🏬 Exam 4: Commercial Real Estate Transactions

1. Under section 1.1 (4) of the Building Code Act, 1992, who must ensure that products intended for use in constructing a building in Ontario comply with the standards under the Act and the building code?

1. The manufacturers, suppliers and retailers
2. The brokerage that later lists the building
3. The tenants who later occupy the building
4. The buyers who later purchase the building

Section 1.1 (4) makes it the role of manufacturers, suppliers and retailers of construction products “to ensure that the products comply with the standards established under this Act and the building code”. Tenants, listing brokerages and later buyers do not supply the products and have no such role.

2. In commercial leasing, the rentable area of a tenant's premises is its usable area plus the tenant's share of the:

1. Common areas of the building
2. Outdoor parking lot area
3. Land under the building
4. Thickness of exterior walls

Rentable area is the usable area plus a proportionate share of the building's common areas, such as lobbies, corridors, washrooms and mechanical rooms. Parking lot area, the land under the building and the wall thickness are not the standard add-on that turns usable area into rentable area.

3. In a commercial building, the HVAC system is responsible for:

1. Heating, cooling and ventilation
2. Suppressing fires automatically
3. Supplying water and drainage
4. Moving people between floors

HVAC stands for heating, ventilation and air conditioning, so the system controls temperature and air quality inside the building. Elevators move people between floors, sprinklers suppress fires, and plumbing supplies water and drainage.

4. Amir Haddad owns an empty 1960s warehouse on Dufferin Road, Fairhaven, and plans to tear it down before listing the land for sale. He asks his salesperson whether he needs any approval. Under section 8 (1) of the Building Code Act, 1992, what is the correct answer to his question?

1. No, a permit applies to new building work
2. No, an empty building needs no permit
3. Yes, a permit is required to demolish
4. Yes, if the buyer makes it a condition

Section 8 (1) of the Building Code Act, 1992 states “No person shall construct or demolish a building or cause a building to be constructed or demolished” without a permit from the chief building official. Demolition is covered as well as construction, a vacant building is not exempt, and the permit is a legal requirement that does not depend on what a buyer wants.

5. Which of the following is NOT usually classed as commercial real estate?

1. A suburban strip plaza of six shops
2. A downtown multi-tenant office tower
3. A warehouse with several loading docks
4. A detached home occupied by its owners

Commercial real estate covers income-producing and business property such as retail plazas, office towers and industrial warehouses. A detached home lived in by its owners is residential property, so it is the one that is NOT classed as commercial.

6. Priya Sandhu is considering buying a 24-unit rental apartment building in Hartwell and will value it mainly by the rent it produces. Which category of commercial property is this?

1. Multi-residential rental property
2. Special-purpose rental property
3. Industrial manufacturing property
4. Retail shopping-centre property

An apartment building with many rental units is a multi-residential property, which investors value by its income. Special-purpose properties are built for one use, industrial properties house manufacturing or distribution, and retail properties are shopping space leased to merchants.

7. In a shopping centre, an anchor tenant is BEST described as:

1. A large tenant that draws many shoppers
2. A tenant on a short month-to-month term
3. The smallest store, paying the lowest rent
4. The firm that manages the shopping centre

An anchor tenant is a large, well-known tenant, such as a supermarket or department store, whose presence draws shoppers to the smaller stores. It is not the smallest or lowest-paying tenant, it normally has a long lease, and it is not the property manager.

8. Under section 10 (1) of the Building Code Act, 1992, a permit is required even if no construction is proposed when a change in the use of a building or part of it would:

1. Increase the hazard under the building code
2. Change the municipal address of the building
3. Reduce the number of tenants in the building
4. Be requested by a new owner of the building

Section 10 (1) applies “if the change would result in an increase in hazard, as determined in accordance with the building code”, even though no construction is proposed. A new address, fewer tenants or a new owner's request do not trigger this permit by themselves.

9. Under section 1.1 (6) of the Building Code Act, 1992, the role of a chief building official includes:

1. Preparing the designs for permit applications
2. Co-ordinating enforcement of the Act and the code
3. Registering deeds for the local land registry
4. Constructing buildings in accordance with permits

Section 1.1 (6) (b) makes it the role of the chief building official “to co-ordinate and oversee the enforcement of this Act and the building code within the applicable jurisdiction”. Preparing designs is the designer's role, constructing in accordance with the permit is the builder's role, and registering deeds is done by the land registry.

10. Under section 1.1 (2) of the Building Code Act, 1992, the role of a designer whose designs support a permit application is to provide designs that:

1. Maximize the rentable area of the building
2. Match the buyer's financing requirements
3. Comply with the Act and the building code
4. Satisfy the municipality's official plan

Section 1.1 (2) (a) requires the designer “to provide designs which are in accordance with this Act and the building code”. The designer's role is not tied to a buyer's financing, to maximizing rentable area, or to the official plan, which belongs to the planning process.

