Allen Mayer, Commercial Real Estate Broker | RE/MAX Ultimate Realty Inc.
25 years evaluating commercial properties across the GTA
Every week someone sends me a commercial property listing and asks: “Is this a good investment?”
They show me the cap rate (usually advertised at 6.5-7.5%), the net operating income, and the tenant list. The numbers look reasonable on paper.
Then I spend two hours doing actual due diligence and find problems that would cost them $150,000 to fix in year two, or discover the largest tenant is planning to leave, or realize the property taxes are appealed and about to jump 40%.
The numbers tell you what the property is worth today. Due diligence tells you what it will be worth in three years.
After 25 years of evaluating commercial investment properties across Toronto, Mississauga, Vaughan, and the broader GTA, here is what I look for that most investors miss.
The Tenant Quality Nobody Analyzes (Until It’s Too Late)
Why “Fully Leased” Means Nothing
A seller lists a small commercial building in Etobicoke: “Fully leased, 7.2% cap rate, strong cash flow.”
I ask for the rent roll. Three tenants:
- Tenant A: National restaurant chain, 10-year lease signed in 2021, 7 years remaining
- Tenant B: Local accounting firm, 5-year lease signed in 2024, 4 years remaining
- Tenant C: Startup tech company, 3-year lease signed in 2025, 2 years remaining
Most investors see “fully leased” and move to the financial analysis.
I see a 66% lease rollover risk within 24 months.
Tenant A is stable — national credit, long-term lease. Tenant B is decent — local business with track record. Tenant C is a massive risk — startup with short-term lease and unknown creditworthiness.
The Tenant Quality Matrix I Use
For every tenant in a building, I evaluate:
- Credit quality: National chain > Regional chain > Established local > Startup
- Lease term remaining: 5+ years = stable, 2-3 years = moderate risk, under 2 years = high risk
- Industry stability: Essential services > Professional services > Retail > Hospitality
- Rent as % of market rate: Paying market rate = likely to renew, paying above market = flight risk
A building with two national tenants on 8-year leases paying market rent is worth a premium over a building with five local startups on 2-year leases, even if the current NOI is identical.
The Red Flag Nobody Sees
When a tenant is paying significantly below market rent.
I evaluated a building in Vaughan where a 4,000 square foot tenant was paying $18 per square foot. Market rate for comparable space: $28 per square foot.
The seller marketed this as “rental upside” — when the lease renews, you can increase rent 55%!
Wrong.
That tenant has been in the building for 12 years at below-market rent because the landlord values the occupancy stability over maximizing income. When you try to raise their rent to market, they will leave. Now you have 4,000 square feet of vacancy, 6 months of lost rent, $30,000 in tenant improvement costs for the next tenant, and 3-4 months of downtime.
The “rental upside” is actually a ticking time bomb.
The Lease Structure That Destroys Your Returns
The Gross Lease Trap
A commercial building with three retail tenants, all on gross leases. The landlord pays all operating expenses — property taxes, insurance, maintenance, utilities, snow removal.
Today’s expenses: $85,000 annually.
Building’s NOI: $140,000.
Cap rate at asking price: 7.0%.
Looks fine. Until you realize:
- Property taxes increased 18% last year and are appealed (likely to rise again)
- Insurance premiums are up 35% in the past two years across commercial properties
- Gas and hydro costs have risen 22% since these leases were signed
In two years, your operating expenses could be $115,000. Your NOI drops to $110,000. Your cap rate just fell to 5.5% — and you overpaid by $125,000.
Why Net Leases Protect You
In a net lease structure, tenants pay their proportionate share of property tax, insurance, and CAM (common area maintenance) increases. Your operating expenses are passed through.
When I evaluate an investment property, I check:
- What percentage of leases are net vs. gross?
- For gross leases, what is the remaining term?
- Can you convert to net leases at renewal?
A building with 80% net leases is far more valuable than a building with 80% gross leases, even if the current NOI is identical, because your expenses are protected.
The Capital Expenditure Schedule Nobody Reads
The $200,000 Surprise in Year Three
A client bought a 30-year-old commercial building in Mississauga in 2023. Clean building report, current tenants, solid cash flow.
Year one: Great.
Year two: Good.
Year three: The roof failed. Replacement cost: $180,000.
It was not a surprise. The building inspector’s report (which my client did not read thoroughly) noted: “Roof membrane has 2-5 years of remaining useful life. Budget for replacement.”
My client saw “2-5 years” and assumed he had time. He had two years. He did not budget for it. It destroyed his cash-on-cash return for year three.
