negotiating

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 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.

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.

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.

Niagara Spring 2019 Industrial Market Update - There is no small space

Industrial Warehouse

Industrial Warehouse

As vacancy shrinks and rental rates rise in this crazy industrial market, it’s important to keep these conditions in mind as you search for industrial buildings or space for lease for your business. This blog applies to all of Niagara, especially St. Catharines.

If you’re looking for something under 10,000 sq. ft. start looking very early and be patient. Speak with knowledgable industrial brokers with their ear to the ground and may be able to make you aware of a coming vacancy months in advance.

If you’re looking for a space under 5000 sq. ft… good luck. At the moment there is either none or very few viable options available. You will need to be patient, and, if a vacancy comes on the market be sure to jump on it as soon as possible assuming you will have competition. Don’t assume there’s desperation from the landlord, there isn’t. It’s a landlord’s market so be sure to approach the situation in that way.

For tenant’s looking to get on a wait list for listings as they come available, please contact me to see what your options are.

How to Calculate Monthly Rent for Commercial Real Estate Lease Listings

If you want the shortcut formula look to the bolded text a few paragraphs down. If that doesn’t make sense or you need explanation read on and even reach out if you have any questions.

If you’re looking to lease a commercial, industrial, or office property, you have probably noticed that most listings are priced per sq. ft. often separating base and additional rents. If this is a new concept to you, I bet it can be a little confusing. One of the most common questions I receive from newer business owners is, “What does that work out to monthly?” Below is a simple guide to calculating commercial real estate rents for the majority of listings that are out there.

Step One, add the per square foot base rent and additional rent together. The base rent can often be referred to as net or triple net rent, additional rent can also be commonly known as CAM or TMI. If you have a base rent of $10 per sq. ft. and additional rent of $5 per sq. ft., that is a combined total of $15 per sq. ft.

Step Two, multiply the combined total above by the number of square feet that make up the premises to get the total annual rent. If we are looking at a 1000 sq. ft. commercial unit, that would be $15 multiplied by 1000 for a total of $15,000 annual rent.

Step Three, divide the annual total rent by 12 to discover the total monthly rent. Taking the example above, $15,000 divided by 12 is $1,250.00 monthly. Keep in mind that commercial rents in most states and provinces in the United States and Canada have taxes applicable to commercial rents. In the province of Ontario commercial real estate rents are subject to 13% HST (Harmonized Sales Tax) which gets added to the total. In this situation 13% of $1,250 is $162.50 for a total monthly rent of $1,412.50 including applicable taxes.

For those looking for a mathematical equation the simplest version would look like this:

((Base Rent + Additional Rent) x Square Footage) ÷ 12 = Total Monthly Rent, before applicable taxes.

Other Factors? Aside from any applicable taxes it should be noted that most commercial rents do not include utilities so it would be good to clarify that with a the listing agent if it’s not clear in the advertising. If you come across a listing advertising gross rent instead of base/additional, it usually means that is number is the combined total of base and additional rent already calculated for you.

If you’re looking to lease commercial space, please make sure you are working with an agent that clearly demonstrates knowledge of how to calculate total monthly rents to prevent upsetting surprises.

What is an Option to Renew in a commercial real estate lease?

An option to renew allows the tenant to have the option to renew their lease before it expires. There is a time frame, a window of usually 3-12 months in which the tenant needs to exercise this option before their lease expires. If the option is not exercised within the specified time period, the landlord has the opportunity to entertain other tenant’s and/or put the unit back on the market.

Try not to think of the option to renew as a right to renew. Although it may give the existing tenant priority, it is usually dependent on agreeing on new rental rates for the future term and possibly negotiating some other terms. Generally speaking, if both landlord and tenant have realistic expectations of what market rents are and no other details need to change, an option to renew can be negotiated quickly. If there is disagreement on rent the tenant could feel compelled to relocate if they feel there is a better deal elsewhere, or the landlord could try to refuse to renew the lease if the rents are perceived to be below market value.

If you think your lease is expiring soon, it would be wise to have a look at it and see what your renewal options are, and when you need to have a new agreement by.

I do offer lease renewal writing and negotiations as part of my services. Involving a qualified commercial real estate broker in the lease renewal process ensures that both parties have a realistic expectation of market rents.

What is TMI, CAM, and Additional Rent in Commercial Real Estate Leasing?

If you're new to commercial leasing you are likely surprised by the way most commercial, industrial, or office spaces are priced and marketed. Most commercial listings have the price broken down per sq. ft. and while that may be confusing in itself, what I find catches most people off guard is the mention of additional rent which is also commonly referred to as TMI (taxes, maintenance, insurance) or CAM (common area maintenance). It's often an overlooked detail in the hunt for commercial space because a new tenant may notice the base rent is within their budget but after discovering additional rent the space is not affordable.

