Leasing Resources

Leasing a commercial property is a significantly different process than renting a residential property. Let’s delve into the differences and how to best proceed so that you are able to successfully, and with minimum stress, satisfy your commercial space requirements.

Step One – Determine Your Needs and Wants

I remember some years ago when David Chilton, the author of the very successful financial management book, The Wealthy Barber, was on a speaking tour and I was fortunate enough to be there. He was talking about the difference between needs and wants and he used the example of how we all want a nice stereo system and he stopped and said, “Well, no we all need a new stereo system,” using humor to illustrate the difficulty of separating needs from wants.

Separating needs from wants is difficult but very important. Why? The chances of you finding exactly the space you need in exactly the right location at exactly the right price is near zero.

You will likely be called upon to give something up and having needs and wants clearly delineated will come in very handy in making a good decision. To help you with that you can download our Needs and Wants Form here.

Location is a key consideration that is often somewhat overlooked. We have heard many tenants state something to the effect that anywhere in the city is fine, but when you sit down and really consider your business, you will find that this is likely not the case. Transportation is a major expense in both time and money and the closer you can locate to your suppliers, clientele, or where your staff live, the better. You may need to be near certain transportation routes.

Step Two – Prepare a Business Plan

If you are leasing a space for your business, it is best to prepare a detailed business plan, not just for your business but also for the lender, and for the landlord. Any sophisticated landlord will want to see your business plan to determine if you are a good risk. Major landlords are generally large Real Estate Investment Trusts or Real Estate Corporations and they represent investors with expectations of good tenants and low risk. They are highly unlikely to consider your tenancy without this so best to be prepared. But, most importantly, you should do a good business plan to determine if buying or if leasing would be better for you.

Leasing is generally better than buying because most businesses find they can earn a better return investing their funds in their business. During the last 20 years, the real estate market in Alberta has been strong and so a lot of businesspeople bought their own units, but that may not continue and you may find investing in your business a better bet.

As well, you may find that the funds required for a down payment may reduce operating capital. Will you have enough liquid assets to handle any future cash crunches?

Finally, buying reduces your ability to change locations should your business grow, shrink or change in some way, so leasing is a safer choice for mobility reasons. Many landlords have other vacancies so if you need to move during your lease, you can often negotiate something.

Step Three – Get Financially Qualified

If you need financing for your business, it doesn’t matter how well qualified you believe you are, commercial financing is very different than residential financing and it is highly recommended you visit your financial institution before commencing your search. There is a big benefit we will discuss next, but the main reason is because commercial financing takes many more things into consideration than residential.

You may qualify but your business may not; the income and expenses of the business will be reviewed and the lender will make arbitrary decisions about the quality of the income. The lower they feel the quality of the income is, the less financing (if any) you will receive.

While you may feel you know your business better than the banker (and that is often true), they are unbiased and an unbiased set of eyes reviewing your business plan is always a good thing; they may see things you don’t and save you investing a lot of money or signing a long lease with a risky business venture.

The interest rate will also likely be higher than you thought, and the amount of the financing will likely be less.

Even if you are investing a substantial amount of your own money, the lender may still require CMHC financing.

The biggest benefit of being pre-qualified is the bargaining power it gives you in the negotiation process. That alone is well worth the visit to your lender. A landlord is more likely to negotiate with someone they know has a better chance of being around for 5 years. But, there is one more major benefit of being pre-qualified; unless you are a major, well-established business, it is highly likely the landlord will ask you to personally guarantee the lease. That’s right, they will likely ask you to put your personal assets up to guarantee the lease. If you are financially qualified, that is one more checkmark in your favor and maybe you will be able to negotiate a lesser or no guarantee at all.

Commence The Property Search

Once you have a good idea of your needs and wants, and you are confident in your ability to secure the needed financing, it is time to commence the search.

Commercial real estate is, unfortunately, unlike residential in that the majority of available properties will not be found in one resource, at least not without an expensive subscription. There are services that collect commercial listing information but to get the details you need often requires an expensive subscription fee. Even then, they are not likely to have all available properties in their database; there are many landlords who choose not to list publicly for various reasons. If you are going to pay that fee, why not consider a real estate agent to work with?

