Building your own equity

Read the accompanying article: Pros and cons of putting a building in a spouse’s name

As a branch manager, Linda Bain is used to fielding her team’s questions about investments, suitability and when the windows will be cleaned.

That’s because Bain, an advisor with HollisWealth in Victoria, B.C., has owned her office building since 2004. “Maintenance is my highest expense,” she says. “I’ve got to hire gardeners and cleaners, and put in a sprinkler system.” Despite that extra responsibility, she values the brand recognition that comes with owning her building, especially since her dealer has changed hands a few times. “Clients say, ‘The sign’s logo changed, but I know you’re inside.’ That’s been one of the biggest benefits of owning.”

Her building also has a heritage designation. “Clients appreciate the character and like the non-corporate look, which was a surprise,” she says. “I’ve done an extensive renovation to the yard, and I now hold an annual client garden party there for about 100 attendees.”

Michael Nichols, a Guelph, Ont.-based advisor who runs Compass Private Wealth, also sees his building as part of his practice’s identity. He commissioned his current office in part to accommodate his aging clients (more on that later).

“I see myself as a businessperson first and a portfolio manager second,” he adds.

Nichols has owned office space for the past 12 years, which he decided to do after leasing for three years. He no longer wanted to be a co-tenant, and, “real estate has tended to be, over the long term, a good investment and a good way to diversify personal holdings.”

With today’s low interest rates, advisors may find it makes better financial sense to purchase their space, rather than lease it. Here are lessons from people who’ve taken that step.

About their buildings

Linda Bain

Bain’s purchase had financial and strategic benefits. In 2004, her branch was still recovering from the tech crash. “I was worn down by the struggles of leasing. It was expensive—I had about 3,500 square feet,” and she was paying $49,000 per month. She was also managing 11 advisors, but realized only a subset was bringing in the majority of revenue.

That summer, she cycled past a stately heritage building on Vancouver St. with a “For Lease” sign in front. “It looked dilapidated, but it had character,” she says. She liked that it was close to downtown and had ample parking. When she inquired, the owners told her they actually wanted to sell. “They had it listed for $625,000, but I put in a low-ball offer and got it for $525,000.” But, “it cost about $40,000 just to put up some walls and throw paint on.” She executed all renovations in 30 days since she had to vacate her previous premises, and she wanted minimal business interruptions. “It was November, so I had the kerosene heaters running all the time.” She had received from money from a recent divorce, so she was able to fund the down payment and renovations out of pocket.

“We went from 3,500 square feet to 1,000,” she says. She asked her top four advisors, who were bringing in about 80% of revenues, to join her. Bain moved onto the second floor and still lives there today. The live-work arrangement is convenient, but has its challenges. “I’ll be relaxing in my yard and the janitors come in on Saturdays, so it’s a bit disruptive,” she laughs.

Today, she spends about $12,000 per year on maintenance, which is tax deductible. Property taxes were more than $14,000 in 2015.

Michael Nichols

Nichols joined with another practice in 2012, and both agreed to relocate to Guelph. “Our initial plan was to buy a new building that my holding company would own, [but] we couldn’t find anything” in the geographic area they’d chosen, he says. He considered leasing, but no properties were available. So, he decided to build.

In 2013, Nichols bought 1.1 acres from the City of Guelph. The land was part of a new development, Hanlon Creek Business Park, and “there wasn’t a lot of negotiation room because so many other people wanted it.” The list price for the section Nichols bought in was $300,000 per acre.

As for the building itself, Nichols says he had to put between 40% and 50% down to secure financing. He adds that cost overruns are common when building from scratch but his project stayed on budget, costing $1.3 million all-in. “I would say within 10 years we’ll recoup [all] costs,” adds Nichols.

His son, who’s an advisor in his practice, worked with an architect on the building’s plans. “It’s a pretty efficient building,” says Nichols. “It’s a rectangle. It was simple to design because it’s only 5,000 feet and one floor. We built it with the potential that we can add to it.”

He asked staff for feedback prior to breaking ground, and customized the office’s features to fit his needs. “We’ve given our staff much larger offices than they’d typically get,” he says. And, “we have a nice patio at the back. The building has green space on two sides of it, so it’s quite a lovely area.” He adds these features make going to work more enjoyable for his staff.

The building fits his clients’ needs, too. “Most of our clients are retirees, so it’s fully wheelchair accessible. Our previous building wasn’t. And a lot of seniors have trouble reading, so we have lots of windows to make sure it’s easy for them to see.”

Other occupants

Linda Bain

While Bain started with four other advisors, three have since retired, so she now shares space with another advisor and three support staff.

“I’ve always offered representatives the option of having a straight desk fee or an override,” where Bain gets a percentage of their revenues. The other advisor in her office has chosen an override. “Every month his payment could change, but because he’s a well-established advisor, there are never concerns about whether he’s covering his expenses. Then he gets billed for one-offs.”

Michael Nichols

The seven team members of Compass Private Wealth occupy the entire space, and there’s room for when the team expands by a few members. He’d considered making the space even larger, but decided he didn’t want to be a landlord.

Estate and succession planning

Linda Bain

Bain deals with her business and her building in her will. “I would have a person purchase my business,” she says. “Around here it’d be for about 1x revenue or assets.”

The other advisor in her office, Michael Coady, would get first right of refusal; then, it would be offered to advisors within HollisWealth (the firm requires she file a succession plan with her regional manager).

If Coady wanted her book, he’d also get first rights to buy the building from her estate. If he didn’t take that option, “my beneficiaries may decide to keep the building and rent it out. You could rent the commercial space separately from the residential space.”

Michael Nichols

For creditor protection and estate planning purposes, Nichols’ building is owned by an incorporated holding company that’s separate from his practice. Shares of the holdco are owned by his family trust, “so, ultimately, it’s my family who owns the building.”

Nichols’s son and son-in-law are his intended successors. So, having the building in the family trust’s holdco means there won’t be any interruption in ownership after Nichols leaves the practice.

Tax considerations

Linda Bain

For tax purposes, two-thirds of the building is considered commercial, and the rest residential. “I didn’t set up a traditional mortgage, as it was much easier to track interest expenses with a secured line of credit,” she says. She adds the interest rate was better, too.

On her books, she expenses two-thirds of the interest expense per month. “I put lump sums on the line of credit all the time,” she adds, “and if an emergency comes up, I have funds available.”

She currently deducts CCA on improvements (not on the building’s capital cost), but recognizes that will increase her capital gain when she eventually sells. “I need the tax deductions now as my income is higher,” she says. “I plan to be in a much lower [bracket] by the time I sell the building.” She adds that her living space will be deemed her primary residence, and so a third of the gains won’t be taxable.

Michael Nichols

His holdco can deduct mortgage interest, since the office building is considered an investment property. That firm also deducts depreciation according to CCA rules.

Since the opco and holdco are related, “we got a market price for what the rent should be, and that’s how much the operating company pays to the holding company. It’s an arm’s-length arrangement.” The opco then claims rent as an expense.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.