When comparing ICI properties, unlike residential, the price per square foot is an important number. Commercial MLS Listings provide a specific Total Area number in square feet, whereas, residential listings only provide a range. However, sometimes in Commercial Listings the Total Area includes mezzanine space. I often get asked, What’s the mezzanine space worth?
My answer is simple. It all depends ‘Who is Asking? Let me explain.
Let’s assume the Seller is asking. They own an Industrial Condo, 4,000 square feet of ground floor space with an additional 1,000 square feet of finished office mezzanine space. This Mezzanine (2nd Floor) space is approximately 15 years old and is good condition. The Seller has invested money in constructing the floor, walls, doors, heating, electrical, light fixtures, stairs, floor coverings and paint. The floor, assuming it is constructed of a metal deck, steel columns and poured concrete would cost approximately $30.00 per square foot to construct. A wood joist floor would be lower. The remaining finish work, depending on the quality of the finishes, could cost between $30.00 - $60.00 per square foot to build. Please note, I have sold Industrial Condos where the mezzanine finishes were of extreme quality and expensive, well beyond $100 per square foot. Given our working example, a typical cost for the mezzanine would range from $60.00 to $90.00 per square foot. Based on the age and quality of the mezzanine space, this evaluation would be then be depreciated. Commonly values range between $50.00 to $75.00 per square foot.
Now, let’s assume the Buyer is asking. The Buyer should be concerned with the legality of the mezzanine. Did the Seller, prepare structural, mechanical, electrical and architectural drawings of the mezzanine? Did the Seller apply to the City for a Building Permit? Was a Building Permit issued? Was the construction in accordance to the drawings submitted? Is the Building Permit Application file ‘closed’ or ‘open’ pending a final inspection? These are all important legal questions. Even though the Seller may have constructed the mezzanine space well and in accordance to the Building Code Standards, it is not legal space, if not approved by the City. The process for the City Application is costly. In one past Industrial Condo Sale, the Seller paid approximately $15,000 to have his existing mezzanine space approved. The City has by-laws governing mezzanine space. For example the City of Vaughan By-Law 1-88 states an ‘open mezzanine’ can not exceed 40% of the Total Gross Floor Area, and a ‘closed mezzanine’ is not to exceed 10% of the Total Gross Floor Area. The example of a 4,000 square foot industrial unit with 1,000 square feet of finished mezzanine office space would not comply with this By-Law requirement. In fact, in accordance with the City of Vaughan By-Law, the maximum allowable mezzanine office space for a 4,000 square foot industrial unit is only 400 square feet. This mezzanine office space of 1,000 square feet is 150% beyond the maximum permitted in the City of Vaughan.
Another important criteria the City reviews in all mezzanine applications is the available parking. There are some Industrial Condo Complexes that many owners have built additional mezzanine space without permits that the daily available parking is a problem. The City reviews the parking on site, the uses of the remaining industrial units in the complex and calculates if there is enough parking available to service the mezzanine space being applied for. Typical parking requirements for office space is 3.50 spaces per 100 square meters or per 1,076.42 square feet. If the on-site parking available, can not comply with the City’s By-Laws and or there is no or little available parking to service the mezzanine office space, the City would not permit or approve the mezzanine space. In fact, the City could place a work order to demolish the office mezzanine space and convert it to an ‘open mezzanine space’ for storage use only, provided all the other City By-Law requirements are complied with, or go as far as having the entire mezzanine space removed. In both cases the cost incurred would be expensive.
Another key point is that if a new application for the mezzanine has to be submitted to the City, then the current City By-Laws and Requirements would apply not the By-Laws of 15 years ago when the mezzanine may have been built. If the mezzanine was built 15 years ago and an application was submitted, but was never ‘closed’ then the By-Laws of 15 years ago may apply. This is important to note since City By-Laws are revised for compliance to more cumbersome requirements. In reviewing our example, the Buyer views the mezzanine space, not as an asset but a liability. And has such the mezzanine space holds no value.
Mezzanines have been the source for many discrepancies on value, even to the point of creating legal issues in many Agreements of Purchase and Sale, where Agreements were terminated or resulted in law suits between the parties. If the Agreement of Purchase and Sale is properly drafted, and the Buyer, within it’s due diligence period, with the help of their team, investigates the legality of the mezzanine with the City, these issues can be discovered, addressed and negotiated. Mezzanine issues are so common today, that many lawyers recommend purchasing ‘Title Insurance’ at the time of Closing. “There are many benefits to obtaining Title Insurance. Depending on the title insurer and the coverage options available, Title Insurance may protect the purchaser from certain title defects. It is best to consult with your solicitor to obtain further information on the benefits of title insurance.” says Michael Tibollo of Tibollo & Associates Professional Corporation. In comparison to the amount of money being invested in your purchase the cost of Title Insurance is economical.
In conclusion, mezzanine space warrants a thorough review. With your findings as supportive evidence, your position and evaluation can be professionally presented and negotiated in an Agreement of Purchase and Sale, all to better serve your best interest.
Hope this helps,