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Maximizing Returns Part 2 

LEVERAGE Leverage involves the use of borrow3ed funds to make an investment in real property in the hopes of realizing a profit, in addition to monies necessary to pay for the borrowed funds. Most commercial real estate transactions involved borrowed funds for leverage, thereby reducing the owner’s initial investment and permitting him/her to participate in various projects within defined financial capabilities. Leverage has the potential to increase the owner’s return on any given investment, but risk is a consideration. Three types of leverage can occur. • Positive leverage – A situation in which the yield to an investor exceeds the overall rate of return that would have been realized on a property had no financing been put in place. • Neutral leverage – Occurs when no increase or decrease in yield occurs as a consequence of leverage. • Negative leverage – exists when the use of borrowed funds results in a lower equity yield than the overall rate of return that could have been realized has no financing been put into place. Leverage and Risk Before warmly embracing leverage as the magic answer to high yields, consider other risks. While increased amounts of financing can lead to enhanced returns through positive leverage, several less palatable destinations await the unwary. Few real estate investments can consistently tolerate high leverage ratios if sufficient cash flow is lacking to address debt service (mortgage payments). When faced with negative cash flow, the investor is forced to use capital reserves to offset deficiencies. Sometimes, this strategy reflects a conscious trade-off by an investor in the hopes of property value appreciation and a significant profit at point of sale. In other words, the buyer may tolerate negative cash flows while operating the property, but recoup such losses through the gain realized when the investment is sole. Consequently, financial pain may be short lived. However, investors may face a double whammy – a negative cash flow, followed by loss of value. If the loss is significant, the investor is also vulnerable to equity elimination i.e., the mortgage exceeds the value of the property. In market lingo, this is called being upside down on equity. If that is not enough, consider the impact of rising interest rates when the mortgage must be renegotiated during the investment holding period. Leverage increases the possibility of higher returns. However, as with all investments, higher returns usually translate into higher risks.

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Maximizing Return - Part 1 

Investors seek to maximize returns through revenue generated from income property. Three concepts directly impact the yield realized. • Cash flow • Leverage • Taxation CASH FLOW Cash flow represents all monies flowing from an investment. Cash flow is fundamental to building wealth from an investment perspective. Cash flow is derived from two sources; ongoing rental income (operations cash flow) and appreciation in the value of the building at point of disposition (sale proceeds cash flow). Operations Cash Flow – Operations cash flow represents periodic monies received from the operation of the investment. Cash flow can be positive or negative. Appraisers and real estate registrants calculate a single year’s cash flow based on income and expense analysis to arrive at a net operating income (NOI). Annual debt service is then deducted from NOI to arrive at cash flow before taxes (CFBT). Cash flow can be further analyzed from an after tax perspective. Cash flow before taxes is frequently used in market value estimates, while cash flow after taxes is applied with investment value estimates, although this distinction should not be overemphasized as the lines are often blurred. In reality, registrant work in both worlds. Sales Proceeds Cash Flow – Sales proceeds cash flow represents the sale proceeds of the investment (reversion). Traditionally, sales proceeds have been viewed separately and treated as capital appreciation. This approach was particularly popular in inflationary periods when operations cash flows were either small or negative and investment decisions were made solely on anticipated sale gains. However, stable economic periods require a more all encompassing perspective on investment return. Real estate investment analysis analyzes the interplay of both operations cash flow and sales proceeds cash flow when determining yield on investment property. Capital appreciation, while valid, is only one dimension within a larger picture. Cash Flow Rules Over the years, investors have discovered three important rules when analyzing cash flow for investment purposes. 1. Larger Cash flow is better than smaller cash flow 2. Today cash flow is better than tomorrow cash flow • It is not only what is received, but when it is received. • Time is an important consideration in analyzing cash flows • Often referenced as Time Value of Money 3. After tax cash flow is better than before tax cash flow • The best measure of true cash flow realized by the investor • The most accurate comparison between carious investment properties being considered.

