CRE

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 

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.

The industrial Real Estate Business Parks in Fort Erie

Fort Erie is in the bottom right corner of the Niagara Region and last stop in Canada before the USA by the Peace Bridge border crossing. This border crossing gives Fort Erie unique opportunities for industrial businesses regularly importing or exporting from the United States.

Businesses that are keen on having close proximity to the border take note; there is an industrial park Located just off of the Gilmore Road exit of the QEW highway. That’s less than 10 minutes from the United States (granted you have a quick and smooth border crossing). The industrial park is visible from the highway. Most buildings are located on Pettit Road, just off of Gilmore Road.

For industrial businesses looking for buildings with a convenient border crossing, you will want to check out Fort Erie. Lease rates in this area can also be a little lower when compared to larger municipalities in Niagara, such as St. Catharines, Niagara on the Lake, and Niagara Falls.

The Office Building Parks of St. Catharines

St. Catharines has historically been a blue collar town, and while there have been some changes in industry, especially since the 90's, it still very much holds it's blue collar feel. With that in mind, we have a relatively small office building market to tap into.

The most prominent and accessible area for office space can be seen from the QEW as you pass through the Martindale Road area. Here there is a mix of low and mediums rise office structures that line Martindale and Hannover Drive. Base rental rates to lease in this neighbourhood start around $12 per sq ft but if you are looking to get into a newer building, you can easily start over $20 per sq ft.  This is often seen as the most desired area for office space in the city.

 The second most known office market in St. Catharines is downtown, which in recent years has had quite a face lift with infrastructure, a new arena, and a Centre for the Arts. Downtown has proven itself to be a good source for food and entertainment but with its mostly outdated office towers and lack of convenient and cheap parking it has gained little traction to attract and retain office/commerce businesses. Office space for lease in this neighbourhood can be found with base rents as low as $8 per sq ft, averaging around $12, and some planned developments are offering space over $30. There are plans for multiple developments involving office towers but time will tell if these buildings ever fill up. In my opinion downtown could/should transform some of it's outdated office structures into non-student housing to mix up some of the demographic living and working in the city core.

 The last known office market is on Queenston which has been quiet in recent years as the hospital relocated from this area to the West end. Back in the day this is where nearly all of the city's medical practitioners were located but it's currently a depressed neighborhood in the starting stages of redevelopment, likely to affordable housing and mixed uses.

 It's important when searching for office space in this city that you select from a building and location that is suitable for your business and your employees. Be sure to enlist the services of a Realtor that has ample knowledge of the local office market to ensure you're making the right decision for your business.

How often is TMI (CAM or additional rent) updated in a commercial real estate lease?

Landlord’s should be in the habit of checking their TMI figures annually to make adjustments if necessary. This should either be done at the calendar year end or the landlord’s year end whichever the landlord prefers or is specified in the lease. If there is a difference in expenses, the tenant’s should be notified within a reasonable time of the year end, my lease states within 3 months.

What happens if there is an increase in the TMI? As mentioned above the tenant’s should be notified within a reasonable time frame specified in the lease document so that they can implement their increase starting the next rent cheque. If there is an increase the landlord will need to send out recovery statements for tenant’s to pay the balance of expenses that went over the previous TMI rate.

I like to make sure that my clients are properly updating and recovering their TMI’s to ensure their investments are operating as they should. If you’re a client of mine and need assistance updating your TMI’s I can provide helpful tips and advice when the time comes.

How come my commercial lease space is smaller when I measure it?

Measuring Square Feet

Measuring Square Feet

I wouldn't say this questions comes up often but I do hear it a few times a year from various tenant's. I don't blame tenant's for suspecting they might be getting overcharged as they are used to basing measurements off interior enclosures, but that's not how space is measured in commercial real estate.

In commercial real estate leasing it is common industry practice to measure according to BOMA standards (BOMA = Building Owners and Managers Association) which focuses on making measurements from the outside dimensions of the space, not the interior. While this may sound like a vague and stripped down interpretation of BOMA standards for measurements I'm merely making this reference to give the average tenant or landlord an idea of how a space can be measured differently. There are other aspects of BOMA standards for measurement such as adding square footage to account for the tenant's proportionate share of common areas (if any) but that belongs in another blog.

The confusion comes when a tenant or unknowledgeable agent measures a space using interior measurements and they come to the conclusion the landlord is trying to rip off the tenant by misleading them about the size of the space. This is usually not the case.  The landlord has likely measured the building properly according to BOMA standards which is the industry standard to follow. In the minds of building owners they want their commercial tenant's paying for every aspect of space they use which would include the walls that enclose their unit. This is in no way shape or form a misleading practice and my purpose for drawing attention to this issue is to prevent tenant's from thinking landlord's have taken advantage of them when they haven't.