Real Estate Talk:
Commercial leasing

A look at commercial leasing and what’s involved

By Joseph Marovitch

The idea of opening a restaurant, boutique or store of any kind is a wonderful idea at the time one has it. The idea of being your own boss, making your own hours and cutting a path forward as opposed to following someone else, sounds wonderful. Where do you start?

You start with an idea of what service or good you want to provide. Then you choose a location where your good or service may be wanted or even required. Then you find a space.

You want to find a good location but just as important, you want a good landlord also known as the lessor. As the person or corporation renting the space, you are called the lessee.

You start with an idea of what service or good you want to provide. Then you choose a location where your good or service may be wanted or even required. Then you find a space.

A good landlord is an entity (person or corporation) that wants you as a lessee for a good long time. A good lessor wants you to grow and expand. The better the lessee succeeds, the better the lessor succeeds. This all sounds good but sadly, more often than not, many lessors do not care if you succeed as long as they get their rent.

Many lessors provide long-winded leases that are ultimately in favour of the lessor. In these leases, if you do not pay the rent or are late in paying the rent, the lessor will have a mortgage on your supplies, a personal guarantee which means they can go after your personal wages and assets and they usually have a hefty security deposit, which they can keep. There are good landlords out there, but you have to know who they are, or you can be in a heap of trouble.

When signing a lease to rent a space, there are several expenses one must pay the landlord which are as follows:

1. Base rent
   An agreed monthly payment that does not include operating expenses, taxes or electricity
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2. Opex
   Operating expenses of the landlord such as building insurance, security, office supplies, staff salaries, snow removal, grass cutting and general maintenance
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3. Non-residential business tax
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4. Electricity and heating

Then there are further costs depending on the space you are in. Shopping centres have a fee for grease trap removal and pest control. If you see an ad that says $3000 per month for 1200 square feet, the amount is usually the base rent. One must assume there is an operating expense, taxes and electricity on top of that $3000.

‘A good landlord wants you as a lessee for a good long time. A good lessor wants you to grow and expand. The better the lessee succeeds, the better the lessor succeeds.’

Commercial leases are usually in the range of 3, 5, 10, 15 and 20-year terms. The term depends on the landlord. In a shopping centre, the minimum term is usually 5 years. However, for large grocery or department stores, the lessee may want longer terms if they intend to invest much money in the space. Investing money and preparing the space for business is called fixturing. When negotiating the terms of your lease you want to consider the following:

1. Annual rent increases of the base rent
   Be careful. You may agree to fixed increases each year for the next five years, but the landlord will tell you they have no control over inflation and the cost of gas, transport and other services in the operating expenses. Therefore, even though you believe you have a fixed increase schedule, the landlord can still up your operating expenses. The taxes are determined and fixed by the government, but operating expenses can be tricky to quantify.
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2. Term and payments
   The beginning and end date of each fiscal year, including the date of the first payment, last payment and increases.
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3. Option to renew
   If you do not have an option to renew your lease for another term of 5 or 10 years, the landlord can evict you in order to get higher rent from another lessee or a lessee that will attract more tenants, like a Starbucks, McDonalds or an Apple store. In some cases, you can negotiate the rent increase in the renewal option. In most cases you cannot. You have the right to renew but you may not know what you will pay till the time of renewal arrives
   .
4. Fixturing
   Fixturing is the period of time required to prepare the space prior to opening for business. If you are a hair salon, clothing boutique or magazine store, the space will require plumbing, electricity, lighting, shelving, signs, a cash system and more. Therefore, you should negotiate a period of one to three months where you will pay utilities and taxes but not base rent. Base rent starts when the business commences, and money is made to pay the rent. In other words, you pay for what you use during fixturing.
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5. Standard clauses
   The rest will be standard and including, but not limited to, items such as insurance, penalty for late payments, times you must be open and /or closed, condition of the space upon possession and when departing, and more.

The preceding are the main concepts in commercial leasing though there are many other factors that can come into play and require at times, insurance brokers, notaries, lawyers and commercial mortgage brokers. If you are new to commercial leasing and intend to rent a space, the use of a good commercial real estate broker can be beneficial and assist in avoiding pitfalls.

‘There are many other factors that can come into play and require at times, insurance brokers, notaries, lawyers and commercial mortgage brokers.’

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, go to the search link and type in Joseph Marovitch.

Have a great week!

Next article: Staging to sell in the Winter market – October to December and February to April

State of the market

In the midst of an election combined with crazy US politics, it is difficult to forecast the economy much less the real estate market. We know Quebec has been suppressed in the real estate market for years due to talk of separation. Money goes where stability goes and separation politics is not a stable topic.

However, while Quebec has had a suppressed market, the rest of Canada was moving full steam ahead until now when the national real estate market has out priced itself, allowing Quebec to play catch up. The past few years have been fairly stable with a decrease in household debt, low interest rates and low unemployment. However, the Montreal market is running out of space to build and investors are scrambling to find real estate to buy.

Every so often opportunities arise and now would be a good time to start looking at real estate investment in outlying areas such as Brossard, Boucherville, Bois Briand, St Lazare and other areas just beyond the St Lawrence River. It is logical that Montreal must expand now, while prices are low, those are the areas to look at for the long term because within ten years Montreal real estate prices will be out of site.

Image: Pixabay

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