tmi

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

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.

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