Hemant Gala: 152305215

Q2. What are the risks associated with this property? (35 points); you may refer to "Types Of
Risk" on pages 427-429 of REFI textbook as an aid. Please discuss;
Micro-economic risks; property type, liquidation
A: 1: Property Type:
The risks associated with a property can be physical, financial, or both. For example, a
property located in an earthquake-prone area may be considered high risk due to the
likelihood of physical damage. Similarly, a property with a history of liability claims, such as
slip and fall accidents, would be considered high risk from a financial standpoint. Property
owners and investors must consider these potential risks when making decisions about
purchasing, leasing, or insuring a property.
1. Physical risks: These are risks in association with natural disasters such as
earthquakes, robberies, and fires. This can greatly impact property loss or even total
destruction.
2. Environmental risks: Environmental hazards such as toxic waste sites, and
contaminated groundwater, may have been present or exist at the location.
3. Liability risks: These are risks associated with lawsuits or claims against the property
owner, such as slip and fall accidents or damage caused by tenants. Properties with a
history of such claims may be considered less valuable.
Here, for an elderly couple, there is less physical risk in Ontario, GTA Area but liability
risk cannot be assessed easily unless proper due diligence has been undertaken with the
help of an expert in order to avoid traps in some fraudulent transactions. For instance,
there was incident on 5th January 2023, when the property was fraudulently sold
without the consent the of buyer (Rodrigues, 2023)
A: 2: Liquidation Risk
Liquidation risk in commercial real estate refers to the possibility that the property may be
difficult to sell or its value may decline significantly in a short time. This risk is especially
relevant for commercial real estate, as the commercial real estate market can be less stable
and less liquid than the residential real estate market. There are several factors that can
contribute to the risk of liquidation of commercial real estate, including:
Market conditions: A recession or slowdown in the economy can have a negative impact on
property valuation and thus its liquidity risk increases since it is more difficult to sell a
property or to receive a fair price for it.
Location: Property location which is risky or unsafe will face challenges and may be harder
to sell.
Property condition: Lack of upkeep of the property or timely renovation will result in a
deteriorating situation may be harder to sell and may have lower values.
Financing: Pending mortgage due or taxes dues may result in legal complexities to selling
the property, as potential buyers may be discouraged by the terms of the loan.
Here, the elderly couple needs to be more caution, especially about the financing part, so
that there is no past overdue liability pending.
B: Macro-economic risks; economy, inflation, legistlative, environmental, etc (15 points)
B:1: Economy Risk: Economy risk refer to the significant changes that impact the growth
outlook of the country resulting in a negative impact on business and economic sentiment
resulting in slower growth. This can occur due to various reasons such as government
policies, external factors, interest rates, natural disasters, etc. As per Deloitte reports, an
increase in the interest rate and monetary tightening across North America and Europe will
result in a recession situation (Deloitte, 2023). As per the reports, GDP growth will slow
down from 3.2% to approx. 1% in late 2023. This will downgrade the business growth and
result in a decrease in property valuation and rental value for commercial property.
For elderly couples, a recession could lead, to a reduction in demand for real estate which
will result in lower rental income growth or loss of rental income due to low occupancy.
Further, property valuation decreased during this phase.
B:2: Inflations Risk: Inflation risk is the phenomenon in which prices of goods and service
increase over the period beyond the simultaneous increase in earning capacity due to which
there will be a decrease in saving or corpus fund for investment or in other saving
instruments. Here, the cost of living is more expensive and impact individual and
corporates. In the period from 2021-2023, there was high inflation in USA and Canada
ranging from 6 % to 8% in range (Evans, 2023). Due to this high inflation, there was an
increase in interest rates across North America which will increase mortgage repayment and
decrease the rental value. Further, the cost of utilities, maintenance, and labor increases
with inflation, resulting in increasing the cost of owning and operating commercial property.
This can put additional impacts on landlords to raise rents to offset these increased costs,
and eventually result in lower valuation and impacting the profitability of commercial
properties.