While we may be biased, we believe strongly that it is in your best interests to seek out and hire a qualified, reputable real estate agent. A good agent will take the time to understand your needs and can save you time and money. While the industry is changing, the vast majority of landlords still include a tenant’s agent commission in their sale price so the odds of you having to compensate your agent are still small.

The best thing about having your own agent is that he or she legally works for you. So, knowing this, let’s suppose you call the listing agent for a space yourself. This is something many people do because they don’t want to commit to working with an agent yet or because they think that is the way to do it. Because this agent is already working for the landlord, he is in a conflict of interest that he must also disclose to you. This conflict of interest is called Dual Agency. When you hire an agent to lease your space, do you expect her to do everything in her power to get you the highest price? Of course you do. When you hire an agent to help you lease a space, do you expect him to do everything in his power to get you the lowest price and conditions possible? Of course you do as well (The law calls this “Undivided Loyalty”). So how does one agent do both in the same transaction (The law calls this, appropriately, “Divided Loyalty”)? Pretty tough, isn’t it? In fact it is so tough, courts generally deem it impossible, citing the old adage, “You can’t serve two masters”.

So, agents who are in this situation are required by law to disclose this to you, and explain the consequences to you, including the fact that they cannot provide you with undivided loyalty.

Now, what is going to happen when you become interested in the leasing agent’s listing? How will an agent who is protecting the landlord also protect you when conflicts arise? This agent is lawfully bound to do everything in her power to get the most money out of you for her landlord client.

Okay, so hopefully this illustrates the potential consequences of calling the landlord’s agent. By choosing an agent who works for you and only for you, you can rest assured your interests are properly taken care of.

Not only will he promote your interests, but he will work to eliminate problems associated with dual agency that can complicate your transaction.

Now, if you choose to lease a space listed with your agent’s brokerage, your agent will have some extra forms for you to sign. By law, we are required to practice what is called Transaction Brokerage. You also have the right to have another agent represent you. If this situation arises, your agent should explain this to you in detail or you can check out www.reca.ca for more information. Feel free to ask him for more information at any time.

Making An Offer To Lease

This is probably the most important part of the process as it will likely lead to legal obligations to lease a property and so, careful attention must be paid to balancing opportunities with obligations. For example, making an unconditional offer will likely lead to you achieving a better deal, but once the landlord signs it you are legally bound to complete that transaction and that does carry consequences.

Sometimes, larger, more sophisticated landlords will 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. It is always best to seek legal advice when proceeding.
For this reason, Gerald prefers going directly to an Offer to Lease (OTL) and not bothering with an LOI. An OTL is a formal document, 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. Landlord prepared documents generally favour the landlord in most or all respects.

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;

Determine market position of the Landlord
Determine the market position of the property
- Listings to Leases ratio
- Inventory increasing/decreasing (market absorption)?
- Immediate competitors
Determine apparent market rent
Is there a Plan B? A BATNA? (See link below on negotiation)
Determine relative bargaining position/strength of landlord
Perform a market rent analysis for the property and set target rate
Set 2 incrementally increasing/decreasing midpoint reductions in relation to target rate
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.

William Ury - Getting To Yes

4 Harvard Principles of Negotiation

Negotiation Principles - Getting To Yes

Six Negotiation Principles

A good agent will help determine the best answer for you to all the following questions;

How much should I offer is the number one question on everyone’s mind, and the answer is, you guessed it, it depends. It depends on a lot of things.

Will a low offer upset the landlord? I’ve seen arguments for and against this question and both are right – you might or you might not. You can never know for sure so all we can do is make an educated guess and balance the benefit gained by a low price offer against the cost of insulting a landlord who then digs in her heels on rental rates.

I believe the most important question to ask yourself in any dilemma is, is the risk worth the potential benefit? This question should be asked in all situations when you are deciding on a course of action in an offer.

If the low offer backfires, how much of an impact will that have on your plans? Is this the only suitable property you have found in a long time? Is the property only somewhat suitable and of little consequence if you lose it, etc.?

Should I make a good offer? Again, same question, is the risk worth the potential benefit? How well is the property priced? Have your agent perform a comparative market rent analysis on the property to help you decide.

What conditions should I include in my offer? Conditions are clauses you add in the offer that basically say, “I will lease this property IF (and only if) it meets all these conditions. If not, my deposit is refunded and we walk away from each other no harm, no foul.”

This could be a very long discussion but let us give a brief summary of the most common (and recommended) lease conditions.

