Commercial Real Estate 101

Special Guest Blog Post by Paul Blunt: Intro to Environmental Assessment

2012-02-24T15:05:00.000-05:00

Today we have another guest blog post. Paul Blunt, Environmental Engineer with Coffee Geotechnics and servicing the Southwestern Ontario Market, will provide us with an intro to environmental assessment:

A Phase 1 Environmental Site Assessment (ESA), is commonly completed prior to the acquisition of a property, generally for due diligence and/or as a requirement of financing. The purpose of a Phase 1 ESA is to identify actual or potential Site environmental impacts and discuss the relevant liabilities.

Phase 1 will assess ‘the Site’ and adjoining properties by conducting interviews with persons having specific knowledge of the Site, reviewing available regulatory files and Site records for the property. Other activities may include reviewing the municipal directories, fire insurance plans and aerial photographs for the subject Site and adjoining properties.

In the case of a lease it may be prudent for an owner or tenant to complete a Phase 1 ESA prior to leasing a Site. A Phase 1 ESA would reveal the history of the Site and potentially contaminating activities (PCA) that may have been conducted at a Site or adjoining properties. The Phase 1 ESA can serve as a ‘base line’ assessment prior to occupying the Site. This becomes increasingly important if the operations are several decades old and the history is unknown or industries replacing like industries (i.e. a dry cleaner drop location is replacing a dry cleaner).

Special thanks to Paul for his contribution. To learn more about his environmental engineering services, visit the company website or call him at 1-416-315-9694.

Security Deposits/1st & Last Month's Rental

2012-02-17T11:00:00.000-05:00

Next segment in our Leasing Series…Security Deposits/1st & Last Month's Rental.

Deposit monies on typical commercial lease agreements can take 2 forms. The first is a basic security deposit and the other would be based on 1st and last month’s rent being paid upfront – both being due at the time of entering into a lease agreement.

With a security deposit, the Landlord often requests it to ensure the Tenant maintains and returns the space at the end of the lease term, in the same condition it was received. Detailed inspections of the condition of the premises at both the time of lease commencement and termination, should clearly be a priority given the implications it has on any security deposit. Grounds for forfeiture of a security deposit, should be clearly understood by both parties and well defined within the lease agreement.

Two months rental in advance (most often 1st and last month’s rent) is typical in a commercial lease, where the landlord wants some additional security in the form of a second’s months rent in advance. This effectively ensures some coverage for the landlord, albeit 1 month, in the event of non-payment of rent and a future default by the Tenant.

Other things to consider with either form of deposit:

1. Is interest payable?
2. Is the lease automatically terminated, if a deposit is liquidated?
3. Is notice required, if it is liquidated?
4. Must the landlord hold it in a separate account?
5. Is it protected in the event of sale of the property by the landlord
6. How does it affect the Tenant’s cash flow? (ie, large premises)

As with everything in commercial leasing, all terms are up for negotiation and deposit requirements will vary from deal to deal. In the case of large multi-national tenants, they for the most part are not willing to advance deposits (beyond a first month’s rental), and generally have any such requirement waived based on their covenant.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in working through the area of deposits with respect to your transaction. To learn more about our experience and background click here.

Early Termination Provisions

2012-02-09T11:00:00.001-05:00

Next segment in our Leasing Series…Early Termination Provisions.

Early termination provisions can be included by either landlord or tenant, within the provisions of an Agreement to Lease. Often referred to as a ‘Break Clause’, they allow the lease to be terminated, subject to meeting certain conditions for termination. Let’s consider it from both sides, to demonstrate how and why it may be necessary for either side to consider such a provision within a term lease.

A typical example with respect to a tenant, might be due to a loss of funding - say in the case of a non-profit organization, where the ability to fund operations cease. In this case, if the Tenant requires continuation of funding on an annual basis in order to carry-on business activities, they cannot make term commitments beyond one year without having the ability to terminate.

An example where the landlord might require it, is where the premises may be needed for other purposes at some future point. Perhaps the landlord needs to create a new entrance lobby into the building, and this particular area is where the plans call for it to go. In this case, the landlord would grant himself that right by way of an early termination, to ensure he can proceed with the building modification as proposed.