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INVESTING IN COMMERCIAL PROPERTY - PT 2 

DECISIONS: INVESTORS VS. USERS Investors want to attain predetermined objectives. Therefore, needs assessment is primary no matter whether objectives involve an expected rate of return, a stated period to hold an investment, the tax shelter opportunities arising from a purchase or a long term strategy to diversify real estate holdings through leverage. Armed with needs knowledge, the salesperson then applies risk analysis. Lastly he or she assesses whether a specific offering can achieve anticipated return on profit given inherent risks. In the case of users, individual needs factor heavily into the buying or selling decision. How the property satisfies buyer/tenant requirements is uppermost. Too often however, registrants fail to realize that risk and return are never far from the user’s mind. While user groups are academically distinct from investor groups, investment objectives are interwoven in the decision-making process. UNDERSTANDING NEEDS A great deal of commercial activity surrounds the issue of needs. What does the user intend to do with the property? What investment return is he or she seeking? What is the user attempting to do, both generally and specifically? Can the salesperson clearly articulate those goals? What about a definitive statement of investment motives that set the stage for property selection and showings? Needs generally fall into three general categories: 1. Investor/User Objectives: General goals of the buyer including type of property being sought, investment return (if applicable), lease vs. own, type of ownership, etc. 2. Physical Requirements: Specific needs; e.g., HVAC requirements, transportation, site characteristics, etc. 3. Financial requirements: Amount of capital, other financial resources, credit standing, financial history, etc. RISK IN DECISION MAKING The element of risk applies to all investment decision. Risk refers to the uncertainty, chance, exposure and vulnerability imposed on an investor, with particular regard to any financial loss that may accrue from an investment. Risk, for all real estate purposes, centers on fluctuations in the income stream and the vulnerability of that stream to external influences such as market trends, availability and suitability of financing, degree of positive or negative leverage, and overall economic conditions. Risk is typically viewed as a primary consideration in any real estate investment. The ability to forecast and in some way quantify the impact of various influences on an investment property is broadly describes as risk analysis. Complex risk analysis models and related computer programs do exist, but often go well beyond the practical needs of commercial brokerage. In reality, reliance on intuitive sense, personal experience and historical market trends in more commonplace.

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INVESTMENT PROPERTY 

Commercial property, from an investment perspective, can appear as a bewildering array of opportunities and option. An expanding variety of specialty fields face the new practitioner, each with its own distinctive characteristics. The marketplace has exploded over the past several decades both in depth and breadth. Brokerage activities now take on international proportions as commercial clients transact capital investment throughout the world. Institutional investors and multi-national organizations routinely screen and select properties based on the most advanced capital budgeting procedures. At the same times, commercial brokerage is a local business: the aspiring entrepreneur leasing retail space, the contractor seeking industrial land for a growing business, the professional couple carefully scrutinizing an apartments building as part of their retirement strategy or the local developer reviewing a potential neighborhood mall site. What all these individuals have in common is the starting point for this commercial journey. Buyers and sellers pursue investment objectives. The marketplace is a seething mixture of user and investors. For them, real estate has distinct advantages such as stability of ownership, security of tenure, an opportunity to earn income, a chance to develop a business strategy or simply a great place to build a financial future. Real estate breathes life into their endeavors. Registrants play a vital role in the process. They help bring investment goals and strategies to fruition. Commercial salespeople must understand unique advantages accruing to those who invest in commercial, industrial and investment properties. After all, real estate routinely competes with other investment options. Salespeople must fully understand the basis for investment decisions to be in a position to properly counsel their clients and provide services to customers. INVESTING IN COMMERCIAL PROPERTY Investment property can include industrial, retail, office, land or other specialized commercial operations. No clear cut classification system exists. The focus is on the investor as opposed to the user with primary considerations directed to key factors that ensure investment success. Why should buyers invest in commercial real estate? Any well-balanced presentation to either buyer or seller will highlight both advantages and disadvantages. After all, the commercial salesperson is competing for investment dollars within the broader local, national and international marketplace. A well-informed buyer must know the rewards and pitfalls of real estate to make an informed decision.

