buildings

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.

2019 Industrial Lease Rates for St. Catharines

In the last year industrial lease rates have once again soared past expectations. This is what happens when business is good and there aren’t enough buildings to house everyone.

For those curious, this is a very general approach to industrial building lease rates in St. Catharines. In the East end of the city, quality B class buildings will start around $6.50 per sq. ft. for base rent, $7+ per sq. ft. or higher can be justified for A class. For the West end of the city B class would start around $7 base rent and A class industrial buildings are now achieving over $8 per sq. ft. and might creep closer towards $10 if things continue at the rate they do.

To ensure that you are paying market rental rates it would be wise to enlist the services of a commercial real estate broker that not only possesses that knowledge, but also knows when and where to find the building or space you need for your business.

How to Calculate TMI ,CAM, or Additional Rent on Commercial and Industrial Buildings

This blog is targeting commercial and industrial buildings that have little or no common area. Most commercial retail plazas and most industrial buildings will fall into this category. Office buildings, or buildings with an abundance of common area would usually take a different approach which I plan to cover in another blog. If you’re new to this TMI, CAM (common area maintenance), and additional rent are industry phrases to represent the expenses for the property, and whatever phrase is used is usually a matter of preference but TMI is most common.

T.M.I. stands for taxes, maintenance, and insurance so the first place to start is adding together your property taxes, all of your maintenance and repair costs on the property, and your insurance costs for the most recent year. That makes up your combined annual total of property expenses. You simply need to divide that total by the total number of square feet that make up the building. You then have your per. sq. ft. rate for TMI.

A simplified formula: (Property Taxes + Maintenance + Insurance) ÷ total square feet = per sq. ft. TMI rate

If you’re looking for information on what TMI is (also known as CAM or Additional Rent), you may want to visit my other blog post with that explanation here https://www.stevendavidson.ca/blog/2018/8/13/what-is-tmi-cam-and-additional-rent-in-commercial-real-estate-leasing

For information on how often your TMI should be calculated I have a post about that here: https://www.stevendavidson.ca/blog/2019/2/12/how-often-is-tmi-cam-or-additional-rent-updated-in-a-commercial-real-estate-lease

If you were looking for information on how to calculate month rent instead of TMI I have information on how to do that here: https://www.stevendavidson.ca/blog/2019/2/22/how-to-calculate-monthly-rent-for-commercial-real-estate-lease-listings

12 important things to consider when you search for industrial real estate for lease

Industrial Warehouse

Industrial Warehouse

Searching for the ideal industrial building for your business goes beyond finding something that is the ideal size and budget. There are a number of features to consider in your search for industrial space for lease to ensure your term in the building is a comfortable one. Below are important criteria to keep and mind and consider in your search for industrial property, none of these are in any particular order.

1) Clear Height - Having a space that is an adequate size in footprint is useless if it doesn’t have an adequate clear height to rack your inventory high enough that you won’t run out of space. Generally speaking, if you’re a warehouse and distribution tenant, having more height allows you to rack higher and save on the number of square feet you occupy. Higher clear height often creates an opportunity to use your space more efficiently by racking up rather than expanding outward.

2) Power Supply - If you manufacture or use a lot of computers and equipment to run your operation you will want to ensure the space you are planning to lease has an adequate power supply. If your business has a requirement for 3 phase power you will want to make sure the unit is equipped with it.

3) Loading Docks - Another popular feature among warehouse and distribution tenant’s is loading docks. Loading docks are truck trailer height and allow for easy movement of inventory on and off of trucks. Unfortunately not all industrial buildings in Niagara have loading docks, in fact we likely have a shortage in comparison to other areas of the province and country. It can take a bit longer to source a building with loading docks, especially if you’re looking for something under 10,000 sq. ft. in St. Catharines or the Niagara Region. If you’re looking to relocate soon and loading docks are a priority, you may want to start your search earlier just in case.

4) Grade Level Doors - Unlike loading docks, grade level doors open at ground level, not truck trailer level. These doors are more common than loading docks and most industrial buildings have them. These doors are used by most industrial businesses however shipping and receiving inventory through them isn’t nearly as easy as using a loading dock. It’s important to make note of the sizes of grade level doors if you have larger items coming and going.

5) Location - Most industrial operations ship and receive goods by transport trucks so a location with close proximity to the highway is usually preferred. Ensuring the location is easy to get to for trucks is important. If you have a lot of employees you may want to locate somewhere with access to public transit. Some operations may prefer to have a rail spur or access to a waterway for shipping. Some industrial businesses are noisy or produce a strong odour which would be a good reason to locate somewhere a little isolated away from housing and other businesses. These are items to consider based on the demands of your business and a good industrial agent can help you find what’s best.

6) Truck Access - Further to the point above you need to ensure the property itself can allow for the proper flow of trucks to ensure shipments and deliveries come and go as you expect them to. There are some poorly designed properties that make it very difficult for trucks to come and go as they should and those properties should be avoided.

7) Type of Heating - The two most common forms of heating in industrial buildings is either forced air gas or radiant tube. Usually it’s a matter of preference but there are some businesses that can’t work with one or the other for various reasons. In terms of efficiency, in a warehouse setting many operations tend to have a preference for radiant heat as it heats the surfaces and not the air, that way when someone opens a grade level door you don’t lose all your heat.

8) Parking - If you have a lot of employees and a good portion of them own vehicles, you need to ensure the building you have selected has enough parking capacity, otherwise you can run into an issue.

9) Office Space - Most industrial businesses have some requirement for office but not all. For those that do, the space space is rarely more than 10-20% of the total size of the unit. You won’t find exactly what you’re looking for so it’s best to keep the big picture in mind and ensure the industrial/warehouse portion of the space meets your needs more than the office. The office is an after thought that can be modified if necessary.

10) Column Spacing - Depending on your equipment, the flow of your manufacturing, the type of racking you have etc., you may need to keep the distance between columns in mind. For example, if you need to fit a 25 foot machine in between columns that are only 20 feet apart, you have a problem. It’s important to share minimum column spacing requirements with you Realtor to keep note of in the hunt for space.

11) Plumbing and Drainage - Aside from needing a washroom and a kitchen, some industrial operations require additional plumbing and drains throughout their unit. Make sure the buildings you have focused on can have plumbing and drains where needed for your business to function as it should.

12) Work with a Commercial Real Estate Agent - I’ve complained about this in other blogs and I can’t state it enough, now is not the time to hire the agent that sold your house. If you expect knowledge and competence when making a major commitment to a long term lease, you want to ensure your requirements are fulfilled and you want your interests protected. The best way to do this is to hire a commercial real estate agent who has the knowledge, skills, and experience in industrial real estate leasing to help you pull that off. Using an agent that sells houses and doesn’t possess those qualities can create a lot of headaches and unwanted problems during the process and well after the move.

If you want to know more about finding the ideal industrial building please don’t hesitate to reach out and ask questions.