Subject to due diligence (various inspections)
Subject to review and approval of landlord’s standard lease
Subject to obtaining suitable finance
Subject to successfully achieving all required municipal approvals (zoning/ fire, etc.)
Subject to satisfactory environmental report

There are numerous other potential conditions that generally occur only in specific circumstances. If you are a large corporation, you may need Board or Management approval as well.

Many larger, sophisticated landlords may have a disclosure package ready with numerous reports, but there is no legal requirement for them to do so. Who pays for items such as inspections, environmental reports, etc., is a matter of negotiation. Be prepared for the possibility of paying for more than one report. You basically need to confirm the property is suitable for your requirements including power, water, etc.

This is more of a concern with older industrial buildings where floor loads, water supply, electrical supply, etc., may not be sufficient for your requirements.

The amount of time required to go about satisfying your conditions varies from location to location, market to market, and transaction to transaction, but most fall between 30 – 90 days. This, like everything, must be negotiated.

You will also want to review the landlord’s standard lease. In most situations, the offer to lease is not the final document. Most landlords have their standard lease which will supersede the offer to lease and will be the binding document governing your time in the property. This document will surely favor the landlord and it is critical that you satisfy yourself with its contents before signing. Once you sign it, you are bound by it.

Be sure to have your lawyer and your agent review it (lawyer especially) for potential trouble spots and try to negotiate those clauses. Just because it is the landlord’s “standard” lease doesn’t mean anything, try to negotiate unfair or troublesome clauses. Take the time to discuss any and every clause that concerns you with your agent and lawyer. It varies depending upon market conditions and various landlords, but you can and should try to negotiate more reasonable clauses when you find ones that are of concern.

Once you have satisfied yourself that the property is suitable for your requirements, you will be granted your business permit, you are satisfied with the landlord’s lease document, and you can get financing, it is time to notify the landlord that you remove your conditions. When you do this, you are legally bound to lease the property.

Congratulations, and best of luck in your new business!

FAQ

The agent wants me to sign a Tenant Representation Agreement, should I?

A Tenant Representation Agreement is usually a contract that binds you to that agent for the period of time specified in the agreement, and signing it, like any contract, has positives and negatives. If done properly, I would say it is overall a very good thing.

First, the main negative is that you are committed to that agent for the period of time specified in the agreement. If you find out afterwards that the two of you are not entirely compatible, or the agent was not the right agent for whatever reason, you may be bound to that agreement. So, let me first answer whether you should sign it.

The shortest answer I can give is, in my opinion, absolutely - if you are reasonably confident in that agent. Many of the best agents will not work with a tenant without a reasonable assurance of being paid for their work at the end of the day. These are good people and they generally provide great client service, but, like everyone, we need to get paid for our work. It is not an exaggeration to say that the risk of an agent not getting paid for his or her work is large and increasing.

Finally, most of the large, sophisticated tenants commit one way or another to one agent whom they trust. These are sophisticated businesspeople who are very experienced at leasing real estate, and yet they commit to an agent. Clearly, they see the benefits of a trusted professional.

So, how do you protect yourself if you are not yet sure? One of the best ways, that many agents will agree to, is to sign a short-term agreement (say 1 – 4 weeks) to get to know each other. Another way is to negotiate a unilateral escape clause where you can give unilateral notice ending the contract, but be aware that, if the agent agrees, he/she will likely add a perfectly reasonable clause that if you should lease a property you were introduced to in any way during your agreement, that they are compensated for that lease.

I found a property without the agent, why should I pay her? She didn’t do her job!

Well, it is quite possible the agent didn’t do her job, but it is also much more likely that you just found it before she did, or, just as common, it doesn’t have some feature that you told the agent you must have. I had a client some years back who found a property on his own with a grade loading door when he told me explicitly he had to have a dock loading door.

Additionally, commercial property searching is far more complicated than residential property searching, and requires more resources. With today’s online world, it is not unusual for tenants to find properties before agents do.

Frankly, finding properties is probably one of the less valuable things an agent brings to the table; our expertise in negotiation, market rents, property operating costs, contract terms and conditions, and an overall knowledge of what is reasonable in all those areas are much more valuable.

Ready To Get Started?

These are only a sample of the many considerations to be taken into account when choosing a commercial property. Gerald’s detailed needs analysis procedures will help ensure all your needs are met.

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