leasing

How CREA and the MLS are destroying commercial real estate through DDF

If you are a commercial real estate agent and you use the MLS, you may have noticed an unsettling trend in the last few years. CRE brokers are accustomed to having a particular flow to their deals that are unique and more elaborate in comparison to most residential real estate transactions. We are also accustomed to working both ends of a deal, especially when it comes to leasing. We have knowledge of how to complete these transactions with professionalism, transparency, and without assistance.

In recent years CREA has implemented DDF (Data Distribution Facility) to all MLS listings by default, unless your board office allows you to disable it at the brokerage level, many don’t. Why is DDF damaging to the commercial real estate profession? DDF allows any brokerage utilizing the MLS to market your listing, without additional consent from you, automatically. While this allows for more exposure of one listing on the internet, it’s a double edged sword that has led to incompetent representation for commercial buyer/tenant leads. Brokerages that are all or mostly residential focused are now getting buyer and tenant leads for commercial real estate listings they don’t have, and more importantly, don’t have the experience or expertise to properly represent someone in a commercial real estate transaction.

A few years ago I operated a small but profitable commercial real estate brokerage. My desire to focus on dealmaking rather than broker of record responsibilities lead me to the decision to close shop and join another brokerage. I was accustomed to operating strictly with commercial standards and it was rare for me to encounter a deal with another agent who wasn’t a commercial practitioner. These days my MLS listings barely generate direct leads for me, instead I’m regularly bombarded with showing requests from residential agents who have received a random lead and don’t know how to handle it. The vast majority of real estate practitioners are residential, with little or no experience to properly complete or even offer good advice for a commercial lease or sale transaction.

When commercial realtors encounter a residential agent with a buyer or tenant, it’s usually an incredibly frustrating experience to try and complete a deal. I for one often observe agents that:

-Don’t know anything about their clients needs or business requirements before showing a property.

-Don’t know the market conditions for commercial, office, or industrial properties.

-Know little or nothing about environmental site assessments.

-Don’t know what BOMA is or how to measure a building according to its standards.

-Make interior measurements and assume the landlord is trying to charge for extra square footage.

-Don’t know how to write a commercial offer to lease or commercial agreement of purchase and sale.

-Have never written, negotiated, or read a commercial lease.

-Can’t calculate the monthly rent.

-Don’t understand what TMI is.

-Misrepresent their clients interests because they simply don’t understand them.

-Can’t answer basic CRE questions and needs to consult their broker of record or another agent in their office for answers.

This list can unfortunately go on and on.

What this leads to is the public being misrepresented when they are accidentally matched up with someone who simply isn’t qualified to complete a commercial transaction and I have heard complaints from businesses who had incredibly frustrating experiences and difficulties as a result. Unfortunately I’ve raised concerns with CREA about this platform and there seems to be no concern about ensuring that people are matched up with quality commercial practitioners for their business needs, and there seems to be no concern for commercial practitioners unique business model.

Is there a solution? As long as the MLS is being used and has DDF implemented it will continue to degrade the commercial real estate profession at a rapid pace. Maybe it’s time commercial practitioners acknowledge the harm that is being caused to this industry and pursue an alternative. CREA has designed the MLS to cater to the housing industry and over the years have continuously failed to improve the commercial real estate sector. What if all commercial practitioners abandoned use of the MLS in pursuit of an alternative such as Loopnet or Spacelist to be the new norm? That’s a conversation worth having.

Until then, if you’re a business owner in need of commercial real estate services, just make certain that you’re dealing with an agent that’s qualified to represent your interests.

What is Base Rent in a Commercial Real Estate Lease?

Base rent, (may also be referred to as net rent) is the base lease rate a tenant pays for a commercial, industrial, or office space in a building. The base rent is net of expenses and percentage rents. What this means is that the base rent is not a representation of the total monthly rent a tenant will pay. Confusing? Possibly if you’re new to it.

