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How to Optimize your commercial property

Tue, 15 Apr 2025 18:15:02 GMT

How to maximize commercial real estate value

How to Optimize Your Commercial Property

Whether you are a new owner looking to improve your property, an experienced owner aiming to optimize cash flow, or a seasoned investor trying to maximize your value before selling, there are a few key strategies to consider to enhance the value of your property.

Here are three key factors that will help keep your property's value high and ensure steady cash flow:

1. Keep Your Building Occupied

This can mean either attracting new tenants for vacant space or renewing existing tenants on new leases with updated terms. Tenant attrition is one of the quickest ways to decrease the value of a building. Here are a few strategies to prevent attrition:

Talk to your tenants. While this may seem obvious to some, for others, it represents a revolutionary shift in how they manage their properties. Regular communication with your tenants will help you understand their concerns about the space, their business struggles, and what’s going well. This allows you to stay informed and address issues before they escalate and begin to cause issues.
Empower your property manager. If you keep your tenants at arm's length, ensure you have a competent property manager and give them the autonomy to handle tenant concerns. This approach becomes especially crucial as your portfolio grows, making hands-on management increasingly impractical.

The key takeaway is that vacancies reduce property value faster than almost anything else. Retaining tenants long-term maximizes cash flow and makes it easier to sell the property. Happy tenants will also positively influence new tenant prospects, as potential occupants often seek feedback from current or former tenants about property management. Negative responses can kill deals, even if the space and location are ideal.

When filling a vacancy, make the leasing process smooth for the tenant. While a good agent can handle much of this, landlords must remain cooperative and try to make the deal work. If the tenant's covenant is strong, be willing to give concessions to secure the lease. Uncooperative landlords—or their lawyers—can sometimes inadvertently prolong the deal process, leading to lost transactions.

2. Increase Rents

Everyone knows increasing rents boosts revenue—but how do you achieve this?

The key is to understand how your building fits into the market. Michael Porter, the renowned business strategist, identified three generic strategies in business: cost leadership, focus strategy, and differentiation.

Cost Leadership:
This strategy applies to lower-cost assets like Class B or C properties, where tenants prioritize price. Increasing rents here can be challenging and may require transitioning to a different strategy.
Focus Strategy:
Focused strategies target niche markets. For instance, you could offer small office rentals on license agreements, shared office space, or specialized options like lab, medical, or dental spaces. By catering to a specific market, you can reduce your costs and increase value for tenants.
Differentiation:
Differentiated products tend to command higher prices and are usually seen in premium or luxury assets (Class A or AA). These properties feature amenities like architectural features, green certifications (such as WELL or LEED), or other high-end initiatives. Differentiated properties typically experience lower vacancy rates because tenants value the premium features and the prestige associated with the site.

3. Maintain Your Building

When it’s time to sell, a well-maintained building will sell faster and at a better price compared to poorly maintained properties. But the benefits of regular maintenance go beyond the sale.

Proactively maintaining building systems like boilers, HVAC, or roofs extends their lifecycle and reduces the risk of unexpected breakdowns. For example, regular inspections and upkeep prevent costly emergencies, save money, and help ensure tenants remain happy. Annual inspections for most building systems are usually sufficient.

Deferred maintenance is a common mistake among cash flow-focused investors as it can lead to tenant attrition and large capital expenditures. These issues can be particularly challenging if the building has insufficient income to cover repairs. Regular inspection and maintenance help you stay ahead of problems and plan for potential issues, ensuring smoother operations in the long run.

In Conclusion

These are not the only factors to consider when optimizing your property, but focusing on these three will have a significant impact on your daily operations and your ability to sell the property when the time comes.

If you’d like specific recommendations for your building or portfolio—whether for selling or as a long-term hold—don’t hesitate to reach out to our team.

Commercial Real Estate for Medical Users

Mon, 07 Apr 2025 20:18:13 GMT

Advice for doctors, dentists, and various others

Commercial real estate for doctors

Our team has worked with numerous medical clinics to locate suitable spaces for their businesses. While each clinic is unique in the services it offers and the specific demographics it caters to, there are some general rules of thumb that all doctors need to be aware of when looking for space.

We understand that for healthcare providers, your time is extremely valuable. If you prefer to discuss our services, you can text or call 780-920-8019 to reach me directly and learn how we can simplify your process.

With that said, here are the main things you need to consider as physicians looking to get into commercial real estate.

Regulations

First, the regulations surrounding the construction of medical clinics are constantly changing. This can be a result of local municipal bylaws or by building codes that are regulated at a federal level. While these regulations are made with the best of intentions, aiming to improve patient safety in the post-COVID era, they also present potential pitfalls to doctors who are unfamiliar with the specifics of the regulations and their impact.

On the local level, zoning bylaws is a significant consideration, but in Edmonton (or Alberta, for that matter), it's a relatively simple one. The key consideration with zoning is to ensure that local zoning authorities will approve the development. Your commercial real estate broker should be able to guide you through this part of the process. If you're considering properties that require rezoning as part of your process, you may want to review your market options to ensure there is not a more straightforward alternative available, as rezoning can take several months to complete.

