Guest post by Samantha Ashly
The commercial leasing process can be confusing. So developing a basic understanding of some critical concepts can help you feel confident along your journey. In this blog, Samantha Ashly, a CRE broker, marketer (and previous Broker Spotlight), breaks down the need-to-know essentials of the leasing process in this helpful resource.
A “lease” is a written contract.
At a basic level, a lease gives you the right to use unoccupied land or structures. The owner transfers the property to another party for a specific period in return for a specified rent. This landlord-and-tenant relationship creates rights and duties for both parties which must be incorporated into a comprehensive but transparent agreement to avoid disputes over specific terms.
Commercial lease documents have grown in complexity over the years to help deal with all possible issues between landlords and tenants. Each agreement is unique and tailored to the property type. Unlike residential tenancy in British Columbia, commercial tenants have no guarantees or predetermined rights, which will be negotiated case-by-case.
Offer to Lease
Once you have identified a property that you would like to lease, the first document that your Commercial Realtor® will draft is an ‘Offer to Lease’ (OTL). This is the first vital step. The document provides a high-level overview or ‘offer.’ Afterward, an agreement on rates, basic terms and material subjects and conditions will need to be reached.
This document is not the actual lease agreement and doesn’t bind you to the property but shows a genuine, legal intention to procure it.
Once the OTL is accepted, the landlord will have a certain number of days, as described in the OTL, to get you a copy of the formal lease document. The OTL will also outline how many days you must go over the lease document with your lawyer. You can negotiate specific details with the landlord should something come up in the lease that isn’t in the OTL.
Ensure you are in contact with your lawyer in advance to ensure they will have time to review the lease before your deadline. Your Realtor® may also submit your offer as a Letter of Intent (LOI) instead of an OTL. Depending on which method you choose, there may be legal considerations, so discuss it with your Commercial Realtor®.
When shopping for a commercial lease space…
Triple Net (NNN), also called “operating expenses” is useful at this stage. This rate is in the advertised listing price on MLS®. Also expressed as a per sq ft price. There will be a range based on the space, its requirements, services and the age and style of the building. The triple net expense includes your proportionate share of the landlord’s property taxes and insurance. So understanding your insurance becomes more important.
You will need to get a tenant’s policy that covers the Landlord as outlined and agreed upon in the Lease. While triple net can include some utilities, you will often be responsible for setting up your utilities in your business name, which you will pay separately. ’Per square foot’ rates quoted for lease space are calculated by multiplying the rate per square foot by the total square feet of the space. The result is your per annum cost or annual rent. (To get your monthly expense, you divide that number by 12)
You can use this calculation with both base rent and the triple net expense to understand what you can expect to pay the landlord monthly. Often you will need to get the triple net cost from your Commercial Realtor®.
For example: If a space is advertised as $14/sq ft, and is a 2000 sq ft space, multiply that price by the square footage, which is your annual total. Divide that by 12 for your monthly rent. You also do this for the triple net.
Base Rent – $14/sq ft x 2000 sq ft = $28,000 annually
Divide by 12, and you get $2,333.33
NNN – $4.25/sq ft x 2000 sq ft = $8,500 annually
Divide by 12, and you get $708.33
This gives you a monthly rent expense of $3,041.66, plus 5% GST, your utilities and insurance. Triple net is typically reconciled each year for the prior year’s expenses. It’s common for the triple net to increase each year, as does inflation. It is also common to get a bill representing the deficit from any expenses underpaid from the last calendar year.
Deposits
Negotiated on a case-by-case basis, a deposit for a standard business with a long track record and good financials can expect to pay two to three months’ rent upfront. For start-up businesses, some landlords may require six months or more.
Personal Covenants
Another negotiable that can reduce risk is personal covenants. These can ensure that you are clear about what sort of guarantees are being provided against the lease, both corporately and personally. When you are negotiating your offer to lease, your Commercial Realtor® will often request tenant inducements (TIs) which are lease incentives to attract new tenants to rent a space.
Incentives may include a rent-free period, tenant improvement allowances, or even a cash payment (although the cash payment is unusual in the current market). They may also request a fixturing period where rent is not charged, so you can get the space ready for business. Sometimes if you finish your renovations early, you can continue with the free rent period. However, in some instances, you may have to start paying rent as soon as you open your doors for business. Make sure you are clear on which situation your lease includes.
These are some of the basic concepts that equip you with essential tools while you’re shopping for Commercial Lease space online.
To learn more about the commercial leasing process, please visit my website at https://shopcommercial.ca/commercial-real-estate-leasing-guide/ or if you or anyone you know is looking for a Commercial Realtor® to help you navigate the leasing process in British Columbia. Please don’t hesitate to reach out to Samantha at 250-448-5008 or email her at samantha@shopcommercial.ca.
Check out Samantha Ashly’s website here.