Howard Katz, on selling the apartment complex, which also includes a small mall and 30,000-square-foot office building: ?There?s mixed feelings because we?ve always had wonderful employees and great tenants.?Peter Power/The Globe and Mail
Howard Katz prayed before giving in to temptation and selling his family's sprawling apartment complex for $215-million.
It wasn't the first time the London, Ont., pastor turned to his faith before sealing a real estate deal. The last time, he prayed that a strip club next to his Open Door Christian Fellowship would close so he could expand into its space.
"And wouldn't you know it, not so long ago the landlord came to me and asked if we'd be interested in buying," says Mr. Katz, who ran the apartment complex with his brother Harvey and brother-in-law Marc Gerofsky. "This time was different, but I think we found the right buyer."
Mr. Katz and his family-owned Esam Construction will today announce a deal to sell its 2,326 apartment units in 13 buildings to Minto Group Inc. The property - which also includes a small mall and 30,000-square-foot office building - had been in the family since Sam Katz began construction on the site in 1966.
The deal, which was brokered by Rock Apartment Advisors, will likely be one of the biggest commercial real estate deals of the year. According to RealNet Canada, only the $370-million sale of the Erin Mills Town Centre shopping centre in Mississauga, Ont., fetched a higher price for a single cluster of properties in the last 12 months.
It is also the highest price ever commanded in Canada for a single-site apartment sale. There have been bigger deals over the last decade, but those involved portfolios of buildings sprinkled across the country.
This transaction is a sign of a wider move among small, private owners to sell their aging buildings to deep-pocketed investors who want to add the slow-but-steady returns of such properties to their portfolios.
"Demand is high from both private and institutional investors," said Derek Lobo, chief executive officer of Rock Apartment Advisors.
Family ownership of apartment towers is common, with the majority of Canada's 100,000 apartment buildings owned by small investors. And while the buildings may not return as much to their owners as shopping centres or office buildings, they offer a steady stream of income.
The landscape is changing quickly - pension funds, real estate investment trusts and large private equity investors are looking to add buildings as a way of hedging against future downturns and protect against inflation.
They are hiring brokers such as Mr. Lobo to literally knock on doors in an attempt to convince owners to sell, since there are not a lot of buildings on the market. The Katz family had been approached "dozens and dozens" of times over the years, but decided to sell this time because they believed Minto was an ethical owner who would take care of the buildings' tenants.
"We wouldn't have sold to Evil Corp. at any price," Harvey Katz said. "It was important to us to be comfortable with any new owner."
Vacancy rates in apartment buildings across the country are at near-record lows. Developers have chosen to erect condos instead of apartments because they provide a better short-term return. Meanwhile, interest rates are so low that it is cheaper to buy an existing building with CMHC insurance than to arrange financing to build a new one.
"Families have owned these buildings for 20 years or more," said David Goodman, a Vancouver broker who publishes the Goodman Report. "There are a flood of buyers who are prepared to let them cash in their chips."
Older buildings require expensive capital investments to keep them operational and safe. Larger owners are able to benefit from economies of scale, saving money on property management and getting better deals from contractors.
"If you don't have the money or the time, then it's a good time to sell," said Ugo Bizzarri, managing director of real estate investments for Timbercreek Asset Management.
Although large investors are interested in increasing their holdings, they are not rushing into the market. Ownership is fractured, making it difficult to buy large portfolios "Opportunities like this don't come around often," said Martin Tovey, vice-president of acquisitions and rental development for Minto.
For owners like Howard Katz and his brother, one transaction is enough to last a lifetime. He plans to use his cut to further his ministry, focusing on his charitable work full-time.
"There's mixed feelings because we've always had wonderful employees and great tenants. But it's just buildings, so there are no mixed feelings that way," he said. "This is freeing me for the next stage of my life, and I feel very blessed about that."