There is no ‘common/typical’ early termination clause (or break clause) and they all generally relate to the circumstances of the parties involved. Beyond the actual purpose of the termination being well defined – other areas to be clear on include the timing, frequency, and financial penalties which apply. Any early termination provision becomes a term of negotiation, as with all other terms within any Lease Agreement, and must be dealt with
and understood as such.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in working through the termination provisions in your lease. You can find out more about our Tenant Representation services here.

Special Blog Post By John Clark: Non-Distrubance Agreements

2012-01-27T13:30:00.005-05:00

Today we have our first ever guest blog post. John Clark, Partner at Clarks Barristers & Solicitors in Windsor, Ontario, will provide us with a post from a legal prespective, as part of our leasing series:

In negotiating leases for commercial landlords, clients often ask me about non-disturbance agreements. They are often after-thoughts for those in the process of purchasing commercial rental properties. They shouldn’t be.

Take this scenario:
Akim has agreed to purchase a 5 unit commercial plaza. To finance the purchase he arranged a new first mortgage with Easy Money Mortgage Co. Three of the units in the development were rented with written leases in place when Akim bought, and he knew that he had two prospects wanting to rent from him once he took ownership and possession. The Easy Money mortgage made no reference to the leases, and none of the old or new leases made any reference to the Easy Money mortgage. All tenants paid their rents on time each month and honoured the terms of their leases.

Akim later runs into financial difficulty with another investment. He uses the rent from this development to pay off his other obligations and as a consequence defaults under the Easy Money mortgage. Easy Money puts the matter into the hands of its favourite receiver, Stripette, Bayer and Sellit, and foreclosure proceedings are begun. In that case, what of Akim’s tenants? In the absence of any agreement between the tenants and Easy Money, here’s what happens:

1. The leases that were in place before Akim purchased, and therefore before Easy Money took a mortgage, have priority over the mortgage. Easy Money has to honour the leases whether they like the tenants or not. And the tenants have to stay, whether or not they like Easy Money. In most cases, the tenants would also have to stay after the sale to the new purchaser that Stripette, Bayer and Sellit finds for the property on behalf of Easy Money.

2. There is a different result for the two leases put in place after the purchase, and therefore after the Easy Money mortgage. And, it’s a double-edged sword, both for Easy Money and for the tenants. As the mortgage has priority, Easy Money can instruct Stripette, Bayer and Sellit to terminate the leases and offer the property to prospective purchasers with those two units vacant. This may be attractive to a prospective purchaser if the market has improved since the time the two leases were entered into, allowing a new purchaser to negotiate higher rents than the displaced tenants were paying. Obviously, this improves the price that Stripette, Bayer and Sellit can command on behalf of Easy Money. From the tenants’ point of view, they stand to lose the cost of remodeling and other changes they put into the units other than improvements that might be considered fixtures in law.

The other edge of the sword is this: if the tenant wants, in circumstances where he has not invested a lot in improving the premises, he can flee. He can look for a more stable development, which might be very attractive if the market has softened, as he may be able to secure premises at a lower rental rate.

To bring more certainty and perhaps to enhance the marketability and value of the development, Akim and Easy Money should have considered subordination agreements and non-disturbance agreements at the time Akim purchased the development. These are contracts entered into between mortgage companies and tenants, who otherwise have not contracted with each other (ie, the mortgage or the leases).

A non-disturbance agreement typically provides that a tenant may remain in possession of the rental premises, despite any power of sale or enforcement actions taken by a mortgage company upon a landlord’s default, so long as the tenant keeps paying the rent and honouring the other terms of the lease.

A subordination agreement typically provides that a mortgage company would have priority over a lease. Often in subordination agreements there is a specific attornment provision. Under that provision the tenant recognizes and acknowledges the mortgage, the mortgagee’s rights upon default, and agrees to pay rent to the mortgagee regardless of the landlord’s default.

As you might imagine, there is a lot of room for negotiation in these agreements, and in some cases the mortgage companies or tenants would rather not enter into these agreements, and for good strategic reasons.

For example, in our scenario, the three original tenants already have priority over the mortgage, and a non-disturbance agreement would be redundant. It is already secure in its possession rights. You might ask why a tenant would ever agree to subordinate. Here’s why. Recall that if neither the mortgage or a lease references each other, and there is no non-disturbance or subordination agreement, both parties are stuck with each other. From Easy Money’s perspective, it has to honour the lease so long as the tenant keeps paying rent. And, if the tenant attempts to flee, or refuses to pay rent, Easy Money can sue to recover any unpaid rent, and may also be in a position of terminating the lease and suing the tenant for the rent that otherwise would have been payable during the balance of the term.