As mentioned above, base rent is net of other expenses such as utilities, property tax, property maintenance, and property management etc... In commercial real estate leases it’s common practice for the tenant to pay for their share of other property expenses through additional rent commonly referred to as TMI. That means in order to see the whole picture of what your monthly rent will be you need to combine the base rent and additional rent. If you’re still confused I have another blog that explains how to calculate the total monthly rent here.

If anyone is confused over the rent structure in my listings I’m happy to provide clarification.

What is the difference between a Gross and Triple Net Lease in Commercial Real estate?

If the pricing for commercial real estate isn’t confusing enough for businesses looking to lease space for the first time, wait until you find out there is more than one type of lease you can sign, but that’s usually decided by the landlord.

The majority of the time commercial real estate landlord’s prefer to operate with some form of triple net or net lease (covered in another blog) which requires the tenant to pay for property expenses in addition to their base rental rate. A gross lease is probably more familiar to tenant’s approaching this for the first time, but don’t expect a landlord to use this type of lease. A gross lease is usually a monthly flat rate that not only includes the base rent but some or all of the property expenses as well. This is an easier option for tenant’s to understand but why is it not an option for most buildings?

The vast majority of commercial real estate landlord’s prefer to operate with a triple net lease if the building allows for it, most do. This allows the landlord to keep its net rental income separate from the property expenses which are paid for by the tenant through an additional rent commonly known as TMI, it also allows landlord’s and tenant’s to see clearly how the base rental rate compares to similar buildings in the market without property expenses clouding the comparison. Some property expenses (but not necessarily all, gross leases vary case by case) that might be grouped into a gross rental rate might be property taxes, building insurance, utilities, property maintenance, service contracts, property management etc.

As mentioned above the vast majority of landlord’s will use some form of triple net lease and a tenant should be prepared to know what that entails. Although a gross lease is easier to understand from the tenant’s perspective, don’t expect a landlord to agree to use one unless there is a unique building/situation that warrants it. For anyone that might have questions about gross and net leases I’m open to answering some questions.

Commercial Real Estate Lease

Commercial Real Estate Lease

St. Catharines Industrial Base Lease Rates Surpasses $8 per sq. ft.

If you’re an industrial tenant coming out of a long term lease wanting to know your relocation/expansion options, there is probably a bit of a shock when you check to see what’s out there and the price tag that comes with it. Not only has inventory dried up, but rental rates have risen drastically, by 30-40% in the last few years. What should you be expecting?

St. Catharines still with the highest demand now has industrial inventory leasing at least $8 per sq. ft. for a quality building. Other municipalities in the region have also had significant increases, so it’s not as if you can avoid new market rental rates. Some industrial buildings have achieved $10 per sq. ft. or higher if they are perceived to have premium location and features.

If you’re wondering if there will be an end in sight to these industrial market conditions, we aren’t seeing it at this time. In order for there to be relief in rental rates either something catastrophic needs to happen to the market that causes a lot of businesses to fold, or a significant amount of new inventory needs to be added. While there is turmoil in global markets due to the threat of trade wars we currently aren’t seeing activity that would be alarming to Niagara’s industrial real estate market. As for adding inventory it’s just not happening due to the current cost of construction. As costs for building continue to increase, it makes it more difficult to justify as the return on investment isn’t high enough to support it.

My advice to tenant’s concerned about these market conditions is to start looking at your relocation options early, with a local industrial real estate broker, and be prepared to act quickly.

Is HST Applicable to Commercial Real Estate Lease Rents in Ontario?

If you’re leasing for the first time you may not know the answer to this question. The short answer is yes, HST (Harmonized Sales Tax) is applicable on all commercial real estate rents in Ontario, Canada. If you have previously rented a residential apartment where HST is not added onto the rent this may be a bit of a surprise.

