Two properties of similar age, class and rentable area, occupied by tenants with similar covenants & lease terms located within one block of each other in the downtown core of Victoria, BC are marketed for sale and subsequently sell around the same time. One asset sells for just over a 6% cap, the other closer to a 5%; why the substantial variance? The answer is simple: Strata vs. Freehold.
The key difference between the two assets in the above scenario is one is strata titled (strata lot), where the other is non-strata titled, sometimes referred to as “freehold”. For reference, a strata title is a form of ownership devised for multi-level apartment blocks and horizontal subdivisions with shared areas and expenses, whereas non-strata or “freehold” is simply a property like a single family home, or in the example above, a freestanding commercial building on a lot that does not share any common areas with other properties.
All else being equal, demand is greater for a freehold property than a strata property and the relative higher demand, results in a lower cap rate/yield. Freehold properties are preferred over strata lots because there is a lack of owner control within strata lots and come with greater owner obligations and limitations when compared to a freehold property.
Strata ownership is however a viable investment option that offers relatively higher yields. Furthermore, with strata corporations and strata managers overseeing and maintaining the exterior of the building, common drive aisles, entrances and other aspects that pertain to the overall development, strata ownership can offer a relatively care-free investment property.
Both strata and freehold commercial real estate are complex transactions and require professional advice and oversight. Strata ownership comes with an additional layer of investigations and questions related to the strata development and its bylaws. These bylaws can impose greater limitations and obligations than one may initially think, such as the types of businesses, forms of signage, hours of operations, standard of maintenance and repair etc. As such, one should be cognizant of all bylaws and rules that may affect or limit the use and occupancy of the property by current, as well as future tenants.
For further inquiries, please contact Form Real Estate Advisors.
**Pictured: Top: Strata lot in Whistler, BC. Bottom: Freehold lot in Vancouver, BC
For more information on strata legislations in BC, click here.