Commercial real estate transaction activity has been brisk in recent weeks, but the overall impact of looming federal capital gains tax changes has been somewhat muted, say brokers who spoke to RENX in advance of the June 25 deadline.
“I would say the word to describe it has been very crazy. It is a real thing. We’ve been extremely busy with getting things to the finish line for tomorrow (Friday),” Sebastien Gatti, principal, executive vice-president, capital markets, Quebec at Avison Young, said in an interview.
“I don’t want to say it (timing of the federal government announcement) was unfair, but it did catch a lot of clients that were considering selling off guard, that the rules were changing.”
With Monday (June 24) being a provincial holiday in Quebec, the Montreal team at Avison Young has been busy during the past week, he said.
“In total . . . the indications on our side were probably about 15 transactions and north of 1,500 units were expedited prior to the deadline.”
It’s not only the property brokers who are feeling the pinch. Other professionals are also scrambling, a Vancouver-based broker said.
“It’s not just me but some of my colleagues who are lawyers closing transactions, and others who are mortgage brokers, they are all feeling the same thing, which is this rush to get properties closed before the 25th. It’s been a whirlwind,” Mark Goodman, principal, Goodman Commercial Inc, said.
‘Badly executed’ government initiative
The commercial real estate business has been taking notice since the April 16 announcement by the federal government that the capital gains tax inclusion rate will increase on June 25, from its current 50 per cent tax rate after $250,000, to 66.7 per cent.
For one broker, this rushed regulation was “badly executed,” and represents “short-sightedness” on the government’s part.
“There is a housing crisis and this is taking away incentives. This government doesn’t believe in rewarding investors,” Derek Lobo, CEO and broker of record at SVN Rock Advisors Inc, said.
In his view, this measure might have helped buyers in the short term by providing an incentive to negotiate and execute a deal, it was an example of government “buffoonery,” Lobo said. While there has been a marked uptick in activity, there are a number of reasons it has not sparked the amount of transactions which might have originally been predicted.
By providing such a short timeline for the market, many deals could not be completed in time.
“It’s very difficult to launch a new property and have it closed before then, unless you already have something in the works. We signed one listing right before the buzzer so we successfully did it once. But more often than not, more likely it’s deals that you have on the go,” Dayma Itamunoala, vice-president and sales representative at Colliers Toronto, said.
“Most purchasers at a minimum need 30 days for due diligence and then you have closings, which is probably 30 days after that. So it’s tough to jam it in. But the short answer is, it has been busy.”
A series of major transactions
For Goodman, the new rules prompted some major transactions involving his brokerage.
“When the capital gains deadline was put forth, it took a little while for people to get their head around it, and when people started speaking to their accountant, the savings have been, in some cases, over a million dollars based on what the property was purchased (for) and the tax base,” Goodman said.
His firm has five deals scheduled to close before the Tuesday deadline, valued at a total of $85 million.
However, this has also produced a modicum of good news for both sides.
“I describe it as being mutually beneficial for both the buyer and seller,” Goodman noted. “The seller, although they’re entertaining a lower price than they would have liked to see before this looming deadline, the net gain outweighs the reduction in the lowering of price. From the buyer’s perspective, if they’re looking at it in the long term and saying, ‘We’re getting for example, a 10 per cent discount off market value.’ ”
For his part, Lobo would have preferred to see the government provide at least a one-year warning, which might have had less of a dampening effect on sales.
“They should’ve provided tons of notice. You might have been hurried but there was not enough time to sell in six weeks. People maybe forget the reason for the capital gains extension. It rewards people who take a risk,” Lobo said.
More factors to consider in CRE transactions
Over the medium to longer term, the new regulations might not have as big of an effect as was forecast, Itamunoala surmised.
“I thought it was going to be more impactful than it was. When they announced it, I thought that the market was just going to completely slow down (post implementation). It turns out capital gains is a big factor, but it’s just one of the factors that folks used to determine when they’re selling.”
While his brokerage reacted by informing its clients of the potential impacts, they’ve also been careful to take all the aspects of selling a property into consideration. This has led to a bit of caution, rather than a rush to transact.
“We’ve had a few different properties that we were about to list right around that, and we said, ‘Hey guys, we can rush this. We can really try,’ and they were like, ‘We want you to do a good job, and we’re afraid that if you go too quickly, we will sacrifice some of the value that you bring in exchange for speed. We’ll end up at the same place, or arguably worse,’ ” Itamunoala explained.
While the effect of the tax changes may have been moderate overall, there is one group that was heavily affected by these measures.
“I think the groups that impacted the most are the generational sellers that held their assets for so long and had such a low cost base. It had a huge implication for those groups: eight to 10 per cent gain with a cost basis of basically zero, that really affected (those) groups,” said Sinnett, principal, executive vice-president and head of capital markets, Quebec for Avison Young, said.
“We had a closing today in that scenario, where the difference between closing today or next week, would have been a $2 million hit.”