commercial real estate

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 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.

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.

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.

Small Office or Institutional building for sale in St. Catharines

Behold 172 Eastchester Ave in St. Catharines with a recent price increase due to the amount of activity. A clean and well maintained small building used for office or institutional uses in the East end of the City. The building has been previously used as a private career college and a church but it can be converted to offices, medical, educational, or other uses.

What makes 172 Eastchester so special? Aside from being well priced at under $200 per sq. ft., this building features 17 on-site parking spaces plus additional free street parking, it has large bay windows that bring in amply natural light, it has a finished basement for more usable space, and it has an elevator which can be re-instated with the implementation of a regular maintenance contract. These are all rare to find features, especially at this price point.

If you are in the market to buy a small office building you will want to check out this listing. Looking for something else? Let me know what you need and I’ll see if I can find an option somewhere by contacting 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.

The Tourist Commercial Real Estate Areas of Niagara Falls

Niagara Falls is a landmark known by most of the world, and as such, there is obviously tourism around it.

One of the most well known commercial real estate areas for tourism is Clifton Hil, a short street that connects Victoria Ave to Falls Ave/Niagara Parkway. Clifton Hill is known for its over the top architecture, large colourful displays, funhouses, entertainment, and food. In peak season Clifton Hill is crowded with vehicle traffic and pedestrians traffic. At the bottom of Clifton Hill is Falls Ave. and Niagara Parkway which are a short distance from the Horseshoe Falls viewing areas, you’re also right next to the Rainbow Bridge to cross into the United States.

The tourist district expands Southwest from Clifton Hill up Victoria Avenue and although Stanley Avenue sort of acts as a border to the West, Victoria Avenue clearly has businesses that look to draw in tourist traffic past that, up Ferry Street, and even a considerable distance down Lundy’s Lane.

The Tourist Area travels some distance to the South Along Fallsview Blvd and Stanley Ave but it tapers off once you pass the Fallsview Casino and the falls itself.

The rents in the prime Tourist areas surrounding Clifton Hill are not a reflection of commercial real estate rents elsewhere in the city. Tourist area rental rates are usually AT LEAST triple compared to most areas, for the obvious reason of catering to high traffic tourism.

If you think your business might be a good fit for the prime tourist areas of Niagara Falls, be sure to connect with a commercial real estate broker who is knowledgable with the area and can act quickly as vacancies are rare.

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.

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.

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.

Why don't I own commercial real estate and why does this benefit my clients?

Real estate agents are known to invest in real estate. For obvious reasons it’s familiar territory and if you work in the industry you will come across various commercial and residential real estate investment opportunities, and it’s hard not to consider the really attractive ones.

While it’s good to have the advice of an agent that is also a savvy investor you need to keep in mind they may not represent your interests very well. I have discovered that not owning a local real estate investment allows me to represent my clients better because I’m not competing with them.

Consider a scenario where I may own a commercial plaza or a multi-tenanted industrial building. I’m motivated to keep my buildings full with tenant’s just like any other investor. If I have listings for lease in my own buildings and listings with other landlord investors that have similar properties with vacancies, it would be wise to suspect that I’m most likely trying to push tenant’s into my own buildings before my other listings. Not only am I competing for tenant’s, I’m also competing for investment opportunities too. As a Realtor with my ear to my ground I’m likely to come across investment opportunities before the average person. Be sure to work with an agent that wants to share that opportunity with their clients rather than keep it for their own interests.

Also considering the scenario from the tenant’s perspective, how do you know that you are being shown all properties or the best properties that fit your criteria? It would be wise to suspect that the agent is trying to get you to focus on their own properties. If you find yourself in the position where you are only being shown options owned by the Realtor it might be good to get a second opinion.

To avoid this scenario it would be good to have this discussion with a Realtor you are thinking about working with. If they own commercial or industrial buildings in the area they are your potential competition if you are a landlord and they may not offer you all of your options as a tenant.

