Limited partnerships offer part ownership of commercial buildings
Fiona Anderson
Sun
Everyone seems to be making money in British Columbia’s hot real estate market — or at least everyone who managed to get in before prices soared. For the rest of the population, even 400-square-foot condominiums downtown are now out of reach.
But real estate investment is still possible, if you don’t mind owning just a piece of the pie and are okay with someone else saying how it is to be run and when it is to be sold. And of course, provided you don’t need it as a roof over your head.
Joanne Thomas and her husband got into the housing market when they bought their family home. But with the real estate market bubbling, and the performance of their mutual fund “lacklustre”, Thomas wanted to put some of her registered retirement savings into real estate as well.
So Thomas invested in a real estate limited partnership that made her part owner of the historic Pemberton building in downtown Vancouver. With tenants like Cartier Jewellers and Caffe Artigiano, she and the other limited partners will receive a cash flow based on rental revenue, as well as a distribution of cash when the building is sold.
Thomas said the investment seemed like less of a gamble than her mutual fund investments, “which were all over the map.”
“I’m a bit down on mutual funds right now,” Thomas explained. “Having invested over the years . . . I don’t see a huge difference from where I was in the early ’90s.”
The investment also let Thomas invest in commercial real estate, something she couldn’t afford to do on her own.
“It was a great entry level for me,” she said.
Thomas made the investment through Accolade Equities Inc., and it’s the company’s first foray into B.C. after buying a number of properties in Calgary.
But despite being a young company, the concept of real estate syndication has been around for 100 years, Accolade’s chief financial officer Philip Pincus said in an interview.
“But it’s always really been for the rich and wealthy,” Pincus said. “Now by denominating our units at $50,000, we’re more or less giving ‘the average Vancouverite’ the opportunity to own a piece of their downtown office buildings.”
Changes to B.C. securities laws a few years ago has made real estate limited partnerships or syndications more accessible to people who want to invest smaller amounts of money, according to Alan Pratten of Victoria’s Pratten Financial, which has been in the business for about six years.
Each partnership is different, with its own minimum investment and property. But generally, a partnership will buy a building or pool of buildings on behalf of investors. The buildings will generate rent, either through residential or office space or in many cases from retail tenants. That rent is distributed regularly to the partners. Then, after a fixed period of time, the buildings are sold or refinanced. In either case, the equity in the building is divided among the partners. In the case of refinancing, the partners continue to own the building and the process is repeated, with the partners sharing the rent revenues and divvying up the built-up equity when the property is again refinanced.
With the Pemberton building, the partnership plans to sell the building in five years, unless 75 per cent of the partners vote to keep it.
So the partners will earn in three ways, Pincus said — from the cash flow from the leased building, from the paydown of the mortgage, and from the appreciation of the property.
The companies putting together the deals, like Accolade and Pratten Financial, make most of their money by taking a 10- or 20-per-cent share of the profits, measured as increased rental revenue and increased property value. By profit-sharing, the interests of the company and the investors are the same.
“It’s important that we have this profit participation because it let’s you know that we’re . . . going to manage this investment for the next five years in the most efficient and profitable manner possible so we too can earn some money,” Pincus said.
Is the hot market essential for the syndicate to make money? Not really, says Adam Gant of League Assets Corp., another relative newcomer to real estate syndication.
“If we buy a property for $3 million and it’s giving us $300,000 in income, what do we care if the market now only thinks it’s worth $2.7 million,” Gant said. “It’s still giving us $300,000 in income.”
The biggest risk is if the rental market changes, so that rental revenues drop, Gant said.
Adrian Mastracci, investment counsel with KCM Wealth Management, points out that investing in a real estate limited partnership isn’t for everyone. The investment is often illiquid and can’t be sold if circumstances change, he said. And some investors may not like being at the mercy of the other investors who decide by vote whether to keep or sell a project.
An average investor may also not have the real estate expertise necessary to evaluate whether a building’s projected earnings are reasonable, Mastracci said.
“A lot of people who invest in these kinds of thinks don’t really understand everything they are getting involved in,” Mastracci said. “But they’ve just got to do their homework. And if they don’t know, they have to find someone that does.”
© The Vancouver Sun 2006
