Commercial Landlord

Determining Market Rent

Before placing your property for lease, it is highly recommended to perform a market rent analysis. This entails several steps, including;

  1. Determine your market position as a landlord
  2. Determine the market position of the property
    1. Listings to Leases ratio
    2. Inventory increasing/decreasing (market absorption)?
    3. Immediate competitors
    4. Determine desired/market return on your asset
    5. Determine apparent market rent
  3. Set your Target Rate
    1. Use specific, non-rounded numbers

First, as a landlord, where do you sit in the competitive hierarchy? Will your tenants likely be similar in capitalization as you, smaller or larger?

Then, you will need to determine where your property sits competitively, and we have listed the five most important factors to consider when determining this. This can be a time consuming process so be prepared.

Finally, studies show that specific numbers (i.e. $11.25) are better than round numbers (i.e. $11.00) for asking rent (actually, for prices in general) in the marketplace. The belief is that a specific number seems like detailed research has gone into it.

Lease Negotiation

As the old saying goes, luck is what happens when preparedness meets opportunity. When an offer to lease is imminent, best to start preparing for the negotiation. Here are a few thoughts;

  1. Determine market position of the Tenant
    1. Desired possession date (quick/longer?)
    2. Business situation – relocating/prime season (retail)
    3. Employment/business situation
  2. Is there a Plan B? A BATNA? (See link below on negotiation)
  3. Determine relative bargaining position/strength of tenant
  4. Remember target rate
  5. Set 2 incrementally increasing/decreasing midpoint reductions in relation to target rate
  6. Determine personality/negotiation style of the other party

Here are a few links on negotiation and persuasion. They are all based on recent negotiation science; the first three on the Harvard Negotiation project (see the book Getting To Yes by Fisher and Ury) and the last one on negotiation principles determined by Robert Cialdini. There are many more negotiation styles and videos, these are some of the most highly regarded.

Documentation

Larger, more sophisticated landlords will sometimes want to start formal negotiations with what is called a Letter of Intent (LOI). This is nothing more than a letter stating very broadly your expectations around lease term, rate and use and any other major concerns. They are intended solely to save everyone the bother of negotiating an offer to lease until the parties are reasonably certain there is a good possibility of a successful transaction. They are a bit tricky because they are normally intended to be non-binding, but courts have, in some situations, found them to be binding. This is beyond our expertise as agents, but generally the more information in the LOI, the greater the possibility it will be deemed binding, even with a clause stating it is non-binding, but always seek legal advice when proceeding.

For this reason, Gerald prefers going directly to an Offer to Lease (OTL) and not bothering with an LOI. It only takes a little more time to properly prepare an OTL and everyone is aware that they are intended to be binding if agreed upon, so the legal uncertainty is reduced. Gerald uses forms provided by the Alberta Real Estate Association as they are prepared by experienced real estate lawyers and are among the most fair real estate documents you will find.

That said, the OTL is generally (but not always) intended to be an interim document that confirms agreement on all the main aspects of the lease. They are normally followed up with a formal lease document, which we discuss in the next section.

The final document in the process is the actual Lease itself. Proper documentation in a lease is arguably much more important than in a sale situation. A sale is a one time thing and, if all goes according to plan, the purchase price is paid and the title transfers, but a lease is an ongoing relationship that may last many years. Many situations will arise over the term of the lease that require a well written lease document as both parties will look to it to resolve differences.

It is well worth having your legal counsel draw up a lease for you. It will cost a lot less for them to just use one of the template documents they have and fill in the blanks, but it is generally much better to sit down with your agent beforehand and discuss some of the details of your property that may require custom clauses to better protect you. Once you have a laundry list of important clauses, your lawyer will be better able to write up a document that ensures you are well protected.

As mentioned in the OTL section, sometimes the OTL is used as the final document and no formal lease is created. In some circumstances such as a small space in a simple environment, the OTL is sufficient; the shortest lease Gerald has ever seen was in a small retail scenario (about 1200 Sq Ft) in a small strip centre. It was one and one half pages and it worked well for several years. That said, a well-prepared formal lease is generally a better way to proceed.

Lease documents can become very lond and complicated. As things change, and different issues emerge (a good example is pandemic related issues), leases become longer and more complex. It is impossible to discuss here all possible issues you need to cover with your leases but we can touch lightly on some of the more common areas of concern;

Retail Leases

Retail leases are some of the most complex documents in the industry. While it is too complicated a subject to discuss here, here are some of the more common areas specific to retail you may need to cover in your lease document;

  • Hours of operations
  • Use provisions (what is/isn’t allowed)
  • Rent (percentage rent/additional rent)
  • Continuous use clause
  • Dangerous goods
  • Parking
  • Demolition clause
  • Business disruption

Obviously, we can’t discuss all these in detail here and there are many more common provisions; be sure to cover these in detail with your agent and legal counsel and provide for them in your standard lease as required.

Office

Office leases tend to be less complicated. Again, while it is too complicated a subject to discuss here, here are some of the more common areas specific to office you may need to cover in your lease document;

  • Landlord and tenant’s work
  • Parking
  • HVAC
  • Common amenities
  • R/U ratio (rentable area/useable area)

Industrial

Same as with office, industrial leases tend to be less complicated. Again, while it is too complicated a subject to discuss here, here are some of the more common areas specific to industrial you may need to cover in your lease document;

  • Environmental concerns
  • Use clauses (what is/isn’t acceptable)
  • Area measurement standard
  • Dangerous goods
  • Outdoor storage
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