# 'Owning' commercial RE in a brand new shopping center



## Kher-Spade (Oct 6, 2016)

So I have come across an opportunity to buy a retail unit outright in a shopping center that is currently under construction by a developer that has successfully done it before elsewhere in the country. It is located close to an oil city that is currently facing the worst downturn probably in its history. But the city is expanding and the population is growing so there is future potential. It is unclear how they will attract business in the current market but at least they have got all the permits after a lengthy application process and the construction work is well under way. The Sales Center has told me that they have sold out more than 90% of the units.

I just wanted to ask if anyone has invested into a retail opportunity that sounds similar to this? What are the pros and cons and is it better or worse than investing into rental condos. My heart tells me to go for it since owning real estate inside a shopping center is rare, but due to the location of the place and current market dynamics my mind tells me to wait and see (but by then it may be sold out 100% or I may not get in at the pre-construction price).


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## Mukhang pera (Feb 26, 2016)

KS,

Probably some here with hands-on experience will offer some thoughts. I'll admit to never having owned shopping center property, but I have conveyed a number of them and also taken distraint proceedings against a few tenants of same for frustrated landlords.

Ley me say I admire your spirit in coming to a new country and being willing to consider such an investment at an early date. Are you living close to where the shopping center is being built? I can guess at where it might be, but I could be wrong, even as to province. Also, there are shopping centers being of the small strip mall type, and then there are shopping centers more like Metrotown in Burnaby and Yorkdale in Toronto. Quite a wide diversity. 

One question I would be asking at this point, is who is among those 90% of buyers? Is there at least one that could be considered to be an "anchor tenant" - something like Eaton's (oops, showing my age)...okay then, Walmart - that will attract traffic to the site?

You say the developer "has successfully done it before elsewhere in the couty (sic)." I take it you mean "country", but maybe "county". Successful for whom? The developer? I'd want to take a close look at those developments and how they have turned out for individual owners. I am guessing that what you are describing in limited detail is some kind of strata development, hence individual units may be sold. I have never seen how a mall of any size with all individual owners works in practice. I am more familiar with malls owned by (usually) a corporate landlord, who requires all tenants to sign essentially the same lease. In that way, the landlord can require tenants to adhere to uniform opening and closing times and such and can put in place covenants limiting competition within the shopping center. That has led to many fights that have found their way to court. For example, a landlord leases space to a hardware store. Another space gets let to Walmart. Walmart sells hardware too. Hardware store tenant is not thrilled with the competition. 

So, while I have nothing to offer in terms of experience with the type of ownership interest of which you speak, I am aware of some issues that might arise and would simply suggest that you consider some of the angles. All the more so if you are buying into an economically-depressed region. If that is the case, and you are able to buy at an appropriate discount, you might look like a savvy investor in the long run. But, in the near term, I would not expect to see a lot of cash and you should be prepared to underwrite the thing for awhile. 

Best of luck to you.


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## Just a Guy (Mar 27, 2012)

Shopping malls seem to be on the wain, developement seems to be going towards big box complexes. I've seen several malls torn down, but few malls built in the last decade or two.


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## Kher-Spade (Oct 6, 2016)

Hi Mukhang

Thank you for the detailed reply. I wouldn't mind sharing the details and location of the shopping center but I dont know how strict this forum is on things like that as I dont want to be seen as advertizing for them. 

You have raised some good points so let me try to answer them from what I know about the project so far.



Mukhang pera said:


> One question I would be asking at this point, is who is among those 90% of buyers?


As far as I know its a mixture of people wanting to rent and those buying to sell for profit once the project is complete. I do not know how many businesses are actually buying for their own retail.



Mukhang pera said:


> Are you living close to where the shopping center is being built?


Right now I am but that might change depending on if I have to relocate somewhere else for work. Would this cause a problem?



Mukhang pera said:


> Also, there are shopping centers being of the small strip mall type, and then there are shopping centers more like Metrotown in Burnaby and Yorkdale in Toronto


Think Pacific mall in Markham ON. It is exactly similar to that.



Mukhang pera said:


> For example, a landlord leases space to a hardware store. Another space gets let to Walmart. Walmart sells hardware too. Hardware store tenant is not thrilled with the competition.


Looks like this has been well thought of since there are a few restrictions on what types of businesses can the retail unit be used for as well as opening and closing times so there is no conflict of interest. Just to add the builder does intend to have a big supermarket type of store.


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## Mukhang pera (Feb 26, 2016)

Thanks for added detail, KS. 