B:3: legislative Risk: It involves changes in government rules and regulations that impact
the real estate business including investors and tenants. This includes zoning regulation, a
ban on non-Canadian buying residential property, levy of taxes, subsidies, etc. For instance,
changes in zoning can reduce the ability to generate rental income. Thus, an elderly couple
needs to take professional advice and understand the legislative risk of property in Canada
before taking a decision.
B: 4: Environmental Risk: It refers to the probability of unwanted risk impacting the
environment and surrounding area due to several reasons, such as waste management, the
release of toxic gases, increase in pollution, waste transportation, and other several other
reasons. Due to this, there can be the possibility of paying the liability to the local
corporation for cleaning the surrounding. This can result in a decrease in property
valuation and rental value due to the presence of a hazardous or harmful substance, an
increase in legal and regulatory costs for non-compliance, etc.
Financial risk; borrowing, interest rates
C:1: Borrowing risk: Borrowing risk refers to the inability of a purchaser to repay the loan
taken for the property due to various reasons which affect repayment such as a decrease in
rental income, an increase in interest rate hike resulting increase in mortgage payment, etc.
Generally, around 70-80% of the property is financed by mortgage and such above factors
can impact the borrowing risk.
C:2: Interest rate hike: Interest rate risk occurs due to changes in the interest rate of
mortgage loans which can affect the payment obligation. This would be the most stressful
situation for the elderly couple buying property in Canada as interest has increased
significantly from 0.25 % to 4.5% in just the last 15 months by the Central Bank of Canada.
This will increase interest payments on a mortgage steeply and can result in financial stress
in the repayment of interest.
Commercial property in Canada is often financed with long-term debt, and changes in
interest rates can affect the present value of these obligations. When interest rates rise, the
cost of borrowing increases, which can lead to lower property values, decreased demand for
properties, and potentially reduced rental income for property owners. This can make it
more difficult for property owners to service their debt and can result in a decrease in the
value of their assets.
To mitigate the interest risk. commercial property owners and investors in Canada may use
multiple methods such as interest rate swaps or maintaining a mix of fixed and floating-rate
debt. It is also important for commercial property owners to regularly review and update
their debt structures to ensure that they are in tandem with their financial obligation line
with their risk tolerance.
Thus, interest rate risk is an important consideration for commercial property owners and
investors in Canada, and elderly couples need to carefully evaluate bank finance including
the type of mortgage and its impact to protect the value of their assets.
Management risk
D: Management Risk: It refers to loss or reduction in rent due to ineffective management of
the property. This can include factors such as poor tenant retention, inadequate
maintenance, mismanagement of finances and budgets, or failure to comply with legal
regulations. The accomplishment of an effective investment often relies on the skills and
experience of the property manager, and managing risk can have a significant impact on the
overall return on investment for the property owner.

It is important for property owners to carefully evaluate the qualifications and track record
of property managers before hiring them to minimize management risk. Furthermore,
regular communication and monitoring of the property management team can help to
identify and address any potential issues before they become larger problems. Finally,
having a well-drafted property management agreement in place can help to ensure that the
manager is held accountable for their responsibilities and that the property owner's
interests are protected.
Stress of property ownership/upkeep
E: Owning and maintaining commercial real estate can be stressful and challenging,
especially for those new to the field. There are many factors that contribute to property
ownership and maintenance stress, including:
Financial Factor: When you own a property, you are responsible for the costs of upkeep,
repairs, and improvements. You also have to worry about whether your tenants will pay
their rent on time and whether they will move out.
Commercial Factor: Commercial property owners are legally responsible for complying with
building codes and safety regulations, managing environmental hazards, and adhering to fair
housing laws. If they fail to meet these responsibilities, they may face legal action and
financial penalties.
Legal Responsibility: Maintaining and repairing a commercial property can be a time-
consuming and expensive process. Property owners must be prepared to invest time and
resources into keeping their property in good condition, including tasks like fixing broken
fixtures, addressing pest control issues, and making necessary upgrades.
Tenant Issue: Tenant issues can be stressful for property owners, especially when it comes
to collecting rent, resolving disputes, and evicting tenants. Property owners must be
prepared to handle a variety of tenant-related issues, from negotiating leases to resolving
disputes.
Many people find that owning a commercial property can be a rewarding and profitable
experience, despite the challenges involved. By taking a proactive and organized approach
to property ownership and maintenance, owners can minimize stress and maximize their
returns.
 Reference
Deloitte (January 2023), Interest rate increases bite, leading to deeper recession,
https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/finance/ca-economic-
outlook-january-2023-report-aoda-en.pdf?icid=eo-report-january-2023-aoda-en
Evans Pete, (January 17, 2023), Inflation rate slows to 6.3% — but groceries are still going up
at nearly twice that pace, https://www.cbc.ca/news/business/canada-inflation-december-
1.6716315

Rodrigues Gabby (January 5, 2023), Toronto homeowners who were out of town discover
their property was fraudulently sold: police, https://globalnews.ca/news/9389172/police-
allege-toronto-house-sold-without-owner-consent/