In the absence of a mutually acceptable settlement, each of the parties has the option to look for better lease terms. If the parties negotiate subordination and non-disturbance agreements at the time the mortgage is being put into place, the tenant may include provisions (which mortgage companies tend to avoid) that the mortgage company will honour all terms of the lease; not just those permitting further possession if the rent is paid. If in our scenario, Akim had agreed to repave the parking lot within 4 years, one of the original tenants whose lease had priority over the mortgage, might require Easy Money to assume that responsibility; otherwise, it might have no other incentive to sign. Mortgage companies typically resist such requirements, unless the tenant is a very strong one whose continued presence in the development would improve the market value of the development. Bear in mind, that the improved market value would also have worked for the benefit of Akim himself, had he not defaulted.

In most cases, Easy Money would not agree to these extra terms, and would prefer to negotiate with tenants if and when there is default, based on the economic circumstances of all parties and the marketplace at that time. From the tenant’s prospective, it would likely, depending on its strength in the marketplace, also prefer not to enter into any specific subordination or non-disturbance agreements.

In retrospect, Akim should have sought the consent of his vendor to speak to the original three tenants and determine their wishes so far as subordination and non-disturbance agreements are concerned. That would have led to early negotiations between Easy Money and the tenants, which may have improved the mortgage terms that Akim received from Easy Money.

If the new tenants were informed by Akim and Easy Money that Easy Money would extend non- and your lender. The time you invest early may save you in terms of interest rate, and enhance market value.disturbance agreements to them, Akim may have been able to secure better lease rates from them. The tenants, in turn, recognizing that they were protected, would have been more inclined to invest in improvements to the premises. The overall market value of the development may have increased as a result.

So, when considering the purchase of a commercial rental property, consider the relationship between the tenants.

Special thanks to John for his contribution. To learn more about his legal services, visit his website at www.clarkslaw.com.

Letter of Intent vs. Agreement to Lease

2012-01-19T13:00:00.001-05:00

Next up in our Leasing Series…Letter of Intent vs. Agreement to Lease.

There are generally two methods by which an initial agreement is struck between a Landlord and Tenant. The first is a ‘Letter of Intent’ (LOI), and the second being an ‘Agreement to Lease’ (ATL). Although both can accomplish the same objective, there are significant differences which have implications for both parties.

The LOI is often a short summary of terms and conditions as proposed by the Tenant and forms the basis for a final lease agreement. Key items such as rental rates, square footage, deposits, possession date, landlord’s work, signage (etc.), are normally included as terms within the letter. However, there is most often a disclaimer contained in the letter which indicates something to the effect of - ‘the LOI is not binding on the parties and is pursuant to a final lease agreement’. In short it most likely has no legal weight, and depends almost exclusively on the goodwill of the parties. If used, and they are used effectively throughout the commercial leasing world, the goal should be to move to the final/executed lease agreement as quickly as possible.

Alternatively, the ATL becomes an actual contractual agreement between the parties, and generally spells out the details of the proposal in greater detail. Even though it is still subject to the signing of a final lease agreement, it will have legal consequences on the parties in the event of any sort of default. The benefits beyond the legal weight issue include - the ability to give possession prior to a final lease being signed, that the ATL can become the actual agreement on the premises (should a final lease not ultimately be agreed upon), and better justification for the time/costs of the parties involved in pursuing a deal. Generally the more complex the deal, the more an ATL makes sense.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in the area of LOI vs. ATL.

Zoning

2012-01-11T15:34:00.000-05:00

Next segment in our Leasing Series…Zoning.

In leasing commercial premises, Tenant’s need to pay particular attention to the zoning bylaw, and specifically how it applies to their proposed use. Often times, assumptions are made by Tenants that based on a commercial zoning designation on a site – that their particular use is permitted. After the fact, this erroneous assumption can be both costly and problematic to resolve. It should also be noted that generally landlords place the obligation of confirming the ‘Use As Permitted’ upon the Tenant, and the Lease Agreement speaks to this as a Tenant obligation.