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Planning and Zoning in the Residential Market 

PLANNING/ZONING Recreational planning and zoning considerations vary significantly depending on the size and nature of the commercial recreational activity. Registrants involved with such properties should have detailed knowledge of specific zoning requirements and other planning considerations relating to such properties. As a general guideline, those parts of Ontario focused on tourism are generally positively disposed toward expansion of recreational (sometimes referred to as tourist commercial) operations, provided that they align with sound planning principles. Further, expansion of resorts or similar uses to year-round, four season operations are encouraged, as are the addition of new commercial enterprises to complement existing recreational activities. BED AND BREAKFAST (B&B) REQUIREMENTS Municipal regulations concerning B&B operations and small country inns vary by municipality, but are generally becoming increasingly stringent. In addition to requiring a current operating license, bed and breakfast operations may be subject to various specific B&B by-law requirements. Selected examples follow: • Must prepare both a floor plan (identifying all guest rooms) and a site plan outlining location of the building, location and size of required parking spaces, and the location of any amenity areas in order to be licensed. • Much ensure that total occupancy and length of stay by any such occupant confirms with the operating license requirements. • Cannot typically operate in combination with any other type of accommodation • Cannot offer services beyond that specified by the operating license • Provide breakfast only and not other meals; maintain a daily register of guests and erect a sign that complies fully with the applicable municipal by-law. Bed and breakfast operations must also be in compliance with the zoning by-law, the Ontario Fire Code and selected health regulations.

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Vacant Land Development - Planning and Applications 

Vacant land, in the GTA commercial market sector, is focused on development activities involving planning, application and development processes. Land technically refers to raw acreage, raw land, vacant land or unimproved land, because no alteration for specific purposes has occurred. This should not be confused with the term ‘site’ that refers to a parcel of land that is often serviced, at least to some degree. Land development has traditionally been focused on property that exists in an unused manner (and not necessarily in a natural state), before the construction of services; e.g., water and sewers and that additional of structural improvements. In recent years, considerable attention has been focused on the revitalization of property. Therefore, both land in a natural state and the conversion of existing serviced land into a new use are discussed. THE PLANNING PROCESS The Planning Act is the overriding legislative framework for the land development in Ontario. Beyond that focal statue, the scope of regulatory and related requirements is a complex interplay of provincial statues, municipal official plans, zoning by-laws and administrative procedures. Planning responsibilities, broadly defined in the Planning Ave, generally fall to the local municipality. The municipality’s long term goals for land development are set out in the official plan. This plan, which is subject to periodic review, is not statutory in nature, but rather a general pokicy document. This, in turn, flows to municipal planning predefined purposes and uses. Each zone type has its own set of restrictions regulating how land may be used. A primary objective of zoning by-laws is to ensure that adjacent lands have compatible uses. The provincial role in land planning, in addition to overall responsibility and associated legislative initiatives is focused on general planning policies and associated policy statements. Municipalities must ensure that their activities surrounding the official plan and zoning by-laws are consistent with such interests. For example, current provincial interests include the protection of ecological systems and provincial agricultural resources, and the orderly development of sage and healthy communities, along with various other provisions. Beyond that, the provincial Ministry of Municipal Affairs and Housing s also involved in approvals for selected types of development.

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Vancant Land Development - Documentation, Requirements and Agreements 