If you are leasing a commercial, industrial, or office building for the purposes of running your business, HST is applicable on all rents including additional rents such as TMI or CAM. You should expect that all advertisements and listings that show lease rates don’t have HST added yet, much like the prices advertised in retail stores are prices without tax added yet. When you want an agent to write an offer to lease, HST will be added then so you can see the big picture on rent.

Any confusions or questions about HST should be cleared up with your accountant or applicable government authority.

Opportunities for Cannabis Retail Space for the Next Lottery Draw

It’s time for the second wave of the Ontario cannabis retail lottery which is to be drawn in August 2019. Much like 6-8 months ago, this already has thousands of retailers looking to tie up a commercial retail space for lease and we are receiving inquiries every day from potential cannabis retailers.

With the rules of the lottery being known in advance this has forced retailers to be more selective of the properties they pursue for submission. We still expect landlord’s to potentially want some form of compensation for tying up the unit, and, with the abundance of retailers trying to compete the landlord is going to pick the tenant that caters to their interests the most… just something to keep in mind (you retailers know you have a lot of competition right?).

We currently have a limited number of retail listings available in St. Catharines of the Niagara Region that may be suitable for cannabis retail, below is information and links for each.

One of the most desirable retail locations in the city of St. Catharines is Fourth Avenue. With the high traffic count, amenities, and nearby highway access this is a very desirable area of the city. The two listings we have available are in the links below:

http://www.remaxnc.ca/listings/commercial-office-retail/lease/78933

http://www.remaxnc.ca/listings/commercial-office-retail/lease/78762

With highway exposure and make a little bit of cosmetic improvement you could have retail space with QEW highway exposure at 10 Dunlop.

http://www.remaxnc.ca/listings/industrial-retail-warehouse/lease/78886

This last one is located in the West end of St. Catharines and is in close proximity to the Go Train station, just in case you want a store that can cater to commuters ; )

http://www.remaxnc.ca/listings/commercial-office-retail/lease/78932

Feel free to reach out and ask questions about the properties. If you’re a cannabis retailer looking to lease retail space within the city let us know if these locations are worth submitting as soon as possible.

Why did the TMI go up in my commercial real estate lease?

T.M.I. (also known as CAM and additional rent) is a common feature in a commercial real estate lease and it represents the expenses for the property. Sometimes when tenants see this figure in their lease they assume it's a fixed number throughout the term, but it's not, and it can't be.

Because TMI represents taxes, maintenance, and insurance, a year to year change in any of those expenses can have an impact on the TMI rate you pay. For example, it's widely known that property taxes steadily increase 

What type of heating is best for an industrial warehouse?

This blog will focus only on the most popular types of heating in my market and in the golden horseshoe of Southern Ontario, natural gas is often available in most industrial real estate buildings. With that in mind, natural gas is preferred over electric heat sources due to the cost factor. Considering warehouses are large open spaces, what is the ideal way to heat them?

The two primary types of natural gas heating I find in a warehouse are either forced air or radiant tube. Forced air heaters usually hang close to the ceiling and kind of look like a large metal box with vents that blow hot air into a warehouse. Radiant tubes also typically hang close to the ceiling and are in fact long tubes that radiate heat onto the surfaces around it. The primary difference between the two is that one heats the air and the other heats surfaces, so in warehouse setting which is best?

While the answer may ultimately be a matter of preference or a requirement depending the materials a business handles, radiant is often the preferred heat source in a warehouse setting for a couple reasons:

1) If a grade level door or loading dock is opened hot air would escape very quickly, but, considering a radiant heat tube heats surfaces instead of air, people and contents will be more comfortable. This is a common concern for industrial businesses because opening bay doors is a regular occurrence to run the business. Depending on construction materials surfaces often absorb and reflect heat as well, further adding to indoor comfort even when cold air is coming in.

2) For reasons stated above it is often more cost efficient. A forced air heater will run more and struggle to maintain temperature every time a door is opened, and in a warehouse you can imagine the large cubic volume of air that needs to be re-heated as it regularly escapes. Radiant heaters don’t have that struggle.