But there are other factors to consider:

i) Does the existing bylaw allow for changes in the business?
ii) Does the bylaw speak to exactly the use by definition?
iii) If not, can you obtain written confirmation allowing the use (from the appropriate city/municipality)?
(iv) Is the bylaw marketable for purposes of sub-let/assignment?
(v) Does the Landlord need to approve any change-of-use (and the implications of that consent)?
(vi) Costs associated with obtaining a re-zoning to allow a use (application fees/ legal costs etc.)?

On the final point above, this assumes that the site does not allow for the use proposed. Although time frames will vary depending on your jurisdiction - rest assured that the process will involve months, not weeks - and the parties are going to face a delay in moving forward on the lease proposal. The other key point, is often times, uses are specifically not included within a zoning bylaw by design. Meaning the governing authority may infact not be interested in including that use within the list of those permitted.

Again, seek out experienced commercial realtors with strong leasing backgrounds, to assist you in the area of zoning compliance with respect to your use.

Ability to Sublet

2012-01-05T10:00:00.000-05:00

Next segment in our Leasing Series…Ability to Sublet.

The area of subletting premises is generally provided for as a standard leasing term in most lease documents. In cases where Tenants wish to relocate out of a particular area or wish to cease business operations, this gives them the opportunity to market the space to other commercial users for the balance of the current term.

Areas to be clearly considered from the Tenant’s perspective are as follows:
1. Ensure your existing lease contains a term allowing a sublet.
2. A Sub Lease cannot be granted for a term exceeding the Head Lease Term.
3. All terms of your Head Lease should be incorporated into the Sub Lease Agreement (most practically, by attaching the Head Lease to the Sub Lease Agreement).
4. Obtain written consent from the Landlord on any Sub Lease Agreement.
5. Approach the deal as if you were the Landlord – particularly with respect to due diligence on the prospective Tenant, security deposits, and monthly payment arrangements.
6. Legal Costs and Real Estate fees will apply.

Landlords typically are not fond of allowing sublet arrangements on their premises, but understand circumstances change and that a Tenant may no longer require premises for which they have an extended lease obligation remaining. Given this reality, the Landlord will ensure that they not only approve of the Sub Lease Agreement itself, but keep the original Tenant clearly in a position of liability with respect to the Sub Lease Agreement.

Tenants looking to sublet may also consider negotiating an early termination settlement with the Landlord to avoid all of the liability issues involved. For instance - if only 2-3 years remain on the term, a termination may be better for both Tenant and Landlord, as such limited lease terms are not as marketable to prospective Tenants. This possibility will be dependent on the strength of your particular market, but certainly worth a discussion.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in working through your sublet requirements and objectives.

First Right to Acquire Adjoining Space

2011-12-21T14:00:00.000-05:00

Next segment in our Leasing Series…First Right to Acquire Adjoining Space.

The concept of a Tenant having a ‘First Right’ to lease adjoining space, is often provided for in a standard lease agreement. The benefit to the Tenant is obvious, as it gives them first option on the space should it come available during the term and allows for premises to expand into. Typically the clause can be worded in one of two ways ---
i) the Tenant does not have to act on the space, until a 3rd party offer to lease comes forward – meaning they may be able to buy time during a vacant period.
ii) the Tenant receives notice immediately upon the space becoming vacant.

Landlords normally do not prefer the first option, as they have to engage a 3rd party tenant prospect on the space, serve notice, and wait the period out before knowing which party is taking the space. The 3rd party tenant does not normally care for this delay in learning whether or not they can proceed, given costs incurred in considering the premises (ie. drafting offer proposals, doing due diligence etc.). It can be rationalized as a cost of doing business with the initial Tenant, if at the end of the day it allows them to expand – which is ultimately good for the Landlord.

The second option simplifies the entire requirement, in that the Tenant receives notice immediately upon the space becoming available, or based on a set date at which it will become vacant. This can then allow a Landlord to offer it over to the adjoining tenant immediately upon it becoming available, and prior to having to market it.

As for notice periods, as with everything in commercial leasing, it is subject to negotiation and conditions in your particular market. Typically 1 week to 10 days would be deemed reasonable, with shorter periods favouring Landlords and longer periods favouring Tenants.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate terms on the ‘First Right’ provision within your lease.

Renewal Options/Holdover Provisions

2011-12-15T15:20:00.000-05:00

Next segment in our Leasing Series…Renewal Options/Holdover Provisions.

Generally all lease agreements have renewal options built-in to the initial lease. Both tenant and landlord effectively agree on the basics of a renewal term, with respect to a new term for the space. Beyond the actual duration of the renewal term – other items which may be included would include; the lease rate itself (or some sort of ceiling on a percentage basis) and the notice period for exercising the renewal.