AMENDING APPLICATION: DOCUMENTATION Municipalities typically require a pre-consultation meeting with the landowner/developer when considering an application to amend the official plan and/or zoning by-laws. The meeting with planning departments representatives ensures that any development proposal generally aligns with existing municipal planning priorities, ensures that all key issues are identified and verifies which supporting documents should accompany a particular application Documentation typically includes a fully completed application, appropriate drawings and the applicable fees. At minimum, drawings would consist of a survey, but usually an expanded preliminary site developments plan is necessary, including survey details plus: • All existing and planned access routes and internal roads (including those of abutting properties), road widening, and layout of all driveways and parking areas. • Physical details of existing natural or artificial features on or abutting the property, including planned changes to these, as well as existing and planned land contours (including proposed landscaping, berms, walkways, bike paths and other amenities). • Location of all proposed building and retained building, including setbacks. • Summary statistics/descriptive information including building uses, gross building floor areas, building coverage and density. As a point of clarifications, this discussion centres on the development agreement with the municipality as a distinct contractual arrangement. However, often a joint developments agreement (relating to preparation of the land) and site plan control agreement requirements concerning structures) are negotiated in readiness for issuance of permits and building construction. As such, the joint agreement would span both contractual matters with the municipality and statutory requirements under the Planning Act. REQUIREMENTS Applications must meet all relevant municipal requirements before being processed. Both current and proposed land uses and requested zoning by-law changes, must be fully described, along with a description of the exiting land use. Municipalities are particularly interest in whether an existing use (or previous use of the property) are particularly interested in whether an existing use (or previous use of the property) has or could give rise to land contamination. Proposed land use details are then fully detailed, along with technical information concerning sewage disposal, water supply, storm drainage, road access and any related environment considerations. Particular emphasis is placed on required studies by appropriate experts.

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Market Analysis of Recreational Market 

Lodging demand is gauged by occupancy level. Many subcategories of accommodation are analyzed given differing market areas and travellers’ preferences. Hotels, lodges and resorts typically rely on market analysis to assess supply and demand factors. Such research may be focused on local, regional, national or international statistics or a specialty market within one or more of these categories. This data is often combined with qualitative information gained through market research regarding travelling preferences for specific types of accommodation and amenities. On the supply side, specialized marketing companies provide research regarding number of rooms within defined markets.

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The Recreational Market in Ontario 

The recreational market in Ontario covers a broad array of property types including second homes, cottages, lodges and larger, mixed-use resort properties. This particular market segment is largely descriptive in nature, with specifics concerning the sale of businesses.

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Farm Construction, Agriculture and other issues 

CONSTRUCTION

Farm building construction, generally regulated under the Ontario Building Code, involves buildings, for housing livestock and equipment, as well as other structures (including silos) used for the production, storage and processing of agricultural products. The Ontario Building Code also permits farm building construction in Ontario to be regulated by the National Farm Building Code of Canada.

As with residential and commercial structures, the building department of the applicable municipality issues building permits for farm structures. Prospective buyers contemplating new farm building can avail themselves of expertise through the Canada Plan Service (CPS). This Canada-wide network of agricultural engineers and livestock specialists focuses on the planning, design and construction of modern farm buildings. The CPS has developed various plans that include detailed design specifications.

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Farm Land Leasing, Zoning and Provincial Legistlation 

FARM LAND LEASING

Three common land leasing arrangements apply to crop land.

· Crop share lease;

· Cash rent lease; and

· Flexible cash lease

In all three types, the landlord normally supplies the land and grain storage, and pays the property taxes. The tenant pays the operating expenses and supplies the labour and machinery to farm the land.

The division of income varies with the type of leasing arrangement. In the case of a crop share lease, the most common division is one-third share of all crop sales to the landlord and two-thirds share to the tenant. The income is often divided as the crop is sold. In the cash rent lease, the tenant receives the income from the crop sales, but pays the landlord a fixed amount each year as rent. Normally, the rent is paid in advance or by one-half payment in the spring before seeding and the balance in the fall after harvest of the crop.

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The Commercial Agriculture and Farming Market 


The commercial farm market consists of many operations, both large and small, theterm agriculture generally refers to the production of goods through farming. No universal definition exists for activities falling within the term farming. As a general guideline, the Farm Debt Mediation Act, a federal stature, defines farming as follows:

· The production of field-grown crops, cultivated and uncultivated, and horticultural crops;

· The raising of livestock, poultry and fur-bearing animals;

· The production of eggs, milk, honey, maple syrup, tobacco, fire, wood from wood lots and fodder crops; and

· The production or raising of any other prescribed thing or animal.

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THE MULTI-RESIDENTIAL MARKET PT 2 

ZONING

Multi-residential zoning requirements for most Ontario municipalities generally follow those for detached homes, with necessary changes to permit greater densities. Key restrictive provisions include, but are not limited to:

· Lot area minimums;

· Lot frontage minimums;

· Lot coverage maximums;

· Overall height maximums;

· Floor area minimums;

· Front, side and rear yard minimums (setbacks);

· Units per hectare;

· Parking allocation per unit; and

· Landscaping minimums (as a percentage of total lot size).

