Vancouver Commercial Real Estate Podcast

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March 2, 2022
VCREP #40: How to Buy an Office Building for Only $150,000 with Darcy Ulmer

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Ever wonder if you could buy an office building or a retail shopping mall for only $150,000? This week, Adam and Cory welcome Darcy Ulmer, Co-founder and Partner at Stream Property Partners, to learn how everyday investors can invest in some big commercial real estate assets for a fraction of the purchase price. Darcy unpacks how a limited partnership works and operates, as well as provides insight to some great projects Stream has on the go in both Kelowna and Mission.

Most people will never get the opportunity nor understand how they would be able to invest in commercial real estate syndicates, so this episode is a must-listen for anyone wanting to understand and uncover the investment opportunities that exist right under their nose.

Who is Darcy Ulmer?

I’ve had an unconventional path to get to where I am today. I actually started my career working in forestry in the interior of BC. I then went to Ryerson University where I learned about critical thinking and data analysis. From there I worked for a market research company in Vancouver.

About 12 years ago, a friend of mine had an opportunity come up with a multi-family project. I was able to cut my teeth on how these partnerships and projects come together. From there, I continued to learn about the commercial real estate business. Two years ago I was able to break out and do my own work. I partnered with Alan Haig and Hans Edstrand to form Stream Property Partners. We’ve done four syndications in 18 months with some great properties in Kelowna and the Fraser Valley. We’re really pleased and it’s been going very well so far. I feel very lucky to do what I do.

How do people get involved in a limited partnership with Stream?

We organize investment opportunities where people can choose to invest with us on an armchair basis. You don’t have to have all of the expertise, but you’ve done your due diligence. We organize the opportunity and present it, alongside marketing documents, financial projections, a business plan and other materials. You then choose if you want to invest in this project presented by Stream.

What is a limited partnership in commercial real estate?

If you do choose to invest in a project we present, we would then set up a limited partnership. A limited partnership is between the general partner, which would be Stream in this example, and the limited partners. There can be any number of limited partners putting in any amount of money.

Together, the general partner and limited partners form a limited partnership based on a limited partnership agreement. That agreement sets out the business objectives, as well as the rights and responsibilities of all partners. It’s a hefty document, usually 100+ pages, and sets out everything the partners would want to know.

Who can become a limited partner?

In BC, anytime you’re issuing securities you’re doing that under the BC Securities Act. Limited partnerships are considered private placement investments monitored under this act. As an issuer, you need to rely on an exemption. The most popular one, and the one we use exclusively, is an accredited investor. So all of our limited partners are accredited investors.

In order to be an accredited investor, your annual household income and net worth must meet certain thresholds. So there is a financial barrier to participating in these investments. And our minimum investment is usually $150,000.

What are the risks to a limited partner?

As the name suggests, there’s limited risk and liability for a limited investor. Their risk is limited to the amount of capital they have invested into the partnership. If you invest $100,000 and the project runs into trouble, your investment liability is only $100,000. The general partner is usually liable for the project from start to finish, carrying more responsibility than the limited partners.

Usually, the general partner is the real estate expert and the limited partners don’t know as much. So the relationship and trust there is key. You’re looking for a good track record and a solid relationship.

What is a waterfall distribution in a limited partnership?

Waterfall distribution or carried interest means if the project is successful, a certain percentage of the profit is allocated to the general partner to incentivize them to make the project as successful as possible. Sometimes there will be hurdles, such as any profit after the investors have received 7% deferred return annualized non-compounded will be split 75% to the limited partners and 25% to the general partner.

How do you choose a real estate market?

Stream is focused on growth markets in Western Canada. We focus on markets where we think there will be rent growth, migration into the market and employment growth. Dynamic markets that are growing are attractive to us. We feel the Eastern Fraser Valley and Kelowna meet those requirements.

What commercial real estate asset classes work best for limited partnerships?

I think a limited partnership can be used across all asset classes. We work in multi-family and retail, but it wouldn’t matter what the asset class is. Each partnership is underpinned by the limited partnership agreement that will set out the business strategy. It’s not just about how profit is shared but also how decisions are made. For example, with our projects we can’t sell without permission from the limited partners.

How do you find real estate opportunities?

It starts with the groups that we partner with. The network of brokers who can bring deals across our desks makes a big difference. When a deal comes to us we see if it’s in a market we want to be in and if it’s an asset class we work in. If we like the property, we’ll ask for a rent roll and start developing a pro forma. We’re looking to roll up our sleeves and add some value to a property.

