Buying a Mixed-Use Building in Ontario

Mixed-use properties are not categorized consistently on MLS. Suitable buildings may appear under retail, office, investment, apartment, commercial and residential, or another commercial classification.

Not every appropriate property is publicly listed. Contact OntarioCRE to discuss current, upcoming and off-market opportunities.

Define the Property Strategy First

Do not begin by looking at buildings. Begin by deciding what the property needs to accomplish.

A buyer may want to:

• Operate a business from the commercial space
• Collect commercial and residential income
• Occupy one portion and lease the remainder
• Renovate and reposition an underperforming building
• Convert vacant upper-floor space
• Improve leasing and property management
• Hold for future redevelopment

These strategies require different properties.

A business owner may prioritize vacant possession, visibility, parking, signage and commercial functionality. An investor may focus on net income, lease quality, operating expenses and future capital requirements.

A buyer planning renovations must also consider construction access, permits, building code requirements, financing and whether the completed value supports the total project cost.

The property strategy should determine the search—not the appearance or character of the building.

Location and Commercial Demand

The commercial space must work in its immediate location.

Evaluate:

• Street and pedestrian activity
• Vehicle exposure
• Customer access
• Parking
• Public transit
• Loading and deliveries
• Signage opportunities
• Surrounding businesses
• Neighbourhood demographics
• Competing vacancies
• Commercial rental demand
• Planned development nearby

A building can produce strong residential income while containing commercial space that is difficult to lease. The commercial component should not be treated as automatically valuable simply because it occupies a visible ground floor.

Assess whether the current or proposed business is compatible with the location. A restaurant, medical clinic, professional office and neighbourhood retailer have different requirements.

Income from residential apartments or other commercial units may help offset ownership costs.

Potential owner-occupiers include:

• Medical and healthcare operators
• Dentists
• Pharmacists
• Restaurants and food-service businesses
• Retailers
• Salons and personal-care businesses
• Professional offices
• Contractors
• Established service businesses

Before purchasing for owner occupancy, determine:

• Whether the intended business use is permitted
• Whether the commercial space will be vacant
• When possession can be delivered
• Whether the space requires renovations
• Whether parking and signage are adequate
• Whether the building supports the required utilities
• Whether business operations can continue during construction
• Whether rental income will support the financing

Do not rely on a seller’s informal statement that a commercial or residential tenant intends to leave. Vacant possession should be addressed in the agreement and reviewed by qualified legal counsel.

Review Commercial and Residential Income Separately

The commercial and residential portions of the property should be analyzed separately before their income is combined.

Commercial Income

Review each commercial lease for:

• Base rent
• Additional rent
• Lease term
• Renewal rights
• Permitted use
• Assignment and subletting
• Security deposits
• Arrears
• Maintenance obligations
• Utility responsibilities
• HVAC responsibilities
• Expiry and vacancy risk

Determine whether additional rent actually recovers the intended property expenses. A lease described as “net” does not necessarily transfer every operating cost to the tenant.

Residential Income

Review each residential tenancy for:

• Current lawful rent
• Commencement date
• Written tenancy documents
• Rent-increase history
• Included utilities
• Parking and storage
• Payment history
• Unit condition
• Vacancy status
• Deposits
• Lawful unit status
• Applicable residential tenancy requirements

Do not substitute projected market rent for the rent that can lawfully and practically be collected.

Calculate the Real Net Operating Income

Gross revenue does not establish investment performance.

Normalize the property’s income after accounting for:

• Property taxes
• Insurance
• Utilities
• Repairs and maintenance
• Waste collection
• Snow removal and landscaping
• Property management
• Vacancy
• Bad debt
• Non-recoverable commercial expenses
• Residential operating expenses
• Recurring service contracts

Capital expenditures should also be considered, even when they are not included in a broker’s stated net operating income.

A building with attractive reported income may perform poorly after adjusting for vacancy, deferred repairs and expenses paid directly by the owner.

Buyers comparing income-producing opportunities should review Ontario Investment Properties.

A lender may consider:

• Percentage of commercial and residential space
• Owner occupancy
• Existing rental income
• Lease terms and tenant quality
• Property condition
• Appraised value
• Environmental risk
• Borrower net worth
• Business financial performance
• Down payment
• Debt-service coverage
• Renovation requirements

A property with mostly residential units may be approached differently from a building dominated by commercial space. The presence of residential apartments does not guarantee that residential mortgage terms will be available.

Speak with a commercial lender or mortgage professional before making an unconditional offer.

Prepare for the lender to request property details, income and expense records, rent rolls, leases, an appraisal and information about the condition of the building. Properties with non-residential space may require separate analysis of the commercial component.

Zoning and the Intended Business Use

A building being marketed as mixed-use does not mean every proposed use is permitted.

Before purchasing, confirm:

• Current zoning
• Permitted commercial uses
• Whether residential use is allowed
• Law
• Lawful status of existing residential units
• Parking requirements
• Signage permissions
• Patio or outdoor-use permissions
• Loading requirements
• Legal non-conforming rights
• Heritage or conservation restrictions
• Whether planned renovations require approval
• Whether redevelopment is realistically possible

Zoning terminology varies between municipalities. A commercial designation that permits retail may not permit a medical clinic, restaurant, automotive use or another specialized business.

Obtain written municipal confirmation where the intended use is essential to the acquisition.

Lawful Residential Units and Upper-Floor Conversions

Do not assume an existing apartment is lawful because it is occupied and producing rent.

Review:

• Building permits
• Occupancy records
• Unit configuration
• Fire separations
• Exits
• Stairs
• Ceiling heights
• Natural light and ventilation
• Plumbing and electrical systems
• Heating
• Utility metering
• Municipal property records

Vacant upper-floor space should not be valued as completed residential space unless the proposed conversion is physically and legally feasible.

A conversion may require zoning approval, building permits, architectural or engineering work, new exits, fire separations, upgraded services and extensive construction.

Projected residential income should be discounted for approval risk, construction cost, carrying cost and delay.