What are rental pools?

gwasser

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Oct 22, 2007
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#1
Some persons have asked me about rental pools and how they work. Although I have invested in a number of rental pools and also have taken seats on the board of several rental pools, I am NOT an expert. Probably other REIN members can help out explaining the ins-and-outs of rental pools.

First of all, rental pools are a legal arrangement to pool rental operations that can be made for any group of real estate properties, whether an apartment complex, a condominium complex, or, I guess, a group houses. It does not affect the duties and rights of ownership other than those agreed to by the rental pool participants within the rental pool agreement.

I was hoping to copy the term "Rental Pool" from the REIN Canadian Real Estate Glossary or from Don`s books, but unfortunately it is missing. I checked several other real estate books, such as Milt Tanzer: "Real Estate Investments and How to Make Them" but found no reference either. Neither does Wickipedia.

So I`ll lift the definition straight from a rental pool agreement: "Rental Pool" means the rental management arrangement in respect of the Resort undertaken by the Rental Manager on behalf of the Resort Owners pursuant to this Agreement in which the Resort condominium Units are made available to the general public in connection with the operation of the Resort.

Lifted from another rental pool: Whereas the CMA Owners have agreed to manage and operate the CMA Units as a single group of residential rental units (the "Collective Management Association" or the "CMA") for the purpose of pooling Revenues and sharing Expenses at attain the following objectives:…


e="font-family:Times New Roman">In less legal words, I would say, a rental pool is a group of properties that have pooled their rental operations for the purpose of sharing the vacancy risk as well as sharing accounting, maintenance, marketing, and leasing costs. Other than having more predictable income, advantages are convenience and easy accounting. The rental pool manager is often responsible for the upkeep of the property and record keeping. It is easier for a group of owners to recruit a rental manager rather than each owner trying to get one on their own. Finally, a rental pool avoids rent competition amongst owners within the same complex.

Rental pools are used for a wide range of property types such as simple residential rental properties, management of hotel resort condominiums and even senior housing. Other than those owners that are on the rental pool board, most owners have a hands-off operation for which they receive a monthly or quarterly statement hopefully with a check attached. There is usually an annual general meeting during which the board for the coming year is elected.

A rental pool is an association or incorporation with a board that in terms of voting procedures and organization is very similar to a condominium corporation. Only the purpose is to rent out a group of properties rather than, as is the case for the condominium corporation to manage the building grounds, exterior and common areas.

The rental pool is governed by the bylaws, the rental management agreement (between the association and the rental manager) and a rental pool agreement (between the owners). Sometimes the rental management agreement and rental pool agreements are combined in one agreement which provides very good bedtime reading.
 

ToddStokowski

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Oct 26, 2007
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#2
That`s a good summary.

From an Income Tax perspective, depending on the rental pool agreement and the nature of the properties in the rental pool, the income generated may be deemed to be Rental Income or Business Income. This may not seem much different, but Rental Income and Business Income have different laws applying to them for income and deduction purposes.

From a GST perspective, which is largely overlooked, there are many GST issues that could arises once a property is put into, or taken out of a rental pool. This depends on the nature of the property. These GST issues may come back to haunt you in years to come.

CRA has recently completed years of real property transaction audits in B.C. and rumour has it that they are coming to Alberta over the next few years. Many real property transactions will be reviewed. If you have any concerns about some past transactions, I recommend having the transaction reviewed by a qualified practitioner.

If you find that there is a GST concern, you may bring the issue to CRA on a voluntary basis. This could save the penalties that would be charged if CRA finds you first.

On a side note, putting a property in a pool may have an impact on the assessment by the Municipality in it’s property tax as a commercial property instead of a residential property. This could affect the property taxes in a huge (negative) way.

Putting the property in the pool in itself would most likely have less of an impact on the Municipality’s view, but the property itself would most likely be the determining factor. Saying that, if the property is in a rental pool (and the pool is business - say hotel/resort), it may be harder to appeal the assessment.

Just some food for thought.

Todd
 

RobMacdonald

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Oct 16, 2007
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#3
A rental pool may also affect the availability for financing. From my experience, if the rental pool is registered as a caveat on the title of the property many banks will not lend on the property. The rental pool agreement will affect the "assignment of rents" the bank requires. The majority of properties that we find issues with are in Ontario, as we do not run into this challenge in AB and BC.

Rob Macdonald
 

gwasser

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#4
Thanks for the comment Tod. Your tax angle is quite interesting. I guess when one invests in rental pools with residential rentals income could be classified as rental income and could be offset by capital depreciation of the building which would make this income tax advantaged or nearly tax free.

On the otherhand, suppose you invested in a rental pool of a resort or hotel, if I understand you correctly, it probably qualifies as business income and the owner would also have to pay commercial property taxes. The latter being considerably higher than residential property taxes. Could the owner still write off the depreciation of the building? Also if the owner had furniture and other equipment, I guess that could depreciate as well? The owner or the rental manager would likely have to account for the GST which would be cumbersome. The positive aspect would be that an owner with a registered GST number would be able to reclaim any GST charged on purchases made such as accounting software, a computer to keep track of the property, ect.?

What about capital gains? If the rental pool qualifies as business income, does that mean the owner would be eligible for the $500,000 lifetime capital gains exemption? Or is that no longer in existence?
Godfried
 

ToddStokowski

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Oct 26, 2007
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#5
Hello, yes the building can be depreciated in either case as well as the furniture. Capital Cost Allowance (tax term for depreciation) is an optional deduction. Some taxpayers choose to claim it, some don`t.
A taxpayer is entitled to claim capital cost allowance (CCA) if their income is Rental or Business. The difference lies in the amount of CCA that can be claimed.

For Rental income, CCA can only be claimed if there is net income from the property and then only to the extent that it brings the net income to zero. It can not create a rental loss. If there is a rental loss, no CCA can be claimed.

For Business income, CCA can be claimed if there is a loss, hence creating a bigger loss. The benefit of this is that the loss can be offset against other income.

When carrying out a commercial activity, the GST paid by a taxpayer can be refunded by CRA if the taxpayer is registered for GST. This relates to the GST paid on the purchase of the property (if any) and any other operational expenses. This does not
apply to Rental Income.

The profit on the sale of the property, if it`s deemed Business Income, would not be eligible for any capital gains exemptions.

The profit from the sale of the property may be capital gains or income based on the facts of the situation. There is some good reading on this topic in this Forum.

Hope that helps.

Todd