Residential zones are often delineated by ascending numbers to reflect incremental density provisions beginning with detaches homes following be semi detaches, and so on. Multi-residential zones are in the higher range but no standardized system applies throughout the province. A fictitious residential zoning grid is provided for illustration purposes only with Zones 6-10 involving low, medium and high rise residential structures.

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THE MULTI-RESIDENTIAL MARKET PT 1 

Multi-residential housing technically refers to any residential structure that has more than one dwelling unit. However, the focus for this discussion centres on larger rental properties (i.e., more than four units) including marketing, zoning and construction matters, but does not include smaller rental properties (e.g., duplexes, triplexes, and fourplexes).

The multi-residential market in Ontario, as with other sectors of the commercial marketplace, is driven by supply and demand factors, but is also strongly influenced by regulatory provisions contained in the Residential Tenancies Act.

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Design Build 

Design build is an arrangement typically involving an owner of land agreeing to build a structure of a size, quality of construction and overall appearance in accordance with requirements of a specific tenant. The owner, as landlord, then leases the completed structure to that tenant. In the commercial real estate marketplace today, design build activities have expanded and include numerous arrangements and variations.

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Typical Industrial Building - Part 2 

FLAT ROOFING

Flat roofing is most commonly found on industrial structures, such as those found in commercial real estate. The term flat is misleading, as flat roofs have some degree of slope for water drainage. Slope refers to the degree of rise. For example, a 4” by 12” slope means that the rood rise four inches in every 12 inches of horizontal run. Industrial flat roofs have a very low slope, as compared to higher slopes in residential property. Residential roofs are not watertight, but rather shed water given the high slope.

The industrial flat roof must be watertight, along with all associated joints and seams. Typically, roof decking in newer building is steel or concrete. Wooden decking can be found in older structures. A typical, new industrial roof has (from bottom to top) a steel decking and a vapour barrier to prevent interior moisture from penetrating insulation placed above it. Above the insulation, a roof surface is applied. Several roof surfaces are available, with a built up roof (or a variation of it) being very common. The built up roof (BUR roof) consists of asphalt, felts and gravel. Successive layers of felt and asphalt are layered over the entire roof (e.g., four-ply roof has four layers of felt and asphalt). The final coat of asphalt is then covered with a granule-based layer of mineral aggregate.

BUR roof life is dependent on many factors such as weather conditions, quality of materials used, number of plys installed and amount of roof foot traffic. A properly installed, high quality 4-ply roof should last about 15 to 20 years. In recent years, other types of roofing have been introduced such as rubber and vinyl waterproof membranes that are laid directly over the insulation and then held down by aggregate. These membranes are made in large sheets with any season properly sealed on-site.

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Typical Industrial Building - Part 1 

Most small to medium-sized industrial, general purposes buildings in the Greater Toronto Area offer similar features and characteristics. For example, a free-standing structure typically includes both a main industrial area and an office area. The industrial area must have a single floor with clear height typically between 16 and 25 feet, or higher if required., a poured concrete slab-on-grade floor (6” or greater thickness depending on need) a steel frame roof using open we steel joists (OWSI), a built-up roof with stone ballast, steel strip windows, metal doors and overhead doors for loading docks. The office area is typically 15 to 20% of total industrial area and is either contained within the building (along with a mezzanine level about the standard height office ceiling) or extends out from the primary structure (sometimes referred to as a box on box design).

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BUILDING CONSTRUCTION/DESIGN 

Industrial buildings, such as those in the Mississauga area of Toronto, given the driving force of demand for products and services, are typically purpose built. Structures are divided into three categories: general purpose, special purpose or single purpose. Single and special purpose dominant, given the need for distinct manufacturing and distribution processes. Because of heavy customization, existing industrial property in the resale market can be slow-moving. Prospective buyers must evaluate costs associated with substantial modifications required to accommodate alternate uses. Given that industrial structures are process-intensive, improvements can be particularly vulnerable to obsolescence. Ceiling heights, clear spans and floor loads acceptable only decades ago can render a building obsolete by today’s standards.