11. Under section 1.1 (4.1) of the Building Code Act, 1992, it is the role of a building owner to ensure that the building is:

1. Insured for its full replacement cost each year
2. Appraised by an accredited appraiser yearly
3. Maintained, repaired and evaluated as required
4. Rezoned whenever a new tenant takes space

Section 1.1 (4.1) (a) says the owner must ensure the building is “maintained, repaired and evaluated in accordance with this Act and the building code”. The section does not require annual insurance or appraisals, and rezoning is a planning matter that is not triggered by a new tenant.

12. A tenant leases a floor in an office tower. The usable area is 4,250 square feet. The landlord's load factor is 20%, which is added to the usable area to obtain the rentable area. What is the rentable area of the floor?

1. 5,100 square feet
2. 4,270 square feet
3. 3,400 square feet
4. 6,120 square feet

Rentable area equals usable area plus the load factor: 4,250 x 1.20 = 5,100 square feet. Subtracting 20% gives 3,400, adding 20 square feet instead of 20% gives 4,270, and applying the 20% twice gives 6,120.

13. In commercial construction, a curtain wall is BEST described as:

1. A non-load-bearing outer wall on a frame
2. A load-bearing wall of poured concrete
3. A fire-rated wall between two tenants
4. A steel column wrapped in fireproofing

A curtain wall is a non-structural exterior skin, often glass and aluminum, hung on the building's frame; it carries its own weight and wind loads but not the floor loads. A poured concrete bearing wall is structural, a fire-rated demising wall separates tenants, and a fireproofed column is part of the structural steel frame.

14. Nadia Okafor, a developer, wants a single-storey distribution warehouse in Brantwood built quickly and economically. The contractor proposes casting large concrete wall panels flat on the floor slab at the site, then lifting them upright. Which type of construction is this?

1. Tilt-up concrete construction
2. Curtain wall construction
3. Structural steel construction
4. Cast-in-place concrete frame

Casting wall panels flat on the slab and lifting them into position is tilt-up construction, common for warehouses. A curtain wall is a non-structural skin on a frame, structural steel uses a steel skeleton, and a cast-in-place frame is poured in forms where it stands.

15. Lena Fournier is shown an office building in Ashgrove completed in 1985. It is in a good location and well maintained, and its lobby has been updated. Its rents are average for the area and below those of the newest towers. Which class does it MOST likely belong to?

1. Class A office building
2. Class B office building
3. Flex industrial building
4. Class C office building

Class B office buildings are older but well maintained, in good locations, with average rents. Class A buildings are the newest and finest and command the highest rents, Class C buildings are older and dated with the lowest rents, and a flex industrial building is not an office class.

16. Under section 13.5 (1) of the General Regulation under the Trust in Real Estate Services Act, 2002, a brokerage that enters into an oral seller representation agreement for a commercial building must reduce it to writing:

1. Within 30 days after the listing begins
2. When the seller's lawyer requests a copy
3. As soon as possible, before any offer
4. At closing, once the sale has completed

Section 13.5 (1) requires the brokerage, “as soon as possible after entering the agreement and before any buyer makes an offer”, to reduce the agreement to writing, have it signed on behalf of the brokerage and provide it to the seller for signature. No 30-day period applies, it does not depend on a lawyer's request, and waiting until closing is too late.

17. Marcus Beaulieu, a salesperson at Northgate Commercial Brokerage Ltd., represents a buyer of a small retail plaza. During his inquiries he learns that the main roof leaks and that the seller has a repair quote. Which action does section 22.1 of the General Regulation require of him?

1. Say nothing, as commercial buyers do their own checks
2. Mention the roof if the buyer later asks about it
3. Disclose it to the client and advise on its effect
4. Wait for the buyer's inspector to find the problem

Section 22.1 (1) requires a salesperson to “take reasonable steps to determine the material facts relating to the acquisition or disposition”, to “disclose the material facts to the client as soon as possible after the determination”, and to advise the client to consider whether they affect the decision. The duty applies to commercial clients too, and it does not wait for a question or for an inspector.

18. Hui Min Zhao is advising the owner of a former curling club in Eastlake, a building designed for one use. The owner asks why offers have been slow to arrive. Which explanation is MOST likely?

1. Lenders refuse to finance vacant commercial buildings
2. Vacant commercial buildings cannot be offered for sale
3. Few buyers can use a building designed for one use
4. A building permit is needed before any sale offer

A special-purpose property, such as a curling club, is designed for one use, so its pool of buyers is small and it can be costly to convert. Vacant commercial buildings can be sold, lenders do consider them, and no building permit is needed before an offer is made.