The term and notice period are generally easy to agree on. Where things get more complicated is on the rate itself or a ceiling. Tenants will argue that they do not wish to see a substantial increase in the base rent, as they move into the next term. Landlords will rightfully point out, that they should not be forced to fix base rental amounts, as there is no commitment to remain in the space beyond the initial term. This matter then becomes a very much negotiated term of the deal, and both sides need to determine how forceful a position they need to take.

If the parties cannot agree, depending on the jurisdiction, an Arbitration Process is a practical solution for all concerned. It effectively allows a 3rd party to determine the rate if the parties cannot come to an agreement at the time of renewal. Arbitration can be used for other reasons, but most often it applies when the parties cannot come to an agreement on dollars, with differing views of market rates. There are definite costs to pursue this line of resolution for both sides, so it is best to review them prior to filing for it.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in negotiating the right renewal terms for your purposes.

Leaseable vs. Usable (Square Footage)

2011-12-06T16:48:00.001-05:00

Next segment in our Leasing Series…Leaseable vs. Usable (Square Footage).

This concept is often times misunderstood by Tenants - that is the idea that LEASABLE SPACE DIFFERS FROM USABLE. Typically this is the case whether we are talking about a freestanding building (for one occupant)or multi-tenanted commercial complex.

In a single user tenancy within a freestanding building, the entire building envelope becomes the leasable amount. For instance, if the building dimensions based on a perimeter measurement are 25’ x 100’, its leasable area is deemed to be 2500’. But if you actually calculate the floor area which you can actually stand on (or use), it is less by the width of the wall sections on all 4 sides. Depending on the building’s construction, this can make for a reduction of 100’-150’.

In the case of a multi-tenant complex, the above determination becomes a bit more complicated. The term ‘common area factor’ comes into play, and it refers to an add-on for shared spaces on a single floor or within a building entirely. These spaces would include lobbies, bathrooms, hallways, and utility closets. It can add as much as 8-12 percent, depending on the extent and size of the common areas within the building. Again, the reality is that the Tenant pays for a percentage of space, above and beyond the actual usable floor area within their actual unit.

In terms of an acceptable measurement standard, one of the most widely used is the BOMA Standard, which is well recognized throughout the commercial real estate world. If used, it becomes the official square footage measuring tool and certifies both the ‘leasable’and ‘usable' square footage for the premises.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in determining ‘leasable vs. usable’ considerations, as well as ‘common area factors’ which may apply in your property search.

Restrictive Covenants

2011-11-29T16:40:00.000-05:00

Next segment in our Leasing Series…Restrictive Covenants.

Restrictive Covenants (RC) are always an interesting point of negotiation between Landlord and Tenant in working out a commercial lease deal. Rather than pick sides, let me try to give you the differing perspectives for both parties.

If you are a Tenant, you would like to ensure that the Landlord does not put you head-to-head with a similar operation within a commercial complex. For instance, if you are setting up a new hair salon, you would prefer to have ‘exclusivity’ on your use within this location. In your RC, you would cover off the key elements of your operation – ie. hairstyling and aestetics. Practically, these areas should represent the ‘bread and butter’ of your business and they cover a high percentage of your total sales. At the end of the day, you become the one and only ‘Hair Salon’ in this particular development.

If you are the Landlord, you want to ensure you are not allowing RC’s that create problems in bringing in other quality tenants. Going back to the hair salon example, you might want to allow a restrictive on the ‘hairstyling side’, but only for women or not on the aestetics side. This would allow you then to bring in a separate ‘nail salon’ or a ‘traditional barber shop’. The most challenging RC’s for landlords, are generally those that are too broad and cover too many areas, thereby precluding a host of other uses. Although not always easy to do, landlords typically try to respect the tenant’s main business focus, but are not as willing to allow restrictions on their secondary business lines.

As a final note, this will again vary property to property, and generally RC’s get harder to incorporate into a lease, the larger the commercial property gets. In a larger commercial setting, competition is seen as good and this includes in-line competition.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating ‘restrictive convenants’ that suit your purposes.

Additional Rent/Operating Costs

2011-11-22T16:41:00.000-05:00

Next segment in our Leasing Series…Additional Rent/Operating Costs.

