Baynes Island Estates

Commercial leasing generally follows a relatively consistent process or sequence of events. I want to lay out some of the basics to provide a first time tenant with a high level road map of how the process evolves.

NEEDS ANALYSIS

Prior to commencing a property search it is wise to sit down and document both the needs and wants of your business in order to provide a game plan to find the right space for your business that meets your strategic objectives and functional requirements. There are numerous important considerations in selecting suitable premises for your business. Here are a few to consider:

• Size: number and type of rooms to meet current and expected needs in a contemplated lease term
• Location: accessibility to staff, visibility and customer traffic, transportation logistics
• Functional Requirements: layout, loading, parking (client/customer and staff), signage, building amenities and services, washrooms, kitchen
• Mechanical Requirements: power supply, plumbing, heating, ventilation, air conditioning
• Communication: internet, cable, telephone, satellite eg building service and subject property pre-wiring/networking 

VIEW PROPERTY

Once a tenant’s requirements are established they will need to look at what is available in their market(s) of interest. Available properties can be found on public and private real estate web sites and in many cases by driving through market(s) of interest and calling leasing agents from site signage. A leasing agent can assist in touring properties that meet your needs and wants and more importantly provide valuable market information that will assist in the decision making process. Market rental rates and availability of product can frequently determine the direction a tenant may go and any concessions they may need to make in finding a reasonable match for their business. It is not uncommon to need to modify a space and invest in tenant improvements to make a lease premises suitable for a tenant’s occupancy.  

OFFER TO LEASE – NEGOTIATION PROCESS

After a thorough property search and the selection of a suitable premises, a tenant must enter into negotiations with a landlord to attempt to come to terms. A leasing agent can be invaluable in this process if not already involved. Typically at this stage a document called an Offer to Lease (or sometimes Letter of Intent) is prepared to facilitate the negotiation. The lease offer will contain a number of higher level terms including but not limited to:

• A clear legal description of the Landlord, the Tenant and the Premises that the lease offer is being prepared for
• A clear description and orientation of the square footage, location and particulars of the premises itself
• The rental rate being offered for the premises and the duration of the term being offered
• A clear break down of Landlord and Tenant costs
• Any renewal provisions
• Other entitlements such as common area usage, parking
• A list of Tenant and Landlord Conditons to be waived or fulfilled subsequent to offer acceptance. If mutually agreeable high level terms are achieved a Tenant may wish to conduct more detailed due diligence on a site and a Landlord on the Tenant themselves 

LEASE AGREEMENT

Once an accepted Offer to Lease is achieved and all conditions are removed, the Landlord typically provides the Tenant with their final lease agreement. This is a much more detailed document that contains the high level terms from the Offer to Lease with additional elaboration on the legal language surrounding such terms plus the appropriate terms and conditions to cover off the numerous “what-if” scenarios that could transpire during the term of a tenancy. A Tenant’s lawyer will frequently review the Landlord’s document and provide recommended changes to ensure that the final lease agreement is equitable for the Tenant as well. It is crucial that a lawyer is involved in this second level of negotiation as this is the document that will govern the Tenancy.

The above information contains some high level information in the lease process, but it is important to hire a leasing professional to assist in your real estate search and negotiation to ensure the best possible outcome for your business.

I am frequently asked the question on how monthly commercial rents are calculated. Residential rentals are very simple in the sense that the monthly amount quoted is more or less what a tenant pays +/- some stipulated inclusions or exclusions.

Commercial rentals are most commonly offered on an annual per square foot basis. For example, a 1,000 square foot space may be offered at $12.00 per square foot.

$12.00 psf x 1,000 sf = $12,000 per annum or $1,000 per month before GST

Per square foot rent is most frequently offered as two components that are advertised separately:

Net Rent (or Base Rent) + Triple Net (sometimes referred to as Additional Rent)

$8.00 base rent + $4.00 Triple Net = $12.00 Gross Rent

Net Rent is typically the going market rate for a given type of commercial space. Triple Net is comprised of the Insurance + Property Taxes + Operating Costs (sometimes referred to as CAM or common area maintenance) of a subject property. These annual amounts for a property are totaled and charged back to a tenant based on their percentage of total square footage in a given building. For example if the total triple net for a 10,000 sf building was $40,000 and a tenant rented 1,000 square feet, their annual triple net cost would be:

$40,000 x 1,000/10,000 = $4,000      $4,000/1,000 sf = $4.00 per square foot.

Most typically, triple net is an annual estimate that is charged to a tenant on a monthly basis. At the end of the year if these costs are higher, than the tenant is frequently responsible for the difference is cash or their annual estimate for the next year will recover the differential. If triple net comes in less the difference is frequently to the credit of the tenant’s account. This type of lease is referred to as a NET LEASE. In this type of lease the tenant bears the risks and rewards of the triple net costs increasing or decreasing. As a tenant it is important to have an understanding of the factors in their local market that can cause triple net to increase.

It is very important for a tenant to understand how their rentable square footage is being calculated. For example, if there is a shared hallway, foyer or washroom for a tenant to have their pro rata portion of such common area included in their “leasable square footage” in their lease agreement because they share the benefit and therefore the cost of such space. The result is the leasable square footage will be the subject space square footage plus the reasonable allocation of the common area.

In some instances a Landlord will offer their space as a “GROSS LEASE”, typically as a gross rental rate per square foot. This implies that the Landlord will offer the subject space for a set annual or monthly amount and assume the risk and rewards of cost fluctuations. Although this seems simpler to administer from a tenant perspective it is important to understand that in a gross lease the landlord is motivated to keep costs as low as possible which is not always the best thing for a tenant’s business. In a triple net lease the tenants may request and negotiate additional work or standards for a building that are beneficial to their business. It is easier to convince a landlord to add costs that benefit a tenant if they are being recovered over time through the triple net recovery.

The MOST IMPORTANT thing to understand is that unlike residential rentals, commercial leasing does not have the same level of consumer protection for any lack of understanding of the rules and trade practices and it is crucial to understand the terms that you are negotiating in an Offer to Lease and to have a lawyer review a final lease agreement with a Landlord prior to sign-off.

The above information is comprised of generalizations to assist in understanding commercial rentals and there are many exceptions to the basic scenarios presented above.