To avoid this conflict of interest I have a promise to my clients that I will not own commercial or industrial real estate in the Niagara Region. This way my landlord clients are assured that I am trying to put tenant’s in their buildings and my tenant clients are assured I’m not just showing them properties that I own.

What is Vegan Real Estate?

This may seem like an odd blog to appear on a website about commercial leasing, but trust me it's not irrelevant. I have been a vegan for over 8 years now and it is a particularly interesting time in history to be a vegan. Veganism or plant based living have been lifestyle concepts for much longer than people think but the number of people who now identify themselves as vegan has exploded in the last few years. We believe veganism has passed its tipping point and is now spreading like wildfire.

So what does veganism have to do with commercial real estate?

To start, veganism goes beyond food choices although that is usually the starting point for someone adopting a vegan lifestyle. A vegan is a person that abstains from consuming or using animal products so it goes beyond avoiding meat, dairy and eggs in your diet. Most vegans will go to great lengths to eliminate animal products in their clothing, accessories, furniture, decor, and vehicles where it may be common to come across ivory, leather, bone, pearls, feathers, and so on. To go even further vegan's will avoid any activity that puts animals in captivity or exploits them which include zoos, aquariums, and animal based theme parks. The decision to go vegan is usually motivated by a mix of health, compassion, and environmental concerns. While veganism is a personal choice, plant based living is a very community based lifestyle which has evolved into a trend towards vegan real estate for such communities to thrive.

So what is vegan real estate? In the most basic sense we can make the assumption that vegan real estate is a property that is free of animal products but it can go way beyond that. Most vegans are concerned about the environment so they desire a structure that was built with sustainable materials (if possible or available) and incorporates green energy sources (if possible or available). But nothing much about that goes beyond the scope of what people would already describe as being environmentally friendly, so what more does it need to be classified as vegan?

Going back to the community aspect of plant based living, vegans don't necessarily limit their social circles to other vegans only, but they do enjoy being surrounded by like minded people on the regular. For that reason vegan establishments and neighbourhoods have started to pop up such as Vegandale in Toronto. Other examples do exist throughout North America mostly along the West Coast in the United States and in areas of Hawaii. Even taking a local Niagara example, Downtown St. Catharines has a very noticeable vegan population with many businesses in the area catering to the lifestyle.

The way this impacts real estate is that vegan businesses will want to work with like minded vegan commercial real estate brokers. Vegan businesses will also want to be located among like minded businesses and community members so that they can easily attract their ideal customer demographic. From a leasing perspective they may be focused on creating restrictions on surrounding uses being contrary to the lifestyle and customer base (if possible). For tenant's in the food service business there will likely be emphasis on pest prevention rather than pest control. These are just some of many examples of how a commercial real estate lease can cater to vegan businesses or landlord's.

The conclusion? It is clear that vegans act just like many cultural groups in that they like to locate close to each other for community aspect and sometimes have an obvious presence in certain neighbourhoods as both residents and businesses. As the number of people who identify as vegans increases we will see its influence and impact on commercial and residential real estate developments, neighbourhoods, and communities in years to come. While the concept of vegan real estate may seem vague and obscure to most, the influence in real estate is still fresh and will evolve into something bigger and better over time as more of the population transitions to this lifestyle.

As Canada's only vegan commercial real estate broker I love hearing from plant based business owners and answering questions on this subject so feel free to reach out.

 

 

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.

What is an Indemnifier, Guarantor, or Personal Guarantee in a Commercial Lease?

This is a common sticking point when negotiating a commercial lease. It seems like every landlord wants it and every tenant doesn't. Unfortunately most tenant's don't understand what it is and why a landlord may want it.

A simple way to put it, the person who signs as an indemnifier or a guarantor is giving their personal guarantee to the landlord that the tenant (a business) will fulfill the obligations of the lease. The most likely person to sign an indemnifier is a company owner or branch owner. In the event the tenant does not fulfill its obligations to the lease, the indemnifier is expected to. This would include but isn't limited to rent owing, property damage, environmental contamination, and other terms of the lease. You can see why some people are hesitant to sign it, it can be an intimidating commitment... Then again to some tenant's this is just a requirement of doing business and in some situations, you may have no choice.