Ultimately you as a tenant will need to determine the best type of heat for your business, but for those that get frustrated with large bills to heat a warehouse it might be worth considering radiant heat instead if you’re running forced air. It may not be the solution for everyone but it’s definitely worth exploring. If you’re willing to sign a long term lease, some landlords may consider changing the heat type for the right tenant, this could ultimately be negotiated into the lease.

Industrial Space for Lease in St. Catharines - 330 Vansickle Road #2

Industrial Space for Lease in St. Catharines - 330 Vansickle Road #2

Industrial space for lease in St. Catharines - 330 Vansickle Road #2. Unit consists of front showrooms, two washrooms, mezzanine, and warehouse with grade level door access and 18 ft. clear height.

What is a Default Notice in a Commercial Real Estate Lease?

A default notice is a document served to a tenant or landlord to notify them that they have not complied with one or more obligations in their lease. Something important to note about a default notice is that it is NOT an eviction notice, but it would be unwise to ignore it because the consequences could be significant. The purpose of the document is to let a party know what the particular problem is and a time frame in which it needs to be remedied. If the problem isn’t remedied within the specified period then action may be taken. What sort of action is taken? That depends entirely upon the scenario and the way the lease is written.

The most common default notice is served to tenant’s is for non-payment of rent, however, there are many more reasons a tenant may receive such a notice. To name a few other potential issues that could require a default notice would be to repair damage caused to the property by a tenant, to comply with parking requirements as per the lease, to cease an activity that isn’t permitted in the lease etc. The type of action that would be taken by a landlord if a tenant doesn’t remedy a default really depends on the scenario and the wording of the lease, but, failing to remedy a default that a landlord considers to be a serious issue could have some significant consequences such as eviction and/or legal action. If you have been served a default notice by your landlord it would be wise to start some dialogue as you work towards your solution. Ignoring such a notice would give the landlord the impression you aren’t even making an attempt to correct the problem which would likely motivate them to take serious action at the earliest possible opportunity.

Can a Landlord be served a default notice? Yes. While most commercial leases are worded to be pro-landlord (because it’s their property) there should be wording that also protects the tenant to ensure the property functions as it should in order for the tenant to operate their business as intended. An example of a default notice a tenant can serve the landlord is if a landlord has not completed work stated in the lease, for example if the landlord fails to install roughed in plumbing they promised in the lease then the tenant can service notice to the landlord to remedy that. The types of action a tenant can take if a landlord defaults varies depending on the type of issue and the wording of the lease.

While there are many reasons a default notice can be served, it shouldn’t always be the first action taken especially for non-serious issues. Most times some regular communication between landlord and tenant can prevent problems from forming to begin with and having that kind of landlord/tenant relationship is ideal to maintain if possible.

Industrial Building for Lease in Beamsville - 4306 Bartlett Road

Welcome to building B at 4306 Bartlett Road in Beamsville, Ontario. The location is minutes from nearby highway access at QEW and Ontario Street, and, Beamsville is a great in between market for industrial or warehouse tenant’s that cater to both Niagara as well as Hamilton and GTA markets due to it’s proximity to both.

The building itself features a very wide grade level door, a common loading dock, and approximately 16 ft. clear height. The building is expected to be available for occupancy around October 1, 2019 after the current tenant vacates and the landlord can complete some work on the building.

Prior to occupancy the landlord plans to insulate the building, bring in a bathroom, and equip it with a 3 phase power supply. For tenant’s that don’t require some of those features or are willing to use common washrooms instead we can discuss some flexibility in the rental rate.

Industrial buildings for rent in Niagara this size with a loading dock really don’t last long on the open market, especially at these rental rates. It would be ideal to act quickly before someone else takes, space like this is in high demand. Contact me if you have questions or interest.

Why are Commercial, Industrial, and Office real estate leases so long?

