By Joanne Paulson

The first time Peter Chisholm’s firm became involved as trustee in a commercial property auction was for an office tower in downtown Calgary.

“It was a unique property,” recalled the senior vice-president at Ernst & Young Inc. “The company had built the office tower but then subdivided it into individual condominiums it was looking to sell. The building had very high carrying costs.”

Subsequently, a cannabis facility in southern Alberta and a piece of vacant industrial land in a Saskatchewan secondary market also sold via auction.

“It’s a trend we’ve seen in the west and it’s a recent trend we’ve seen over the past probably five years,” he said.

Most distressed commercial properties still sell via traditional methods, but auctions are a coming thing. The inspiration seems to have come from the success auction houses have long had selling Western Canadian farmland.

“There’s a large market for farmland right now,” Chisholm said. “When our properties go to auction, there’s a reason.”

There seem to be two common themes sending commercial property to auction, he said.

“It’s where there’s been a steep decline in value versus what the real estate may have originally cost to purchase or build, and what the bank advanced against the property relative to what it’s worth today. Secondly, there are high carrying costs associated with the property between property taxes, utilities, insurance, and condo fees.”

Kim Anderson, a lawyer specializing in insolvency with Robertson Stromberg LLP in Saskatoon, noted that auctions in general are a more common tool in insolvencies, such as for large equipment.

“The more generic or the larger the user base for the equipment, probably the more sense it makes in terms of disposing equipment by way of auction. If you have one buyer for specialized equipment, there is little point in going to market.”

Commercial property decisions follow similar principles. The insolvency professional must ask, what is the marketplace for this particular property?

“For example, an apartment block of anywhere from say 10 to 30 units, it’s more of a commodity,” Anderson said. “You probably have a lot of investors who are interested, and in certain circumstances, instead of a realtor process, may be better off to go with an auction, again, depending on the nature of the property.”

With large scale, more complicated properties, an auction may be less useful.

He described auctions as a relatively new “part of the arsenal” when dealing with distressed properties, often after traditional approaches have not resulted in a sale.

Commercial real estate auctions have been “on our radar for a bit more than five years. From time to time, we’re the centre of innovation (in the west), but generally speaking, if you look at the volume of insolvency work, you’re more likely to see the innovation take place in places like Vancouver, Calgary and Toronto.

“It may just be proximity, but we tended to see it out of Alberta first. We’re also seeing it in B.C.”

Auctions offer speed, transparency

Auction house Ritchie Bros. has been selling farmland largely in the west for more than 20 years, and today conducts 100-plus on-farm auctions annually, said Eva Smoluch, the company’s national director, insolvency and restructuring, who is based in Toronto.

Now, Ritchie Bros. is also seeing a rising trend of using auctions to sell distressed commercial properties, which also started in the west but is creeping east.

“We are definitely seeing an uptick in real estate sales in Ontario and Atlantic Canada as well,” she said. “Alberta and the Prairie Provinces were the early adopters of the process with farmers.”

Everywhere, insolvency professionals today are generally broadening their approaches, such as issuing requests for proposal to a broad number of stakeholders, “which I haven’t really seen in the past,” Smoluch said.

In many cases, she is seeing a hybrid approach where a property may be listed on a traditional commercial real estate site and also move to auction if the bids are not satisfactory or nonexistent.

“It’s not a dominant selling method, but we are definitely seeing an increasing trend in situations where speed, certainty of sale and transparency are important, which are the three components most important in a distressed situation,” she said.

Properties listed through traditional channels for many months can erode the amount a property could potentially sell for, she added.

“Speed might be critical in order to meet some court deadlines or just for capital recovery for the estate or even pressure from the stakeholders that are trying to monetize on the sale of the property,” Smoluch said.

As to transparency, “When properties are being sold through public auctions and are being offered to a very large, wide audience, that creates a clear record that the true fair market value of the assets is received.”

She noted that the auction process has been challenged in court many times, but the transparency has generally been viewed by the courts to result in a commercially reasonable transaction.

Auctions create certainty around the sale as well.

“Typically, for bidders to participate in the auction, they must provide some kind of a nonrefundable deposit,” Smoluch said. “The moment that hammer goes down, and the property is sold to the highest bidder, that bidder is contractually obligated to follow through or forfeit the deposit.

“That kind of eliminates the risk of people trying to arrange financing and failing or as in many cases change their minds.”

Online marketing reaches a wider audience

Digital selling platforms provide exposure beyond local markets, and that certainly applies to the marketing and holding of auctions.

One of Ritchie Bros.’ prospective clients had a property listed elsewhere on the market for two years, priced originally at $90,000 and then reduced to $60,000. When it finally moved to the Ritchie Bros. marketplace and came up for auction, the property sold for $100,000 to a bidder from outside the vendor’s province, Smoluch gave as an example.

“We can do it faster, we can open up the property to a much wider audience, and that brings up the values,” Smoluch said.

“Those are the advantages that we have — the competition aspect, and that the psychology also plays a role when you’re looking at auctions.”

Anderson noted that with business transactions such as these, the industry is not battling the misinformation problem so rampant today.

“In an age when you have increasing quality of information about these things, and when you’re able to expose it more broadly on an electronic basis, then it lends itself a little bit better because your potential bidders can reach literally around the world.

“Your ability to reach potential buyers has changed so dramatically in the last 10, 15 years.”

Auctions also tend to light a fire under potential buyers, who may be sitting on the sidelines waiting for a price reduction. Once the auction is announced, it forces them to get involved, said Chisholm.

Auctions are primarily online, where bidders can see the numbers moving up, adding to the urgency.

“The market determines what the property’s worth,” he said. “The auctions are broadly advertised; the auctioneers reach out to parties who they know are interested. You’re certainly getting attention from the market. People are getting caught up in bidding against each other.”