19. Section 10 (2) of the Building Code Act, 1992 says the chief building official shall issue a change-of-use permit under subsection (1) unless certain conditions apply. Which of the following is one of them?

1. The applicant is a tenant and not the owner
2. The building is over twenty-five years old
3. The application for the permit is incomplete
4. The adjoining owners object to the change

Section 10 (2) lists three grounds for refusal: the proposed use would contravene the Act, the building code or another applicable law; “the application for it is incomplete”; or fees due are unpaid. The applicant's status as a tenant, the age of the building and neighbours' objections are not listed grounds.

20. Under section 1.1 (3) of the Building Code Act, 1992, a builder who finds that site conditions affect compliance with the building code must:

1. Notify the designer and an inspector or code agency
2. Revise the drawings without telling the designer
3. Ask the real estate salesperson to approve the change
4. Notify the owner's insurer and the municipal council

Section 1.1 (3) (d) requires the builder, when site conditions affect compliance, “to notify the designer and an inspector or the registered code agency, as appropriate”. Insurers, councils and salespersons have no role in that notice, and the builder may not change the design on its own.

21. Which of the following is NOT a role of a builder under section 1.1 (3) of the Building Code Act, 1992?

1. Provide designs sufficiently detailed for permit review
2. Construct the building in accordance with the permit
3. Use appropriate building techniques to meet the code
4. Hold off construction until the permit has been issued

Preparing detailed designs is the designer's role under section 1.1 (2) (a), which requires “documentation that is sufficiently detailed to permit the design to be assessed for compliance”. Section 1.1 (3) makes it the builder's role “to construct the building in accordance with the permit”, to use appropriate building techniques, and to ensure construction does not proceed without a permit.

22. Two office towers in Millbrook quote the same net rent of $30 per rentable square foot to a tenant needing 5,000 usable square feet. The load factor, which is added to the usable area, is 22% in Tower A and 12% in Tower B. Which statement is correct?

1. Tower B costs less for the same usable space
2. Both towers cost the same for that usable space
3. Tower A costs less for the same usable space
4. Tower B has the larger rentable area of the two

Tower A's rentable area is 5,000 x 1.22 = 6,100 square feet, or $183,000 a year, while Tower B's is 5,000 x 1.12 = 5,600 square feet, or $168,000 a year. The same rate per rentable square foot therefore costs more where the load factor is higher, so Tower B is cheaper and has the smaller rentable area. A tenant should compare cost per usable square foot, not only the quoted rate.

23. A tenant's floor has 10,000 square feet of usable area and 11,500 square feet of rentable area. The load factor is the difference between the two areas expressed as a percentage of the usable area. What is the load factor?

1. 15%
2. 13%
3. 87%
4. 115%

The difference is 11,500 - 10,000 = 1,500 square feet, and 1,500 / 10,000 = 15%. Dividing by the rentable area instead gives 13%, dividing usable by rentable gives 87%, and dividing rentable by usable gives 115%.

24. A buyer is offered an office building with an asking price of $3,120,000. The building has 20,800 square feet of usable area and 24,000 square feet of rentable area, and it sits on a 30,000-square-foot lot. What is the asking price per rentable square foot?

1. $104
2. $130
3. $150
4. $975

Price per rentable square foot is $3,120,000 / 24,000 = $130. Dividing by the lot area gives $104, dividing by the usable area gives $150, and dividing by the 3,200 square feet of common area (24,000 - 20,800) gives $975.

25. In the income approach to valuing a commercial building, what is net operating income (NOI)?

1. Effective gross income less the operating expenses
2. Effective gross income less the mortgage payments
3. Annual operating expenses plus the debt service
4. Potential rent before any vacancy loss is deducted

Net operating income is the income left after vacancy and collection loss and the operating expenses of the property have been deducted. Potential rent is the figure before vacancy loss, mortgage payments are financing costs rather than operating expenses, and expenses plus debt service is a cost figure, not an income figure.

26. In direct capitalization, the capitalization rate expresses the relationship between which two figures?

1. Vacancy loss and the potential gross rent
2. Operating expenses and the effective income
3. Mortgage payments and the annual income
4. Net operating income and the property value

The capitalization rate is net operating income divided by the value or price of the property, so value equals net operating income divided by the rate. The ratio of expenses to income is an expense ratio, mortgage payments to income is a debt-coverage measure, and vacancy loss to potential rent is a vacancy rate.

27. What does a Phase I environmental site assessment of a commercial property typically involve?

1. Drilling to sample the soil and the groundwater
2. The removal of contaminated soil from the property
3. A review of records, a site visit and interviews
4. Laboratory testing of the building materials on site

A Phase I assessment is a non-intrusive review of records, a visit to the site and interviews, used to identify possible contamination. Sampling and testing of soil and groundwater belong to a Phase II assessment, and removing contaminated soil is remediation, which is a later and separate step.