“Why is this lease so long?”, “Is all of this wording really necessary?”

I get questions like this from either new businesses, or businesses that have come from a building that simply had a very relaxed leasing policy. More often than not, a relaxed leasing policy and short lease documents that lack detail cause problems.

A commercial real estate lease should be very detailed about the relationship between landlord and tenant. Not only should it contain important details about the deal such as lease term, start date, rental rates, size of premises, use, etc, but it also needs to have details about rules on the property, insurance requirements, types of action that can be taken in the event of a default, environmental responsibilities, and so on. The list is actually quite extensive for what can be contained in a commercial real estate lease which is why most documents are dozens of pages in length. My document often ends up between 30-35 pages depending on the tenant, building, landlord, type of lease, zoning, etc. While many tenant’s may think that’s a long document, I feel each point is necessary and would have difficulty shortening it. I would actually have an easier time finding content to add than take away.

Back to the questions, why are leases so long and is it necessary? If a tenant asks that question and I look at the building they’re in, I likely see issues such as poor maintenance, poor parking arrangements, structural issues, driveway pothole and access issues, and tenant conflicts. A properly written lease document that can address those issues and is enforced by the landlord and tenant ensures fewer issues for both parties. A lengthy lease should be considered as necessary by both parties because leases should be designed to protect the interests of both landlord and tenant. Yes, leases by default are naturally pro-landlord, but that’s because it’s their property. That doesn’t mean there isn’t or shouldn’t be protection for tenant’s so that is something you need to look for and ensure is in your lease. The landlord’s I represent take good care of their buildings because the lease requires them to. This allows the tenant’s to use the property as efficiently as possible to run their businesses, as long as they follow the rules with the other tenant’s. This is the ideal situation for everyone.

Every clause in my lease has a reason and my document is updated when new industry trends occur or new issues are discovered in the marketplace. Each clause has a purpose because at one point it was created to correct a problem or properly define something.

So is all that wording necessary? Absolutely. As long as it reflects the needs of your business and protects the interests of both parties, every clause should be seen as necessary and relevant. Make sure you are represented by a knowledgeable commercial real estate broker to ensure you get what you need from your lease.

Industrial Building for Lease in St. Catharines - 101 Hannover Drive

Another rare listing of industrial space under 10,000 sq. ft. is officially on the market and available next month. 101 Hannover has 5600 sq. ft. of warehouse space coming available which can be combined with the office unit at the front of the building.

The building is located on Hannover Drive, just off of Martindale Road and QEW highway interchange for close highway access. The location is arguably the nicest business park in the city, offering convenience for many amenities an industrial tenant or its employees may need. The building is well constructed with brick and concrete block construction. Though the parking lot is currently adequate the landlord is prepared to expand it for uses that require additional parking spaces.

Inside the space is open concept with only one column approximately in the middle of the unit. Interior features consist of 18 ft. clear height, radiant heat, a grade level door, two washrooms, and an entrance area with window display.

This unit will not last long on the open market due to the demand for space this size. It would be wise to act quickly if you think this building can meet your criteria.

Commercial Space for Lease in St. Catharines - 225 St. Paul Street West

Welcome to 225 St. Paul West, St. Catharines, a building with a nice updated stucco exterior for your business to make a great first impression with. There is plenty of on-site common parking right out front, the lot was recently re-paved too. For retail or food service tenant’s there is ample exposure with expansive window display.

Inside the space feel well lit from the expansive window space. The unit is open concept and cater to a variety of professional uses such as office, retail, medical, service, and food service. The ceiling height is approximately 12’ but there is a drop ceiling at a lower level. The rental rate for the entire space is $12 per sq. ft. for the base rent and $4 per sq. ft. for the TMI. Depending on the tenant the landlord may consider splitting the unit into approximately 1500/2000 sq. ft. units but the asking base rent would be up at $17.95 per sq. ft. instead.

