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Commercial Leasing Basics

Navigating the commercial leasing process can be confusing if you do not have a basic understanding of the key concepts. In this blog post, I am going to give you an overview of some of the things that you’re going to come across and what they will mean to you as a tenant looking for a commercial lease space

A “lease” is a written contract in which the right to use unoccupied land or structures are transferred by the owner to another party for a specific period in return for a specified rent.This land lord and tenant relationship creates rights and duties for both parties and it is important that these rights and duties become incorporated into a comprehensive but clear agreement to avoiddispute over specific terms. Commercial lease documents have grown in complexity over the years to help deal with all of the possible issues which may arise between landlords and tenants. Each agreement is unique and tailored to the property type. Unlike residential tenancy in British Columbia, there are no guarantees or predetermined rights for commercial tenants, your rights will need to be negotiated on a case by case basis.

Once you have identified a property that you would like to lease,the first document that your Commercial Realtor®will draft will be on‘Offer to Lease’(the acronym is OTL). Drafting an OTL is an important first step as this document is a high-level overview, or ‘offer’, to see if the land lord is interested in your business use at the property and if you can agree on rates, basic terms and material subjects and conditions that either of you may have for the leased property. It is important to understand that this document is not the actual lease agreement and does not bind you to the property but instead shows a genuine legal intention to procure the property.

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 own lawyer. This can be the time to negotiate more specific details with the landlord if something comes up in the lease that was not included in the OTL. Make sure you are in contact with your lawyer in advance so you know they will have time to review the Lease prior to your deadline. Your Realtor® may also choose to submit your offer as an LOI (Letter of intent) instead of an OTL. There are some legal ramifications to which method you choose so be sure to go over that with your Commercial Realtor® and decide together.

B shopping for a commercial lease space it is important to under stand Triple Net (the acronym is NNN), also referred to as “operating expenses”.This rate is not included in the advertised listing price on MLS® and is an amount that is also expressed as a per sq ft price (per square foot) and it will range based on the space, its requirements, services and on the age and style of the building.Triple net expense includes your proportionate share of the landlord’s property taxes and insurance,but it is very important to understand your own insurance. You will need to get atenants’ policy which covers the Landlord as outlines and agreed upon in the Lease. While triple net can include some utilities, more of ten than not you will hook up utilities in your own business name, which you will pay separately.

When you see ‘per square foot’ rates quoted for lease space it is important to understand how these rates are calculated. When you multiply the rate per square foot by the total square feet of the space what you will come up with is a per an num cost. Which means annual rent. To get your monthly expense. You divide that by 12. You perform this calculation with both base rent as well as the triple net expense to get an understanding of what you can expect to pay the land lord monthly. Often you will need to get the triple net expense 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 and that is your annual total. Divide that by 12 for your monthly rent. You also do this for 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 own utilities and insurance. It is very important to know that triple net is typically reconciled each year for the prior year’s expenses, so it is common for triple net increase each year, as does inflation,and it is common to get a bill which represents the deficit from any expenses that were underpaid from the last calendar year.

Deposits are negotiated on a case-by-case basis,however a typical standard for a business with along track record and good financials can pay expect to pay around 2 to 3 months’ rent as a deposit. For start-up businesses some landlords may require up to six months or more.Personal covenants may also be negotiated to reduce risk to make sure that you are clear as to 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 typically request tenant inducements. Tenant inducements (the acronym is TI’s) or 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 slightly less typical in the current market). They may also request a fixturing period which is a term that refers to a period where rent is not charged so that you can get the space ready for business. Sometimes if you finish your renovations early you can continue with the free rent period but 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 you will need to understand when shopping for Commercial Lease space online.To learn more about the commercial leasing process, please feel free to 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 me at 250-448-5008 or email me at samantha@shopcommercial.ca.

Samantha Ashly

Commercial Realtor®

Macdonald Realty Interior

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