So what is this additional rent? It's the landlord's expenses for the property.

What are the landlord's expenses? Property taxes are usually the most significant of this figure but it also includes but isn't limited to property insurance, landscaping, snow removal, waste removal, cleaning and maintaining common areas, building management and administration fees, and repair and maintenance for items like the roof, HVAC, etc.

Why is additional rent separated from the base rent? Keeping the base rent separated and priced per square foot makes it easy to compare against competing spaces to determine what is in line with market value, this benefits both landlord and tenant.

Why do tenants pay additional rent for the landlord's expenses? I've been asked this a few times as if this is a deceiving practice but it isn't. The tenant pays their proportionate share of the property expenses because it's the tenant's that use the property, not the landlord. The tenant's use the structure, the HVAC, the parking lot, the common areas etc. and those items need to be paid for and maintained. Logically it should be the party that uses it that pays for it and that is why the expenses to maintain the property paid for by the tenant usually through TMI.

How is TMI/additional rent calculated? In most scenarios the combined annual total for expenses is divided by the total number of square feet of the building. This provides the per square foot rate for expenses we call additional rent, AKA, TMI or CAM. This per sq. ft. figure is multiplied by the number of square feet that make up the tenant's premises and that is the annual total the tenant is responsible for paying as additional rent.

Does TMI change or increase? Yes. I mentioned above property taxes usually make up the bulk of additional rent and unfortunately property taxes have a tendency to increase regularly. In addition to this the cost of maintenance and repairs also change over time and will have an impact.

Is additional rent negotiable? No. Property expenses are not negotiable. They are what they are.

Have a question about additional rent that isn't in here? Let me know what it is.

Why Don't Commercial Real Estate Landlord's Like Short Term Leases?

Occasionally I come across commercial tenant's that don't have a long term commitment in mind but somehow expect a deal from landlord's. In short this is the opposite of what the landlord has in mind.

Real estate investors like long term stability and predictability and tenant's only looking for month to month options or short term leases will find themselves out of luck in most markets. Month to month tenant's are unpredictable because most can leave with just 30 days notice, which isn't much notice for the landlord to get the space ready and on the market looking for a replacement tenant. Landlord's hate putting themselves in a scenario where they have a revolving door for tenant's. Not only is it a headache to deal with it's also costly. Further to that a short term or month to month lease agreement doesn't exactly protect the tenant either, the landlord can issue them 30 days notice to vacate as well, and usually there is little or nothing the tenant can do about it.

While most residential leases are for 1 year, that too would be considered a short term in a commercial building. Most of the landlord's I currently work with won't entertain a 1 year lease in this market. The typical minimum term for most landlord's right now is 3 years but most landlord and tenant's are currently aiming for 5 year terms or longer.

Why so long? If a tenant has a solid business plan they should have no issue committing to a multi-year lease because they should have a pretty clear long term business forecast. Newer businesses are adverse to risk and prefer short terms, which are not impossible to find, but you likely won't end up with your ideal building unless you're ready to commit to longer terms. Something else to note is that landlord's are rarely negotiable for short term leases, often requesting a premium rental rate as a result.

For tenant's with questions about the commercial real estate leasing process feel free to contact me for more information.

Niagara's Industrial Real Estate Market Heats Up

If you're an industrial tenant on the move in the Niagara Region you have probably noticed by now that there isn't much out there to select from, especially if your business is under 5000 sq. ft. Even for larger tenant's it's still slim picking.

What we are experiencing is simply a supply and demand issue. There are an abundance of tenant's looking but simply not enough property available. In St. Catharines for example, this has caused average base rents to escalate quickly over the last few years from an average around $5 to $6 per sq. ft. towards $7 per sq. ft. in 2018. (keep in mind these rental rates are for quality spaces)

There appears to be no end in sight for the supply and demand issue in the industrial market. While the Niagara Region is expanding and bustling with residential development, there has been very little development in the industrial sector to create more supply and cool the lease rates for available space. With landlord's enjoying low vacancy rates combined with higher rental rates there is a lack of desperation to be flexible and negotiable for new and existing tenant's.

It's important for industrial tenant's to make sure they are working with a knowledgable commercial / industrial realtor for access to the most up to date opportunities, and to ensure they are being competitive enough when they find the building they want to pursue. Submitting a well written competitive offer will increase your chances of success so it's important to make sure you're working with a knowledgable commercial agent for the best approach.