To discuss the opportunities to lease this commercial building please contact me.

What is a rent free period in a commercial or industrial real estate lease and how do you achieve one?

A commonly requested or negotiated item in commercial real estate leases is a rent free period. Depending on market conditions for the type of space or building you’re looking to lease you may be able to achieve one.

A rent free period is a defined period where the tenant does not pay rent either prior to their lease term or at the start of their lease term. How much rent free to ask for is usually dependent on market conditions and the reasons for needing a rent free period. For Example, an office or industrial tenant looking to build out a new floor plan of offices might need 2 months to complete the work at their cost, and in turn would ask if they could achieve two months rent free to make the transition smoother. A landlord might see this as a reasonable request dependent on market conditions and the length of the lease term.

Speaking of the lease term, a rent free period is usually not considered unless you are signing a longer term lease, which in current market conditions is usually around 5 years depending on the landlord, property, and the reasoning. If you are not prepared to offer a lengthy commitment, it would be wise to not request a rent free period as you would be seen as unrealistic. It would also be wise to not request too much rent free period for the same reason unless it’s a very unique deal that warrants it.

There are also different options for a rent free period. In the situation of a triple net lease for example, some landlord’s may only agree to giving base rent free, meaning the tenant would still pay their proportionate share of property expenses through TMI, CAM, or additional rent depending how the lease is worded (this is common practice and considered a reasonable request).

There is also the option of having a rent free early occupancy period or a rent free period at the beginning of the lease term. If your lease starts February 1, 2019 and you have one month rent free early occupancy, your rent free period would be for the month of January before your lease starts. If it is rent free within the lease, it would likely make February the month you have free. What is agreed is usually a matter of preference between landlord and tenant. For landlord’s, it’s usually more of an advantage to have rent free early occupancy because if you have a 5 year lease, you still get the full 5 year term whereas with rent free within lease, the beginning of the term is eaten up with the free period.

A rent free period is a common negotiating tool for commercial, industrial, and office building leases, but it has its limitations in many markets and not all landlord’s consider it. Because it’s an incentive there may also be a claw back clause in the lease for that incentive in the event the tenant defaults. If the landlord agrees to a rent free period it’s because they feel there is a legitimate reason for the timing of the request and that it benefits their long term big picture of their investment property.

In the current Niagara industrial market, in particular St. Catharines, space is tight so rent free incentives usually aren’t very long if considered. Rent free on a commercial retail space is dependent on building and scenario and office buildings usually have consideration for it if the tenant intends to do their own improvements and alterations to the space.

To make sure you’re getting the best advice on rent free incentives, make sure you’re speaking with a knowledgable commercial real estate broker for the market that you are in.

Are you an industrial tenant that can't find a building in Niagara?

If you’re an industrial tenant in St. Catharines or Niagara looking on commercial listing websites and noticing nothing with your criteria is coming up or if you’re calling real estate offices with similar results, that’s likely because there aren’t any… at the moment.

The best thing you can do is speak with a reputable commercial real estate broker and let them know what you are looking for and how long you can wait for it. I have conversations daily with tenant’s expressing this frustration, but, sometimes there is a solution if you talk to the right people. I have a database of properties that have leases coming due on the regular. Sometimes I have a creative solution. A conversation with the right commercial real estate broker can make a difference.

I had a conversation with an industrial tenant the other day discussing their timing and expansion options. I happened to make them aware of a building we can pursue in a few months with expansion options a year from now, an option he wouldn’t know about unless that conversation happened.

Right now I’m keeping tabs on the tenant’s looking and when availabilities come up I like to make them aware of it. If you want to be one of the tenant’s that benefits from opportunities that can be created by a commercial broker, please contact me. Don’t expect residential Realtor’s to be of the same level of assistance, their knowledge is usually limited to what is available right now, which isn’t much.

The difference between loading docks and grade level doors in industrial real estate.