The Capital Reserve Analysis I Run
For every commercial property, I create a 10-year capital expenditure forecast:
Immediate (0-2 years):
- Roof condition and estimated replacement timeline
- HVAC age and expected lifespan
- Parking lot condition (asphalt resurfacing typically needed every 7-10 years)
- Exterior cladding and window condition
Mid-term (3-7 years):
- Structural repairs (foundation, masonry)
- Electrical panel and distribution upgrades
- Plumbing system condition
- Elevator modernization (if applicable)
Long-term (8-10 years):
- Major building system replacements
I add these anticipated costs to a capital reserve spreadsheet and calculate the annual reserve requirement. If the property needs $250,000 in capital work over 10 years, I am setting aside $25,000 annually in reserves.
Most investors do not do this. They assume the building will magically not need any major repairs. Then they get hit with a $150,000 HVAC replacement in year four and wonder why their returns collapsed.
The Property Tax Appeal You Didn’t Know Was Pending
How Property Tax Appeals Work (And Destroy Valuations)
Property taxes in Ontario are based on assessed value. If an owner believes their property is overassessed, they can appeal to the Assessment Review Board.
Here is the trap: If the appeal is successful and the assessment is reduced, the property taxes go down — and the property value goes up (because the NOI increases).
But if the appeal is unsuccessful, the assessed value stays the same — except now the municipality knows the owner challenged it, so they are more likely to increase it on the next assessment cycle.
And if the appeal is pending when you buy the property, you inherit the outcome.
The Due Diligence Question Nobody Asks
“Is there an active property tax appeal, and what is the status?”
I reviewed a property in Toronto last year where the seller disclosed an active appeal. The property taxes were $42,000 annually based on the appealed assessment. If the appeal failed, they would revert to $58,000 annually.
The buyer was using the $42,000 figure to calculate NOI and justify their purchase price.
I insisted on using the $58,000 figure for valuation. The property was immediately worth $80,000 less. The buyer walked.
Three months later, the appeal failed. The taxes went to $58,000. The seller had to drop the price by $75,000 to find another buyer.
The Zoning You Assume Is Grandfathered (But Isn’t)
The Legal Non-Conforming Use Problem
A building in North York has been operating as a mixed-use property with retail on the ground floor and office on the second floor for 40 years. The current zoning permits residential only.
The seller tells you: “It’s grandfathered. Legal non-conforming use. No problem.”
Here is the problem: Legal non-conforming use protection ends if the non-conforming use is discontinued for a certain period (typically 6-12 months in Ontario).
If your commercial tenant leaves and the space sits vacant for 8 months, you may lose your legal non-conforming status. Now you cannot re-lease it as commercial. You have to convert it to residential or apply for a zoning variance.
Zoning variance applications cost $15,000-$30,000, take 6-12 months, and are not guaranteed to be approved.
The Zoning Due Diligence I Do
I request:
- Zoning compliance letter from the municipality (confirms current use is permitted or legally non-conforming)
- Site plan approval status (required for any future modifications)
- Any outstanding zoning violations or orders
If the property relies on legal non-conforming use, I add a clause to the purchase agreement requiring the seller to provide written confirmation from the city that the use is protected.
The Environmental Assessment Nobody Wants to Talk About
Phase I ESAs Are Not Optional
Every commercial property sale should include a Phase I Environmental Site Assessment. It costs $3,000-$5,000 and can save you from buying a $500,000 environmental remediation liability.
I have seen buyers skip the Phase I ESA to save money. I have never seen it end well.
Common issues that appear in Phase I reports:
- Former gas stations (underground storage tanks, soil contamination)
- Dry cleaners (solvent contamination)
- Auto repair shops (oil and chemical contamination)
- Industrial properties (heavy metal contamination)
If the Phase I identifies concerns, you need a Phase II ESA (soil and groundwater testing). If contamination is confirmed, you need remediation cost estimates before closing.
The Seller Who “Already Did” an Environmental Assessment
Sellers will sometimes provide an old Phase I ESA from 3-5 years ago and say: “We already have one. No need to do another.”
Never accept an old ESA. Environmental conditions change. New contamination can occur. Regulatory standards change.
Always commission your own Phase I ESA with a current inspection and updated regulatory review.
Work With a Broker Who Has Seen Every Mistake
I have represented buyers and sellers of commercial properties across Toronto and the GTA for over 25 years. I have seen every bad deal, every hidden problem, and every surprise expense.
If you are evaluating commercial investment properties, you need someone who knows what to look for beyond the numbers.
View commercial properties for sale across the GTA or schedule a consultation to discuss your investment criteria.
Related Resources:
- 5 Costly Commercial Real Estate Mistakes Toronto Business Owners Make
- Toronto Commercial Properties for Lease and Sale
- Commercial Real Estate in Mississauga
Allen Mayer is a licensed commercial real estate broker with RE/MAX Ultimate Realty Inc. and a member in good standing with RECO, TRREB, and CREA. He has evaluated and transacted on commercial investment properties across Toronto and the GTA for over twenty-five years.