All of this week’s top stories tackle controversial or unique property sales or developments, including Canada’s first publicized conversion of office space to hotel units. In West Vancouver, a homeowner battled the court over polarizing shadow-flipping tactics, while approved plans for a False Creek development are drawing critiques from fellow developers. Meanwhile, the sale-leaseback conversation continues on from our last edition of Weekly Buzz.
Here are Western Investor’s pick of the top four stories on commercial real estate.
Exchange office tower eyes partial hotel conversion – Western Investor
The $200-million, spec-built Exchange Tower in downtown Vancouver will covert a third of its office space into 202-unit hotel, pending city re-zoning approval. The nearly completed office tower is converting space because pre-leasing hasn’t met owner Credit Suisse’s expectations.
On behalf of the Switzerland-based developer, Iredale Group Architecture submitted a proposal to the City of Vancouver on March 7 to convert the 1929-built heritage section – floors 2 through 11 – from office to hotel uses.=
Approximately 110,000 square feet of office space would be removed from the Class AAA office building to fit in hotel rooms and guest amenities.
The 31-storey Exchange building was the first North American office tower built on speculation by Credit Suisse. When it was conceived four years ago, it was also the first LEED (Leadership in Energy and Environmental Design) Platinum tower in the city and it is still the second-largest LEED Platinum building in Canada.
As part of the city’s Metro Core Jobs and Economy Land Use Plan at the time, Credit Suisse was allowed density more than two times higher than the original floor-to-space ratio (FSR) zoning on the Howe Street site. The FSR went from 9 FSR to 21.5 FSR.
The city also waived community amenity costs for new core office buildings. The incentives helped to spur the start of six new downtown office towers with a total of about two million square feet of space.
The Exchange, which completes this year, is the last of that wave. But, while most of the other new office buildings are nearly fully leased, the Exchange still has only one tenant, National Bank, which has taken 45,000 square feet, including street-level retail space.
This is not what the developer expected when the building was announced in August 2013. Agents had predicted it would be fully pre-leased within three years.
Rainer Scherwey, director at Credit Suisse Real Estate Asset Management, noted that the Exchange building was a departure for the global real estate company.
“Normally, we would invest in a fully developed, leased property,” he said during the Exchange launch. “This office tower represents the first time in North America that we are confident enough to build a major project from the ground up.”
“The Exchange missed the wave,” said commercial agent David Thistle, who acted as the broker on the National Bank lease. Thistle said the tower is coming late to the market and the Exchange’s premium lease rates may have slowed pre-leasing action.
Chambers, who took over as the Exchange’s lead leasing agent 18 months ago, said the hotel conversion is not a step back for Credit Suisse, and he expressed confidence that the office tower would eventually reach full occupancy.
“The Exchange is part of the new wave” of downtown office towers, he said.
Judge orders sale of home in British Properties – North Shore News
Shadow flipping – purchasing or selling a home then assigning the contract to another buyer at a higher price – has become a controversial tactic in Lower Mainland real estate. The North Shore News covered the story of a West Vancouver man who took to court with his British Properties home he refused to sell after it became subject to shadow flipping.
Tsai originally inked a deal to sell the British Properties home on May 16, 2015. But over the next several months, the sale contract was “shadow flipped” twice through contract assignments, and the property ended up selling for $6.3 million, according to court documents.
When Tsai refused to complete the sale, Lian Zhang, the final contract assignee, took the case to court.
According to reasons for judgment filed in B.C. Supreme Court, Tsai originally signed a sale contract on the same day the property was listed, agreeing to sell it to Zhixiang Li for $5.1 million.
But when Li discovered he couldn’t sell his own house for what he wanted, he asked the real estate agent about assigning the sale contract to another buyer.
Two months later, on July 15, 2015, Li assigned the contract to a numbered company for $5.7 million. That company paid $5,000 to Tsai for an extension on the completion date before flipping the contract one month later to Lian Zhang for $6.3 million.
When Tsai learned the contract had been shadow flipped for “significant profit,” he refused to go ahead with the sale.
But Bowden ruled the contract was still legally binding.
In making his ruling, Bowden noted that the B.C. government has since passed new laws forbidding assignments of contracts for a higher price without the approval of the original seller.
But he added those rules only apply to contracts signed on or after May 16, 2016.
False Creek Flats a lost opportunity, say developers – Business in Vancouver
The City of Vancouver will proceed with plans for rezoning and development of False Creek Flats, but developers and are saying the 450-acre development does not capitalize on the opportunity for more much-need housing.
City plans for the 450-acre site include only a small amount of student housing connected to post-secondary campuses.
But Vancouver Mayor Gregor Robertson defended the city’s vision to ensure the flats are reserved primarily for workspace, not living space.
“This zoning now supports the growing innovation economy and creating many more jobs in the core of the city. … Huge job growth is possible if we have the space to house that,” Robertson said following the evening vote.
Vancouver City Coun. Andrea Reimer added that her concern “is that working-class Vancouverites will have nowhere to work, and that’s what this plan really seeks to address. Understanding that half a million people are within very close transit, active transportation or walking distance to this really puts a fine point on how essential it is to preserve job space.”
But Anne McMullin, president and CEO of the Urban Development Institute, Pacific region, which primarily speaks for multi-family developers, said the plan ignores the potential of mixing high-density housing within the commercial and industrial space.
“This is a lost opportunity,” McMullin said.
In a last-ditch May 16 appeal to city council, McMullin noted that the city’s plan allows only 1,400 residents on the land, or a density of three homes per acre.
“Given that there are 20,000 jobs potentially being created in the area and major institutional uses [a hospital and educational campus], there will not be enough balance between residential and employment-generating uses. Ideally, we want employees and students living close to their jobs and educational institutions. The plan in its current state, will discourage this and result in much more commuting from other areas.”
Sale-leaseback transactions on the rise; densification demanded – Business in Vancouver
The Robson Telus tower sale-leaseback story made our list of top stories last week, and Business in Vancouver has taken another look at the rising popularity of these arrangements.
Commercial sale-leaseback arrangements appear to be rising, on the back of strong valuations for commercial properties.
In a sale-leaseback agreement, an owner sells a property and leases it back for the long term.
Avison Young has listed 1476 West 8th Avenue, home to the Girl Guides of Canada, and 1985 West Broadway, owned by Wawanesa Mutual Insurance Co., touting the properties’ proximity to the rapid transit line planned for Broadway from VCC-Clark station to Arbutus Street. Farther afield, Colliers International has a sale-leaseback in place for the Sleepy Lodge Motel beside Burquitlam station in Coquitlam.
Calls to the various brokerages in town found few able to comment on the emerging trend. Most sources said such arrangements are more common for industrial properties.
The last wave of commercial sale-leaseback transactions occurred in 2007-09. Ottawa kicked off an ambitious sale-leaseback program for 40 federal properties in 2007, including Sinclair Centre on West Hastings and 401 Burrard. Ritchie Bros. Auctioneers Inc. followed suit in 2008 with the sale and leaseback of its Richmond head office pending construction of its new headquarters in Burnaby the following year, also subject to a sale-leaseback deal. QLT Inc. recouped the equity from its Great Northern Way headquarters in 2008, too, reaping $65.5 million from the deal.