28. What is a legal non-conforming use of a commercial building?

1. A use the owner began after the by-law was passed
2. A use lawful before the by-law that now prohibits it
3. A use that a committee of adjustment has approved
4. A use that the official plan has long prohibited

Section 34 (9) of the Planning Act provides that a zoning by-law does not apply to prevent a use of land, a building or a structure that was lawfully carried on the day the by-law was passed. A use begun after the by-law was passed is not protected, a minor variance is a separate permission under section 45, and a use that was never lawful does not qualify.

29. Under section 45 (1) of the Planning Act, which body may, on the application of the owner, authorize a minor variance from a zoning by-law?

1. The Land Titles registrar
2. The chief building official
3. The Landlord and Tenant Board
4. The committee of adjustment

Section 45 (1) of the Planning Act gives the committee of adjustment the power, on the application of the owner or a person authorized in writing by the owner, to authorize a minor variance from a zoning by-law. The Land Titles registrar deals with registered title, the Landlord and Tenant Board deals with residential tenancies, and the chief building official issues building permits under the Building Code Act, 1992.

30. A committee of adjustment may authorize a minor variance under section 45 (1) of the Planning Act only if, in its opinion, what is maintained?

1. The assessed value of the neighbouring lands
2. The existing tenant mix of the whole building
3. The intent of the by-law and the official plan
4. The market rent for the units in the building

Section 45 (1) requires the committee to be of the opinion that “the general intent and purpose of the by-law and of the official plan, if any, are maintained”. Neighbouring assessments, the tenant mix and market rents are not the tests the section sets.

31. A developer plans a new retail building in a site plan control area. Which of the following is one of the items that section 41 (4) of the Planning Act lists for approval before development?

1. A status certificate for the lands being developed
2. A rent roll showing the expected tenants and rents
3. A Phase II report showing the soil and water results
4. Plans showing the location of buildings and structures

Section 41 (4) of the Planning Act bars development in a designated area until the authorized person, or the Tribunal on an appeal, approves one or both of the listed items, the first being “Plans showing the location of all buildings and structures to be erected”. A rent roll and a Phase II report are sale and due diligence documents, and a status certificate relates to a condominium corporation.

32. What may a municipality regulate in a zoning by-law under section 34 of the Planning Act for a proposed office building?

1. The rent that the owner charges each future tenant
2. The commission that the owner pays the brokerage
3. The mortgage rate that the lender offers the buyer
4. The height, size, location and use of the building

Section 34 (1) of the Planning Act lets a council regulate “the height, bulk, location, size, floor area, spacing, character and use of buildings or structures”. Rent, brokerage commission and mortgage rates are private commercial terms that a zoning by-law does not set.

33. A salesperson represents the seller of a small shopping plaza. What does section 22.1 of the General Regulation require in respect of material facts?

1. Disclose them to the buyer's lawyer before closing
2. Find them by reasonable steps and tell the seller
3. Wait for the buyer to ask about them in writing
4. Rely on the seller's lawyer to find and report them

Section 22.1 (1) of the General Regulation requires the salesperson to “take reasonable steps to determine the material facts relating to the acquisition or disposition” and to disclose them to the client. The duty is owed to the client and does not depend on a request from the buyer, and the salesperson cannot hand the task of finding the facts to the seller's lawyer.

34. A developer holds a building permit for a retail building, issued before council passes a by-law that prohibits retail use on the site. Under section 34 (9) of the Planning Act, may the building be erected and used for retail?

1. No, the by-law applies to buildings not yet built
2. Yes, if the permit is not revoked and the use continues
3. No, a permit gives no protection from a new by-law
4. Yes, once the committee of adjustment approves it

Section 34 (9) (b) of the Planning Act provides that a by-law does not prevent the erection or use of a building for which a building permit was issued before the by-law was passed, provided the permit has not been revoked and the building is used for the purpose for which it was erected. The protection does not depend on a committee of adjustment approval, and a permit issued before the by-law does give protection.

35. Where an official plan is in effect, what does section 24 (1) of the Planning Act provide about a new zoning by-law for an office area?

1. It needs the consent of the area's owners
2. It replaces the official plan for that area
3. It needs a committee of adjustment approval
4. It must conform with the official plan

Section 24 (1) of the Planning Act provides that, where an official plan is in effect, “no by-law shall be passed for any purpose that does not conform therewith”, subject to limited exceptions in the Act. A zoning by-law implements the official plan rather than replacing it, a committee of adjustment grants minor variances rather than approving by-laws, and council does not need the consent of the area's owners to pass a zoning by-law.