Additional rent is the other half of the rental amount that applies to commercial premises. Again in industry terminology, this is most often referred to as the ‘operating costs’ of the property. It includes realty taxes, building insurance, maintenance/management costs, janitorial expense, and any other related costs which support the operation of the property. It is applied as a proportionate share of the tenant’s space, relative to the size of the overall property (or building square footage). Simply put, if a tenant occupies 10% of a building, they pay 10% of the total operating expenses, as additional rent.

When considering ‘Additional Rental Costs’ on properties, the amount is represented on a dollar per ft. basis. Additional rent costs, although included on line with most MLS listings, are not as prominent on listing summaries. After doing the net rent comparision - tenants need to make sure they compare the additional rent factors, so as to have a handle on the total monthly cost.

A budget breakdown of additional rent costs, should be available for a tenant’s review, to understand how the cost per ft. is arrived at. It is typically done annually on a projected basis, and then reconciled at year’s end, to the actual expenses incurred on the property. Sounds like a lot of math and accounting - but it should be relatively straightforward and confirms the additional rental costs that apply.

Just a final note, on ensuring additional rent costs do not exceed your expectations during the term of the lease - there is a means of capping increases allowable on additional rent, so that a tenant is not faced with a 10-20% increase from one year to the next. It is acceptable to require a landlord to hold the line on annual increases to a modest % (say 2-3%), in any given year. The only justifiable exceptions would be for property taxes and or utilities, which the landlord has no real control over.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate lease terms for your purposes.

Lease Base Rates

2011-11-15T16:00:00.001-05:00

Next segment in our Leasing Series…Lease Base Rates.

When considering ‘Base Rates’ on a lease, this figure represents the dollars per ft. being paid for the premises. In industry terminology, this figure is normally considered to be ‘Net Rent’ to the landlord – which excludes all property taxes, operating, and common costs relating to the building. This is generally referred to as ‘Additional Rent’. The Net Rent is the basis of the return being generated on the property from an investment standpoint, and also serves to pay the financing against the property.

From a Tenant’s perspective, although base rates represent a major part of your monthly lease cost, you need to do the math in adding the additional rent portion (if this is confusing, look for our next post on Additional Rent). Typically, leased premises online are quoted at its base rate. As an initial comparison of properties, it is a good starting point.

In evaluating any market, you can typically seek out the base rate range of any district by looking at the active properties available. Getting to the actual base rates paid on recent deals, is a more involved process, but certainly is available if you look in the right places. These places include – MLS (ICX) data, local appraisers, and experienced local commercial leasing brokers.

As final note, what can you expect in terms of base rate fixing for a set lease term? Again things vary market to market and deal to deal – but generally, landlord’s will look for some sort of incremental increase(s) over the term of a lease. It will largely depend on the market you are in - ie. high vacancy vs. low vacancy and your approach in negotiating the deal.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate lease terms for your purposes.

Lease Terms

2011-11-08T16:00:00.002-05:00

Next segment in our Leasing Series…Lease Terms.

Outside of the actual lease rate itself (meaning the $’s per ft.), defined lease terms are the next most important aspect of the deal for both tenant and landlord. It represents the commitment between the parties, for a set period of time for use of the premises.

Terms will generally vary from market to market, and even from property to property. Newly built developments, be they offices/retail plazas, or industrial buildings, are based on longer term commitments for the most part. Typically 10 years would be the standard, at least for an anchor type tenant - with say 5 year leases being available only to smaller scale tenants. Lease terms are also vital to the financing which landlords arrange on these new builds. Generally landlord’s use the 5 year threshold as the bare minimum.

On existing buildings in most categories, term arrangements can become much more flexible. Start-up businesses often times prefer to stick with shorter commitments, as they are uncertain as to business volumes and growth plans in the early days. Bear in mind though, with 2 and 3 year commitments, landlords have little incentive to assist the tenant in any improvements which the space may require. Shorter term deals for the most part, would be done on an 'as is’ basis from the landlord’s side.

Just a quick note on renewal options (beyond the initial lease term). They are generally provided for on the tenant’s behalf, at a pre-set period in advance of the lease expiration (typically 3-6 months). This then gives the tenant the right to exercise his option to renew the lease, for a pre-determined period. In most instances the rental rate ($’s) , needs to be negotiated at the time of exercising the renewal option.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate lease terms for your purposes.