The most interesting added item is where you said: "Think Pacific mall in Markham ON." It's been a long time since I was in Markham. I'll have to google that mall you mention and get some idea. There were no malls in Markham when I used to go through there in days of old. I recall trips to Musselman's Lake from Toronto, via Hwy. 7, turn left in Markham onto Hwy. 48 north. There was a good place to buy ice cream in the summer, on the northwest corner. That was probably the major retailer there at the time.


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## twa2w (Mar 5, 2016)

If I had to guess, I would say you were talking about the Asian mall near cross iron Mills north of Calgary.
In any event, what I would want to know is how many retailers have bought space versus number of investors who have bought space hoping to either flip but ultimately rent to a retailer.
If you are not a retailer, or end user of some type, you will be competing against all the other investors for tenants. Because in the end, these units have to be rented out for your investment to succeed. How your particular unit (investment) does will depend on a number of factors. Location in mall, size of unit relative to needs will affect the rent and perhaps quality of your tenant. You may have to divide your space or jointly lease your space with another land lord. You may have to provide some leaseholds depending on tenant.
If the right retailers are attracted to the mall and it draws enough shoppers, the mall will be a success. If this is the case and your tenant does well, your investment will succeed. 
Unlike residential though, if your tenant does not do well or the mall does not do well, replacing a tenant can take much longer. Can you carry the costs, mortgage, condo fee, taxes for an extended period?.
90 % sold? Have all the good locations gone? Does the price reflect that.

Higher risk but higher reward.
Best of luck


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## Kher-Spade (Oct 6, 2016)

twa2w said:


> If I had to guess, I would say you were talking about the Asian mall near cross iron Mills north of Calgary.
> In any event, what I would want to know is how many retailers have bought space versus number of investors who have bought space hoping to either flip but ultimately rent to a retailer.
> If you are not a retailer, or end user of some type, you will be competing against all the other investors for tenants. Because in the end, these units have to be rented out for your investment to succeed. How your particular unit (investment) does will depend on a number of factors. Location in mall, size of unit relative to needs will affect the rent and perhaps quality of your tenant. You may have to divide your space or jointly lease your space with another land lord. You may have to provide some leaseholds depending on tenant.
> If the right retailers are attracted to the mall and it draws enough shoppers, the mall will be a success. If this is the case and your tenant does well, your investment will succeed.
> ...


You got it, it is exactly the mall that you just described 

So in terms of location, all the corner 'boutiques' are gone even though they were about 10-15% more expensive.

You are right, replacing a tenant would be expensive but as opposed to residential tenancy law it is also much easier to kick a tenant out if they are not behaving properly since commercial tenancy law favours the landlord more than the tenant. Also, being a small shop unit it would not have the hassles of looking after plumbing, electrical, or other maintenance issues as you would expect with a residential tenancy. 

Although as you said, if the unit is unoccupied then the landlord will have to pick up all the fees and costs but I guess it is the same as a residential dwelling.


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## mark0f0 (Oct 1, 2016)

Personally I'd be wary. If this was such a great 'deal', the developer would take out a bank loan and keep the units for himself instead of trying to sell them off on the public. Unless you're a real insider, this sort of arrangement was probably shopped around to a gazillion others in the community, who rejected it or were otherwise unable to fund it. You'd want to compare against a REIT, or even just against a plane-jane TSX index fund (or even the oil index if you are convinced that there is such high correlation to the O&G sector in the community in question!). If you already own your own home, and do not have a substantial additional portfolio of stocks, bonds, etc., then you probably don't need any more exposure to the RE market whatsoever.


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## Kher-Spade (Oct 6, 2016)

mark0f0 said:


> If this was such a great 'deal', the developer would take out a bank loan and keep the units for himself instead of trying to sell them off on the public.


The developers are not selling 100% of the project, rather they are keeping some portion of the shops and majority of the associated amenities to themselves, just like they have done in Pacific Mall in Markham ON. I guess they will also make money from the management fees and charges. The reason perhaps why they are not doing the lease model is because the units are much smaller than what you usually get in big shopping centres therefore they are not suitable for big retailers. Location wise this new mall comes right before the city's iconic outlet shopping mall called Cross Iron Mills as you drive out of Calgary towards Edmonton, and is only about 10 minutes drive from Calgary Airport. This mall is not exactly part of Calgary but with the expanding city boundaries and the potential city train line extension up to Calgary Airport and to Cross Iron Mills will cover this mall very nicely for commuters if that project goes ahead. The growing community in adjacent areas already consider themselves part of Calgary thanks to the sky high property prices caused by the oil boom which forced them out to buy in the suburbs of Calgary. Just to add the new house construction is still going up in those suburbs despite the oil downturn.

I have also paid a visit to Pacific Mall and there were hardly a couple of units vacant. But I agree that finding a commercial tenant sometimes take time.


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