Why does the landlord want an indemnifier? It's added security to the lease.

Some landlord's don't care about getting an indemnifier unless they are spending money for the tenant or providing other forms of incentives to the tenant. Having an indemnifier gives them a warm and fuzzy feeling that they will likely recover those costs or incentives. Some landlords feel they have a premium property and/or management service and that requires a premium commitment from a tenant in the form of an indemnifier. And some landlord's just demand it regardless of tenant, building, location, and management style. Whatever the scenario, if you have a landlord demanding it, you may not have a way around it if this is the building you want to be in.

What is the concern from tenants? A tenant that is confident in their business and finances may not care and just see this as a requirement of doing business. Tenant's that feel less secure may worry about the worst case scenarios that could unfold. What if a business fails 2 years into a 5 year lease? That's a lot of rent to be on the hook for personally if the business failed. On that note you can see the wheels spinning in the tenant's head with all the possible scenarios that could unfold and that can make a person paranoid and reluctant to sign as an indemnifier, often killing a deal.

Not all landlords want an indemnifier to rake them over the coals. Landlords are often human beings too and many of them understand shit happens and hard times come. If a tenant finds themselves struggling but keeps an open dialogue with their landlord about their concerns there may be an alternative solution.

What are some alternatives to signing an indemnifier or personal guarantee? Just because a landlord demands an indemnifier it doesn't mean it needs to be black and white. You could ask if the landlord would entertain a limited indemnifier for either a limited period of the lease, or set a maximum dollar limit the indemnifier would be responsible for. For example a tenant could propose that they would be willing to indemnify 3 out of the 5 years in their lease, or, if the landlord spends $10,000 on leasehold improvements for the tenant then the landlord can recover a maximum of that amount or penalty with a different dollar value. You could also see if the landlord would take a larger security deposit instead. These are just a few scenarios that can be crafted as an alternative.

If you are a tenant already in the middle of a lease, don't forget that most leases provide an opportunity to sublease or assign your lease and that can sometimes be used to help get an indemnifier out of a financial bind, but not always.

Regardless of your approach to indemnifying a lease, it's important to keep in mind that you are using someone else's property to do business. If that property owner demands it try to keep in mind that this is a common request. If you were to lease or purchase a car, or lease or purchase a house, these are big ticket items and the companies or parties selling, leasing, or financing these big ticket items all want some form of security to give them the warm and fuzzies that you will fulfill your obligations in the agreement. If you have no problem providing additional security for those scenarios, why not to your commercial landlord as well?

If you have questions about being an indemnifier or a guarantor on a lease it might be best to speak with a commercial real estate lawyer to get the advice you need.

STOP ASKING ABOUT UTILITY COSTS!

I get asked frequently when showing a space, "Do you know what the monthly utility costs are for this space?"

My answer is almost always, "NO" and here is why:

Whatever the previous tenant paid in utilities is irrelevant and in no way shape or form should be an indication of what the next tenant will pay. End of story.

Think about it for a minute. This is commercial real estate. Every tenant is different. It's not like we can say the average business pays X for heat and Y for hydro because every. single. business. is different. You could be a clothing retailer looking to take over a space previously occupied by a restaurant, a hair salon, a dentist, a tanning salon, an office. For industrial you could be a warehouse and distribution tenant taking over a space previously used by a manufacturer, a machine shop, a showroom etc. 

Nothing from the previous tenant's utility use should be an indication of what you will pay unless your use, number of employees, hours of operation, number of customers, computers and equipment, and desired interior temperature are identical. The odds of this happening is so insanely low I haven't seen it happen yet in over a decade of commercial leasing working with hundreds of tenant's.

Something else to note is that the previous tenant paid the utility bills, not the landlord. It isn't reasonable to expect the landlord to know the previous tenant's utility costs because the landlord was not billed for and did not pay them.

