Buying retail and mixed-use property

General information, not tax or legal advice. Rules and rates change, and every situation is different. Talk to your lawyer and accountant before you act on anything here.

What I look at

• The tenants. What they sell, how they’re doing and how long they’ve been there.
• The leases. Term, renewals, rent increases and who pays costs.
• The street. Foot traffic, parking, transit, neighbours and what’s changing nearby.
• Re-leasing. How easy it would be to fill a shop if a tenant left.

Mixed-use buildings

Every checklist applies at once: retail for the ground floor, office if there’s office above, and the residential rules for the suites. The apartments usually fall under BC’s Residential Tenancy Act, which limits rent increases and sets rules for ending tenancies, so build that into your numbers.

The commercial side carries more of the risk. Apartments usually re-let in weeks. A commercial unit can take months to lease, negotiate and build out before rent starts. The bigger the share of income from the ground floor, and the fewer commercial tenants there are, the more one move-out hurts.

• Several commercial tenants on longer leases spread the risk.
• One tenant with most of the ground floor is fine if their covenant is strong and the term is long.
• Budget for the downtime and improvement costs if a commercial unit goes vacant.
• Older two- to four-storey town-centre buildings have charm, but expect older elevators, one exit stair, fire alarm and sprinkler gaps, and accessibility upgrades once you pull a permit.
• Check which ground-floor uses the zoning and any local business association allow.

Costs to plan for

GST applies to the commercial part of most purchases. Property Transfer Tax applies to the whole price, and the further 2% over $3 million applies only to the residential portion.

Retail and mixed-use property in detail

What drives value

• Who the tenants are, how long their leases run, and how well they trade.
• Frontage, visibility, foot traffic and the strength of the street or centre.
• An anchor such as a grocery store or pharmacy that brings people back every week.

Typical lease structures

• Net leases with additional rent for common area costs, insurance and property tax.
• Some leases add percentage rent above a sales breakpoint.
• Exclusive use, co-tenancy, radius and relocation clauses all affect what the next lease can be.

Due diligence

• Every lease, amendment and side letter, plus estoppel certificates.
• Year-end recovery reconciliations for additional rent.
• Any exclusives registered on title, and permitted uses for each unit.
• For mixed-use, the residential tenancy agreements and rent history.

BC and Vancouver specifics

• Retail is assessed as Class 6, and the apartments in a mixed-use building as Class 1, so tax is split. See BC Assessment property classes.
• Residential suites are under the Residential Tenancy Act, so rent increases on existing tenants are limited to the yearly rent increase limit.
• Many Vancouver high streets are zoned C-2, with shops below and homes above. Check the Vancouver zoning map.

GST. The sale of commercial property is generally subject to GST. If the buyer is registered for GST, the buyer usually self-assesses instead of paying it to the seller. See the CRA guidance on real property and GST/HST and talk to your accountant.

Anchors and zoning

A neighbourhood centre lives or dies with its anchor, so check the anchor’s lease term and how it’s trading. Before you go further, check the permitted, conditional and prohibited uses for the site. A conditional use needs City approval, and a prohibited one is close to a dead end.

Single-tenant retail

A building leased to one retailer on a net lease is simple to own, but the income rests on that one tenant. Check how many years are left on the lease, who signed or guaranteed it, what the renewal options say, and what happens to the signage and fit-out if the tenant leaves. Price it on what the space would be worth empty as well as leased.

Questions people ask

How does PTT work on a mixed-use building?

The general rate applies to the whole fair market value. The further 2% on residential property over $3 million applies only to the residential portion.

Are retail buildings a good first investment?

Small ones with several tenants can be, because one vacancy doesn’t sink the income. Check the tenants closely.