I've heard tenant's and landlord's use grade level door and loading dock interchangeably as if they are the same thing. They are not.

Most industrial buildings, units, or space for lease contains a grade level door. It would be rare if a building wasn't equipped with one as they are a standard useful feature. A grade level door opens and closes down to the grade and if that sounds confusing just replace the word grade with ground. The door is level with both inside and outside ground so as you can easily move objects through in and out. Most times these doors are large enough for vehicles to drive through which is an important feature for many tenant's.

The loading dock is different in that the door is truck level and acts as a dock to safely move between building and truck trailer. A transport truck can back its trailer into a loading dock and when parked, it should be possible to enter the truck through the warehouse by flat surface. This makes it possible to load and unload goods quickly, especially with the use of a tow motor or fork lift. Unfortunately loading docks are in demand but have low supply, especially for industrial units under 10,000 sq ft. Compared to grade level doors a loading dock is not cheap or easy to install which is why they are more rare. A property needs to be able to handle truck access to back into a dock as well.

In St. Catharines and the Niagara region it is unfortunately difficult to find loading docks in our current supply of industrial buildings. While there are currently and abundance of grade level doors, it would be good if developers and building owners started recognizing the shortage of loading docks to ensure they are a more common feature for warehouse and distribution tenants needing to rent warehouse space with that feature.

10 things to consider if you're a tenant wanting to buy a commercial or industrial building

I work with a lot of tenant’s and something I commonly hear from them is that their goal is to buy a building. Owning commercial or industrial real estate can be an excellent investment and a worthwhile pursuit, however, I have discovered that most tenant’s with this goal aren’t aware of what is required to buy a building when they make this statement. Not only do I do commercial and industrial leasing, I also do sales, and I want tenant’s to know what the process is like not because I want to discourage them, but because it’s a process that is approached best with eyes open and expectations realistic. I would say most tenant’s abandon this pursuit after learning about the requirements and the process.

To start, the biggest thing you need to know is that getting a commercial real estate mortgage is way different than getting a mortgage for your home for many reasons. It’s common to encounter large downpayment requirements, fees, appraisals, an environmental site assessment etc. which adds time to the approval process. Many residential mortgages achieve approval within a couple weeks, but on the commercial side it could take months. Below is a list of things to consider before you even start looking at properties for sale.

1) High Downpayment Requirements - Probably the most notable obstacle for buying any real estate is ensuring you have enough for a downpayment. In comparison to residential mortgages that can offer a great deal of flexibility on the down payment requirements, it’s common to see a demand of 25% - 40% downpayment. I’ve met many business owners that have assumed this requirement can be much lower and have come to realize they just don’t have the ability to put together that much cash. There may be some flexible exceptions out there through private lending options or through the BDC that can present better options for buyer/users but this is dependent on the business.

2) Bigger Deposits - With bigger downpayment requirements comes the need for bigger deposits (and for other reasons). It’s common for knowledgeable commercial real estate brokers to try and achieve a deposit around 10%. Why? Commercial sales can take a long time to come together and if you’re expecting to tie up someones property with lengthy conditions you need to prove that you’re worth the wait, and, show that you obviously have a good chunk of cash ready for a downpayment. If you’re expecting to tie up a property with a few grand, you may be perceived as unrealistic.

3) Longer Closings - In comparison to home sales which can go firm within a couple weeks, it’s common for commercial sales to take a couple months, sometimes even longer depending on the structure of the deal. The main culprit for longer deals is usually the financing where lenders request environmental site assessments that can take anywhere from weeks to months to complete. It would be wise to expect occupancy of the building to be months into the future, don’t expect to be moving your business in within the span of a month. It’s not impossible, just very unlikely.

4) Different Mortgage Requirements - In addition to high down payment requirements, commercial mortgages are typically structured differently. The interest rates are different from residential and it’s not common to get an amortization period as long as you could achieve in a residential mortgage. Not only are the down payments higher, your mortgage payments will be higher with having to pay the building off sooner. It’s also common to come across fees in the process of commercial lending which is not something you typically encounter when buying a house.

