What happens when a strata property becomes a burden to repair? How about when a developer wants to purchase an entire condo building? This process is called a strata dissolution, or more commonly, a strata windup.
Phil Dougan from Access Law Group joins Matt and Adam to discuss the many complications and implications involved in a strata windup and gives some tips on how savvy real estate investors can target these types of properties.
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About Phil Dougan:
Phil is 51, and he was 38 when he went to law school. This was a benefit because the more life experience you have, the more you understand the law and how it’s used in society. The law is used to live the best life we can. If you travel to the third world and see the absence of a lawful society, you can appreciate what we have in Canada. Phil likes to see himself as a problem solver in law – doing the harder things that need creativity and clear thinking. This is what he loves about his job. Phil has eight children and has been married for 27 years.
On getting into the strata subsection of law:
Phil made an easy entry into law because the guy he works with, Jamie Bleay, is a long-time friend. After he’d been in law school for four days, Phil was offered a job by Jamie, who works in strata law. So, Phil specialized in this as well. They call it family law for groups because it becomes contentious. There are over 30,000 strata corporations in BC and probably over 2 million people who live in them, but there are only about 20-30 lawyers whose primary focus is strata law.
On strata and building culture:
The lawyers will often talk to owners who have a contentious issue; somebody selling and moving could be a good part of the solution to many of the problems. For example, often the two choices a strata has is winding up and moving on, or taking on a huge repair. Within any group of people, there will be many different opinions about which is the most valuable option. Phil figures the government’s intention with changing regulation was getting to slightly more of a “no fault divorce”, rather than everyone voting unanimously to wind up a building, which is what was previously needed.
On what a dissolution or “wind-up” is:
Think of what it is you created in the first place. Imagine a piece of property, for example a farmer’s field; we’re used to a developer creating a subdivision and a builder creating houses. A strata plan is another form of subdivision that often subdivides the land vertically and horizontally, especially in Vancouver where a developer builds a large tower on top of a small piece of land. A strata plan takes the single parcel of land and divvies it up into all the strata lots that would be built into a tower, in this example. These are parcels of land parallel to air space because the building is not yet built. When you “wind up”, it’s legally the opposite process: you take the subdivided units and turn them back into a single parcel again. This may or may not include destruction of the building, or perhaps a new developer buys the building and refurbishes it. The legal theory is it goes from many owners back to one owner.
On why strata owners would want a dissolution process to occur:
There may be a huge bill looming. This arises because section 72 of the strata property act says, “a strata corporation must repair and maintain its building”. There is no choice. If the building envelope starts to deteriorate, the bills can be enormous, but you’re always talking about millions of dollars. However, it may not be worth repairing. We know in Vancouver land is worth a fortune, but individual units may not be worth very much, and the value of the repair may be approaching the value of the building.
Another reason is: an older building is in a lucrative location e.g. Coal Harbour, English Bay, near a SkyTrain. In theory, developers would be very interested in buying these properties because it’s in line with the City’s idea of densification. Perhaps a four-story wooden building with 25 units that could be replaced with a 40-story tower. Owners of these units may think it’s their lottery ticket. Some buildings don’t consider it and get approached by developers.
On how people are compensated in the process and what factors determine compensation:
A developer will do a cost-benefit analysis/feasibility study, which is their due diligence on what’s possible. This addresses things like engineering and construction issues, costs, and dollars per sq. ft., and determines how much money they can offer the owners. Many things go into this math and costs vary enormously, so developers are very careful about this. Their offers likely contain a healthy buffer between what they offer and what they can afford. For owners, there is a huge misconception. Many owners think because the Vancouver market is skyrocketing, there’s an endless supply of money and developers will buy anything. It is not this way. A general rule of thumb might be 1.5 times the value; for instance, in most cases if a property is worth $500,000, an owner might be offered $750,000.
On how long this typically takes:
It rarely happens quickly; we’re talking months and years. When the legislation changed, people thought there would be a flood of buildings for sale because owners would line up to sell. This has not happened and perhaps many buildings have considered and investigated it, but the flip side is it’s still people’s homes. So, if they agree to sell, what are they doing next? With the rising market, even if they get a premium above appraisal value, this does not mean they can move into the building next door; they may not be able to stay in their own neighborhood or even the city. This emotional part stops people. Some people get excited, others get nervous. A developer makes a proposal and people are either swayed or hardened against it, and the developer must decide to get involved in politics and convince owners to sell. It can be quite time intensive, so some are resistant and won’t get involved until the vote is in place. Other developers have approached owners individually and to negotiate and buy them out one-by-one. When they reach the 80% mark themselves, they can bring on the vote and proceed with dissolution. In the meantime, if there is no rental restriction, they can be a landlord to people in the building.
On the offer process and duration that contracts are conditional:
This is not an endless process. If a developer thinks there are possibilities, they want to have a good look, do their investigating, and decide quickly. Phil has seen it take from 30 days to up to 3-6 months. The general process involves talking about what might be possible and getting to know each other, getting the sense that ownership is interested, and investing in due diligence.
The trouble can be it’s like herding cats even if a proposal is solid. You are not dealing with a limited liability corporation driven by a board of directors; the strata council does those roles, but the decision-making power lies with the shareholders, or owners. If a certain number of people simply say no, you’re in trouble. If you get to the point where 80% of owners think it’s a good idea, this helps as the new rule says there’s potential for a sale. Then, the process becomes preparing materials and convincing a judge it’s in the best interest of all owners and more beneficial than not doing it.
On the result of the process and people’s emotions:
It is a mixed bag, but judges take these decisions very seriously. They are aware an expropriation of someone’s property is a significant remedy at law – a judge considers this a draconian measure and would be very hesitant to order it as a matter of course. They look at the balance of probabilities: sometimes if it’s not wound up, people could lose their homes if they can’t afford to pay a large repair levy. The non-legal, or more social and personal elements of this are interesting: investor-owners won’t mind because they’re getting a big return; younger owners won’t mind because they can re-establish themselves elsewhere. However, older folks who may have lived in the building since it was built will often be resistant, as they planned on staying until they have to go into care or die. It can be traumatic for them.
On the future of strata wind-ups, focusing on certain areas or buildings, and seeing this as an investment opportunity:
This is an opportunity as long as you have a long-term view. There are many stratas from the 1960s or 1970s that were built reasonably well for the time (low density, four-story wood buildings or townhomes). These are attractive to developers because if there’s extra green space, it gives more FSR (floor space ratio) to show the City they can redevelop to a much higher density without overburdening the land. But this could take years. Investors must look at it as it stands alone as a rental. Sometimes these units need work, which can either mean potential for a wind-up, or the investors are slapped with a special levy to fix them. This can be a risky investment.
On areas that are more active for strata dissolutions:
It’s not by area. Things to pay attention to are the size of the land parcel (to get extra FSR), areas on the edge of gentrification, and the relative market in which you’re dealing. For instance, the risks and rewards downtown are much higher than in a place like Coquitlam, where there is more space.
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