Rent Free Periods

2011-11-01T16:00:00.004-04:00

Next segment in our Leasing Series…Rent Free Periods.

Once we begin the process of strategizing proposed terms & conditions on a lease deal, what sort of rent free periods can we expect to obtain? As the saying goes – “as much as you can negotiate“.

But once we consider what might be considered reasonable from the Landlord’s position, you soon realize that there are a certain set of expectations which typically apply. Let’s look at the two scenarios below:

Example 1-
In a case where a tenant is proposing a reasonable term lease and accepting the premises in ‘as is’ condition, generally a landlord will provide a better rent-free
incentive. The rationale is that the tenant, in exchange for a rent-free allowance, will undertake their own tenant improvements at their own expense - thus saving the landlord any tenant improvement cost at the front end of the lease. It will vary deal to deal, but 3 months r/f on a 5 year deal should be reasonable - and assuming the tenant is investing their own funds to complete their improvements.

Example 2-
If the tenant has a requirement for the landlord to invest considerable dollars into tenant improvements on behalf of the tenant, then typically any sort of r/f allowance becomes a token amount. Although it can differ deal to
deal, generally a 30 day r/f might be the best case expectation – often times referred to as a fixturing period. In this scenario, the landlord has a further investment
into the lease and as a result, wants to realize the cash flow from the rent as early as possible after commencement.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the rent free terms within your agreement.

Lease Documentation

2011-10-25T16:00:00.003-04:00

Here is the next segment in our Leasing Series…Documentation.

Once you’ve surveyed and toured the market for commercial premises, and selected a property for your purposes -- how does the transaction get ‘papered’. There are 2 prinicipal documents involved in most cases - the ‘AGREEMENT TO LEASE’ and the ‘LEASE’ itself.

The Agreement to Lease is more or less the preliminary document needed in order to negotiate and secure the premises, and becomes the basis for both the agreement and as the precursor to the final Lease document. All terms of the deal are outlined - including the lease term, rate, additional rental costs, commencement date, landlord’s work, tenant’s work, rent free periods etc. In addition, tenant information is normally provided at this time, so that the Landlord may complete their due diligence with respect to the Tenant and their proposed use.

The final Lease then typically follows - which in addition to including all the terms of the agreement, also includes a comprehensive point by point summary of all the obligations of both parties, among other details. There is no such thing as a typical lease length, as they come in all shapes & sizes – they can be anywhere from 8-80 pages. Involve your lawyer at this stage of the process, to ensure you understand the document front to back, as this is the overriding document as it relates to your use of the space. In most cases, you will and should have signed the final Lease Document prior to taking possession of the premises.

Seek out experienced commercial realtors with strong leasing backgrounds, to assist you on the transactional side of entering into a lease deal. Their experience is invaluable, in helping you to understand the documentation side of it.

Inaugural Blog Post - Intro to Leasing

2011-10-18T17:15:00.000-04:00

Welcome to our inaugural blog post! We hope to tackle a wide range of subjects encompassing all aspects of commercial real estate, as our blog title clearly indicates. Although we have lots of posts to follow in the weeks and months ahead concerning real estate investing - we felt it was high time someone tackled the area of leasing.

With that said, here is the first entry of ourleasing series...

Leasing commercial premises, be it office,retail or industrial space, requires a level of market expertise which is essential for any prospective tenant. Unlike data which is much more readily available on property sales (either through MLS or Real Track), determining actual lease rates is a very challenging task. Relying on leases reported through MLS or like sources, can be misleading as they do not include improvement allowances, rent free periods, or any other inducements that may apply. These all serve to reduce the 'net effective rent' and obviously the cost to the tenant.

In analyzing any market, that is existing or second generation space, you need to consider the cost per foot on an 'as is' basis - both the rent and operating costs (which we will touch on in a blog post coming soon). That then gives you a common ground for comparison, and then you consider what are the additional requirements needed to make the space work for your business. Do you need an improvement allowance to finish the space to your specs, or can you negotiate a reasonable rent-free period to do some minor renovating on your own? Either way, you need it to be 'turn-key' for your operation when you take possession.

Commercial realtors with strong leasing backgrounds can not only put together the market surveys your require, but can negotiate the other terms which are necessary to make the economics of the deal work to your advantage.

In our upcoming posts on leasing, some of our topics will include: lease documentation, lease terms/base rates and capping mechanisms for operating costs.