move that would allow investors to cash in on the rent it charges for suites across the city.

Minto Properties announced Wednesday it's seeking to create the trust, which will include 22 properties across the country, including 14 here in Ottawa.

Other properties are in Toronto, Calgary and Edmonton.

Real estate trusts allow investors to essentially buy shares in residential properties, giving them a cut of the rent payments the company receives from tenants.

Carleton business professor Ian Lee said this is a chance for Minto to take the buildings, which are valuable assets, and get some money to potentially move in another direction.

"It appears they have decided to focus on a different part of the real estate market," he said. 

"Usually, when you're selling off your entire portfolio, as they announced they are today, that suggests a change in strategic direction."

No changes likely for renters

In their prospectus to investors, Minto claims its properties are 98 per cent occupied and charge an average monthly rent of $1,358.

Lee said this isn't really going to change anything for renters.

"It's just as if the name of the company collecting your rental cheque every month has changed and you're indifferent," he said.

The move still has to be approved by regulators, but in a release Minto said it could eventually add more units to the 4,279 included in the initial offering.

CBC reached out to Minto CEO Michael Waters, but he declined to comment as the process unfolds.

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Toronto Real Estate Leads The Country In Average Price Declines, Saint John Pops Higher

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The average sale price of Canadian real estate is falling, and fast. Canadian Real Estate Association (CREA) numbers show the average price of a home is down 11.3% in April 2018. Most of the declines are being attributed to the country’s largest and fastest falling real estate market – Toronto. Yeah, I haven’t heard of it either.

Average Prices

The rumors are true, average prices aren’t great for determining how much you’ll pay for a home. When the range of distribution for sales is normal, the average price is a very effective measure. However, when the range of distribution is wide, it will tend to skew higher and lower, depending on extremes. That is, extremes to the high and low of prices can skew the number in either direction. It’s still a useful indicator if you know what you’re looking for.

The average price can be a useful proxy for dollar volume, and upgrade flow. After all, CREA only deals with resales. Usually people that sell will be upgrading, buying a more expensive home as well. This typically sends the average higher. If people are selling, but have no plans on buying again in this market, you’ll see the average slide. Who sells and doesn’t plan on buying again you might be asking? At least a quarter of people planning to sell in Toronto this year.

Vancouver Has The Highest Average Sale Price In Canada

Vancouver, Toronto, and Fraser Valley are still the priciest markets in the country. Vancouver has the highest average sale price at $1,067,266. Toronto comes in second with an average sale price of $804,584. Fraser Valley is in third with an average sale price of $780,736. These markets have remained in the same order for quite some time.

Average Sale Price of Canadian Real Estate (April)

The average sale price of all homes in Canada by major CREA regions. In Canadian dollars.

Source: CREA. Better Dwelling.

Toronto Has The Fastest Dropping Average Sale Price

Saint John, Saguenay, and Victoria had the fastest rising average sale prices compared to last year. Saint John had an average sale price of $199,136, an increase of 22.9%. Saguenay had an average sale price of $202,729, a 15.8% increase. Victoria had an average sale price of $703,592, an 11.9% increase. The first two cities are seeing huge growth, but are still cheaper than the national average. Victoria has been on a tear, but it also has one of the biggest drop in sales-to-new listings in the country.

Toronto, Thunder Bay, and Hamilton regions are the fastest falling compared to last year. Toronto saw the average sale price drop to $804,584, a 12.6% decline. Thunder Bay had an average sale price of $217,745, an 11.9% decline. Hamilton – Burlington saw the average sale price drop to $569,490, an 11.3% decline. Toronto and Hamilton-Burlington saw huge gains last year, so a drop was expected.

Canadian Real Estate ASP Percent Change (April)

The percent change of the average sale price (ASP) of all homes in Canada by major CREA regions.

Source: CREA. Better Dwelling.

The average decline in prices across the country is being attributed to B-20 Guidelines. The Guidelines subject uninsured mortgage borrowers to undergo a stress test. This reduced the maximum size of a mortgage people could borrow. Some have claimed the stress will have minimal impact on borrowers. However, the Bank of Canada estimates over 81,000 buyers last year would have been impacted by the new rules.

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