If the building you are viewing has a draft and has been poorly maintained, it's best to go with your gut and assume that you will likely pay more in utilities than a building that has been maintained better.

Ultimately the tenant's business is what makes up the utility costs and tenant's should have a generic idea of their utility budget based on what they do. There are some structural influences that could influence utility costs but the tenant should have some general knowledge of how this will influence their costs.

One alerting thing I have no problem telling tenant's is that obsessing over finding out utility costs without obvious reason (such as a gaping hole in the side of the building impacting heating costs) is a serious red flag to the landlord that you don't have a solid business plan to budget for this aspect of your business. That won't make them feel comfortable.

 

 

What is the biggest mistake you can make when trying to lease Commercial Real Estate?

It doesn't matter if you are the landlord looking to fill vacancy or a tenant looking to move, there is one big mistake either party could make in this process.

MAKE SURE YOU START THE PROCESS RIGHT BY HIRING A STRICTLY COMMERCIAL REAL ESTATE AGENT THAT FOCUSES ON LEASING.

If you plan to do a commercial lease, now is not the time to hire the guy that sold your house.

All Realtors are not equal. Without a doubt, most real estate agents focus on residential home sales. Some focus on farms, vacant land, multi-residential, but the majority of Realtors out there have a very narrow scope of experience mostly catering to residential real estate sales. All Realtor's in Ontario are forced to have some basic commercial real estate education as part of the licensing process, but this does not make them the most qualified person for the job.

So, who are you looking for?

The obvious answer is you want a Commercial Realtor and you want to ask some very specific questions about their leasing experience. If you ask most Realtor's if they do commercial real estate most of them will answer, yes, but that is because they have the license to trade it, that doesn't mean they have any experience with it. Some residential agents do the occasional commercial deal but this doesn't mean they are qualified or best for the job. In addition to this, not all commercial agents are great at leasing as some may have a specific focus for commercial vacant land sales or commercial investment sales etc. You have three very specific criteria to be met:

1) The agent focuses strictly on commercial real estate

2) The agent has notable experience with leasing.

3) The agent doesn't own properties that compete (more on this in another blog)

Why is it important to use a strictly commercial agent? The short answer is that an agent that has little experience with commercial real estate is not going to be able to represent their clients interests because it would be like the blind leading the blind. How do you expect to be represented by someone who is unfamiliar with the process? I wouldn't feel comfortable and I know most of my clients wouldn't.

If the agent is strictly commercial, make sure to inquire about their leasing experience. Most commercial realtors regularly engage in leasing activities however for reasons stated above, some are more experienced at it than others.

Ultimately the client needs to make sure they are comfortable with who they are working with to get peace of mind they will be properly represented. If you're a tenant, don't go signing a buyer agency agreement with the first agent that pushes for one. Spend 10 minutes on Google to figure out who is truly right for this job.

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.

Is a Security Deposit the Same as Last Month's Rent?

The answer to this question is ultimately determined by the wording of your lease however, the way I write my leases and the industry standard is that a security deposit is not your last month's rent.

A security deposit could be any amount but most commonly it is equivalent to last month's rent and that is where the confusion occurs with tenant's. Even though it is the same amount as your last month's rent, it is not used as rent.

A security deposit is held by the landlord to repair any damages caused by the tenant or to guarantee the tenant's performance against the lease term. It is held until after the tenant vacates the premises at the end of their lease and is returned minus deductions from defaults, damages, etc. that may have occurred. The tenant is more likely to finish their lease and leave the unit in good repair with the incentive of a returned security deposit.

Do tenant's still need to pay last month's rent if they provided a security deposit? Yes. As mentioned above, the security deposit is not last month's and can not be used in that way. If you don't pay last month's rent you would be in default of your lease.

Not only is it good for landlord's and tenant's to have a good relationship during the lease term, it's also important to part company at the end of a lease term on good terms. A security deposit is just one option to ensure cooperation through to the end of the term.