What real estate market in BC are you interested in?

The entire Okanagan Valley real estate market is very interesting. There’s incredible growth in Kelowna and just like we’ve seen with people priced out of Vancouver, there will be a domino effect in the Okanagan. I like that area a lot from Penticton to Vernon. Baby Boomers who are coming up on retirement are starting to head out to the Okanagan Valley.

Can you tell us about the projects Stream has in Kelowna?

The first project that Stream syndicated was the Scotia building at Bernard and Ellis in Kelowna. It’s in the centre of downtown. We knew the location was phenomenal and there were great tenants. The property was well-maintained so we did go forward with acquiring it. Since then we’ve refurbished the lobby and common areas, we’ve painted the exterior and we’ve done some leasing. We love the project and our investors have been happy.

From there, we were able to acquire the building next door. It was pretty much vacant when we bought it and now we’re about 75% complete on refurbishment. There are really beautiful spaces, with many leased or pending, as well as a large office space we’re working on.

The immediate goal is to finish the refurbishments, get these buildings leased up and get them stabilized. Once they’re cash flowing assets, if there’s an opportunity for disposition we will look into that. But we’d be happy to hold those assets in that prime location. It’s a really great market so it will be interesting to see what happens.

Can you tell us about Stream’s purpose built rental project in Mission?

With this project, 10% of the units are deemed affordable by the city of Mission. Purpose built rental helps with financing, thanks to CMHC insurance.

We initially focused our search on Abbotsford when this property in Mission came along. The project had already got off the ground with Mission City Council, so we knew it was very viable. We like the location and the access to amenities. We also like how close it is to the West Coast Express. You can hop on the train in Mission and be in downtown Vancouver in 70 minutes.

We broke ground on the property in June 2021 and have about another 12 months of construction to go.

What is a real estate entitlement?

Real estate entitlement is the process by which you get approval for your project. You start by working with an architect and coming up with a concept for the project, which you then submit to the city. You work together with the city, incorporating feedback from the planning committee, looking at things like affordability, and so on. You then take it to the council for approval, which involves a community review. There are a series of readings and if the project is approved, you get a development permit.

From there, you’re onto the nuts and bolts of construction and getting a building permit. That is the entitlement process. In a place like Mission, the entitlement process can take 12-18 months. In other municipalities, it could be much longer.

Why is the BC real estate market so strong?

The fundamentals in the Lower Mainland and Kelowna real estate markets are extremely strong. We have population growth, employment growth and an attractive lifestyle. That tells us people will be attracted to those areas.

Are you bullish on the real estate market in 2022?

I really am bullish on the real estate market in 2022. With our rental projects, we want to take advantage of the CMHC programs. They make it easier for people to make the numbers work. If you have a CMHC insurance certificate, you will get the best pricing in the market when you go to get your loan.

How does inflation impact real estate?

Real estate is a classic hedge against inflation. If you own in a rental apartment building, you’ll see an increase in your rental income as inflation goes up. Your building will also increase in value.

What is your favourite commercial asset class?

I really like purpose-built rental. If you look at supply and demand in BC, there’s a real imbalance. We need 150,000 units over the next 10 years in order to keep up. In the last decade, we haven’t come anywhere close to meeting our supply goals. So the demand is there and the rent growth is there.

What advice do you have for someone looking to invest in a limited partnership?

Do your due diligence and look at all of the materials the issuer has available. Meet with the issuers and get to know them. Look into their history and experience. There are lots of great opportunities in real estate, so don’t wait for the perfect one. If something ticks all the boxes, consider the investment. Real estate is a “get rich slow” investment so place your money into a compelling project.

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Vancouver Commercial Real Estate Podcast

For all the curious minds interested in commercial real estate investing, grab a coffee and pull up a chair because we have exclusive stories and tips from commercial real estate brokers, investors, developers, economists, urban planners, and everyone in-between. From the successes and failures to the motivations and lessons learned, the Vancouver Commercial Real Estate Podcast is your insight into commercial real estate in Vancouver, Victoria, Kelowna, and beyond.

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This communication is not intended to cause or induce breach of an existing agency agreement. E&OE: All information contained herein is from sources deemed reliable, and have no reason to doubt its accuracy; however, no guarantee or responsibility is assumed thereof, and it shall not form any part of future contracts. Properties are submitted subject to errors and omissions and all information should be carefully verified. All measurements quoted herein are approximate.