5) Environmental Site Assessments - In Canada (and probably most of the United States) it is standard for commercial mortgage lenders to request an ESA for commercial and industrial properties to prove it is within ministry of environment standards. Most times it is standard for the seller to prove the property is within MOE standards so the cost of the report usually falls on them, but, this condition can take anywhere from weeks to months to complete which can create a lengthy conditional period and a potentially drawn out closing. Things usually get drawn out and costly if contamination is discovered.

6) Lender Selection - You would think that most of Canada’s big banks are a great source for a commercial mortgage but few actually specialize or excel in offering this service. If you’re not exactly happy with your preferred bank for commercial mortgages you may want to explore lenders that specifically market themselves for that service.

7) Borrowing Potential - If you think that owning a building might be the best thing for your business, it actually may not be for everyone. Each business only has the potential to borrow so much money and if it’s perceived that most or all of your borrowing potential is tied up in bricks and mortar, it may be difficult or impossible to borrow money for other business purposes, like if you wanted to borrow to upgrade some expensive equipment or make alterations to the property. Unfortunately I have met some tenant’s who have felt that buying a building paralyzed their business growth and regretted their decision. The positive idea of building ownership can make you blind to this potentiality.

8) Lease Payments are Tax Deductible - Mortgage payments… not as much.

9) Cost of Alterations - Unless you’re building new to spec, you will likely find it impossible to find a building that is perfect for your business needs in its current state. Alterations to make sure the building is a good fit for your business are almost always necessary because the previous business was different and had different layout needs than your business. The cost may not necessarily be high in some situations but you will want to make sure you have a proper budget allocated for this after closing.

10) Maintenance and Repairs - As a tenant the building is likely repaired and maintained by arrangements through the landlord or a property management. This is handy because it allows tenant’s to focus on their business and not maintaining a property. Once you buy a building you become the landlord and are now responsible for arranging repairs and maintenance, just something to keep in mind.

If after reading this you feel that buying a building is the right thing for your business then please reach out and lets see if there are some options available for you in the Niagara Market. It would be wise to ensure the agent you’re working with has experience with commercial or industrial real estate sales.

What is a Commercial Real Estate Lease Assignment?

Yesterday I wrote a blog about subleasing in commercial real estate which is usually the most common option when the space or unit is no longer needed by the tenant for various reasons. Today I want to touch on the other option which is commonly referred to as a lease assignment.

If you read my blog on subleasing you would notice that I mention that the original tenant still remains on the hook to fulfill obligations of the original lease in that the sub-tenant pays the tenant and the tenant still pays the landlord in addition to fulfilling other obligations in the document. The difference with a lease assignment is that it usually releases the original tenant from its obligations to the lease. While this may sound like the more attractive option from the tenant’s perspective, it’s not always an option on the table and it’s often not the preference of the landlord. In the lease assignment one tenant assigns all responsibilities of the lease to the new tenant, letting the original tenant off the hook. The new tenant would have a direct relationship with landlord going forward.

So what are some reasons that a lease assignment would be preferred over a sublease? As mentioned above the first choice and sometimes the only option a landlord wants to give is the option to sublease. In the eyes of the landlord they have an existing relationship with the current tenant so they may not feel comfortable working with a lease assignment. Reasons for a landlord to consider a lease assignment instead of a sublease is because there may be an opportunity to achieve higher rents with the newer tenant, or the newer tenant may appear to have a more solid financial backing (such as a well known national franchise) vs. a mom and pop business that is going out of business. It’s obvious the landlord would want to form a direct relationship with a tenant they perceive to be a better fit for the building and their investment goals.

If you’re a landlord or tenant who has encountered this situation and don’t know what’s best, weigh the pros and cons of either and it should be clear what is best for the scenario.