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SITE REQUIREMENTS AND PROFILES 

Complex site requirements frequently occur in a commercial real estate market driven by specific demands. Industrial users not only consider requirements (e.g., zoning restrictions, availability of services, transportation facilities and physical topography), but also factors extending to the community, regional and sometimes provincial perspective. Community profiling can be one of the highest priorities in industrial strategic planning leading to the opening or relocating of an industrial facility.

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Zoning Considerations For Office and Industrial Properties 

For zoning purposes, permitted uses will vary by municipality in the Greater Toronto Area and commonly include manufacturing and warehousing, research/training facilities, transportation uses including truck and rail terminals, public works depots, contractor yards, service and repair operations, electric power facilities and automotive service establishments. In recent years, industrial areas have become more varied in terms of land use with the appearance of large-scale entertainment centres, recreational facilities, fitness clubs, fraternal organizations and large vertical market retailers. This vide diversity of uses has served to blur traditional lines separating retail/office and industrial markets.

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Overview Of The Toronto Area Industrial Market 

Industrial real estate is broadly defined as property used for the processing and manufacturing of good. Industrial real estate in Toronto includes all land and buildings, either utilized or suited for industrial purposes. While most people think of industrial property as specifically relating to manufacturing, the term has a much broader meaning that includes production, storage, distribution and logistics services of tangible goods (as opposed to intangible goods; e.g., professional services). Traditional uses normally centered on manufacturing, warehousing or transportation

 

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Zoning Considerations For The construction Of Office Buldings 

The construction of office buildings is viewed positively within the overall planning process in the Greater Toronto Area , as these structures general municipal tax revenues and expand employment opportunities.

Planning considerations include the compatibility of any new project with existing structures, density issues given the concentration of people within one structure, the need for extensive parking facilities, added municipal responsibilities regarding fire and safety (particularly in the case of high-rise office towers), provision of municipal water/sewer, traffic generated given by such developments and accessibility, including roads and public transportation.

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Office Building Construction 

Toronto area office building construction varies significantly according to structure size, its locale (downtown and suburban), age of building, zoning controls, occupants’ needs and functionality, and internal/external design. These are further complicated by unique circumstances, such as incorporating existing historical structures and complying with heritage requirements. The following description details methods used in office building construction, but these same techniques generally apply to other buildings discussed in later chapters, including multi-use residential buildings.

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Building Classifications and Sub-Markets 

Building classifications have proven effective when analyzing market trends, vacancy rates and rental rates, while also generally ordering buildings in terms of their desirability. Larger urban markets such as Toronto contain several sub-markets, which are viewed as distinct and most commonly arise due to geographic considerations.

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The Office Market 

The commercial office market generally follows a cyclical pattern with changing supply and demand forces. Many factors impact supply, including growth in the labour force and, more specifically, workers requiring office employments. As with other types of real estate, demand expands during buoyant economic times, and contracts when downturns or recession periods are encountered

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Selecting a Space Planner and general Contractor 

Selecting the right space planner and construction manager can make or break the success of a project. The enclosed outlines some suggestions and ideas for hiring the right people.

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New Regulations for Environmental Site Assessments For Commercial Properties 

Recent amendments to the Ministry of Environment (MOE) regulations have created significant changes to Environmental Site Assessments (ESA) affecting Purchasers and Sellers of industrial properties in the GTA.

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Market Conditions – GTA Industrial Market 

Demand for industrial space in the Greater Toronto Area (GTA) moderated for two consecutive quarters before losing all momentum in the second quarter of 2012.

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Watch This Space- Cliff Hanger 

CBRE group news channel- a video commentary on  election results and what it means to the economy and commercial real estate market and the financial cliff.

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Time Lapse Photography Of City Skylines 

Check this out these brilliant videos composed of time lapse photography of the city of Toronto Montreal and other cities. Both as set to music from Hans Zimmer. They very unique and mystifying.






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