On the building code side, it is substantially more complex, and utilizing a general contractor with experience in healthcare and medical real estate is crucial for completing your project. The primary consideration for most medical clinics will be HVAC. Following the pandemic, there were significant changes made to HVAC requirements within medical settings and clinics. Even those built just 10 years ago may no longer meet today's requirements.

These requirements are specific to the types of clinics being built, so utilizing the right contractor with the knowledge of the area will save you time and ensure that you are not overbuilding or under-building your space.

For these reasons, it is critical to have both an agent and a general contractor who understand real estate as it relates to healthcare professionals and the specific requirements applied to doctors.

Location

Location is another key consideration for healthcare professionals. I've seen medical doctors move into spaces with limited parking and poor access to public transportation, and their practices generally suffered as a result. While it's true that in Alberta, there is a shortage of family doctors, and if you build it, they will come, you must also consider that your office staff will be hearing complaints from your patients multiple times a day if your location is hard to find or if parking is hard to find. While this can be manageable in the short term, in the long term, it makes working in the clinic significantly less enjoyable for the staff members who are there.

In Edmonton, specifically, the city has relaxed all parking requirements for certain uses, leaving it to the discretion of the developer. While this requires more creativity on the part of developers, it also leads to some sites that are essentially dead areas due to a lack of parking. Typically, medical development should have a ratio of 3:1,000 or 4.5:1,000 parking stalls, which means that for every 1,000 square feet, you should have three to four parking stalls. Some practices will require more, while practices located in a major urban area may need fewer parking ratios if the area is walkable and has good access to transit.

Having exposure or access to residential neighborhoods will be beneficial to some practices but not to others. For example, a family medical practice will benefit from having access to neighborhoods or being exposed to them. An oncologist will not benefit from exposure but will benefit if their location is easily accessible and parking is convenient for patients.

At the time of writing, in Alberta, it is challenging to find developed medical space due to a net positive migration of doctors to the province. While ongoing disputes have existed between the provincial government and doctors, Alberta remains one of the most attractive destinations in Canada for doctors relocating their practices, resulting in a low vacancy rate of healthcare space.

Buildout

In addition to the regulatory hurdles faced by doctors' offices, there will also be specific requirements that depend on the specific practice entering the space. For example, a family medical practice generally has exam rooms that are 8 feet by 8 feet or even smaller, while an ENT, dermatologist, or ophthalmologist will want much larger treatment rooms due to their equipment requirements.

For doctors performing major procedures, such as those in ENT, dermatology, or ophthalmology, as mentioned above, the clinic may be required to have an IPAC-approved or NHSF-approved facility for operations. Again, this is where your contractor comes in and can provide a good idea of what the requirements are. Many regions will have specific requirements for contractors as well, so you may be required to use a particular contractor for your build-out.

Depending on the procedures being performed, space may also require upgraded power, HVAC, or potentially pressurized air lines.

It's also important to note that obtaining all these permits and completing the buildout takes time. At the time of this writing, it typically takes 6 to 8 weeks for a development permit and up to another six months for a building permit, depending on the city. Once the building permit is granted, you can expect a build-out time of three to four months. This means that you should plan for up to a year between submitting your application and actually completing your build-out and moving in. This is in addition to the time required to find the space and work through a purchase or lease contract, which typically takes another two to three months. This will be accurate for Edmonton, Alberta, however, it may change over time and may not be the same in all municipalities or regions. Therefore, it's always best to consult a local expert.

Our team collaborates with contractors and healthcare professionals to expedite this process, typically shaving several months off the timeline by utilizing our contractors and specialists in these areas.

Term

Depending on how long her physician tends to operate out of a location, it makes more sense to buy or lease. Some physicians overwhelmingly prefer to rent because of the simplicity of calling the landlord when anything goes wrong with the building. Others prefer to purchase because of the opportunity to build wealth and for succession planning reasons.

Owning real estate also comes with several tax advantages, so it is crucial to understand the local regulations and consult with an accountant who is familiar with the area and can create the most tax-efficient corporate structure.

When looking for a new location, also consider your intended growth over the next 5 to 10 years. If you want to grow and start multiple locations, then leasing is probably the way to go. Building some flexibility into your lease agreements will go a long way in ensuring that you can expand without being hampered by your real estate.

Cost

The cost of medical real estate will vary based on location but is generally in line with either the office or retail asset classes, depending on where you intend to locate your clinic. In some cases, a medical clinic can be discounted by other medical users, such as a pharmacy within a Plaza, because there is a benefit and a synergy to having associated uses. (Another example would be locating an ENT clinic with an audiologist).

One of the advantages of purchasing commercial real estate as a medical professional is that many doctors are eligible for preferential financing. Doctors and specialists, even those who are startups, can expect highly favorable interest rates and loan terms with the Big Five banks. Many banks will have lending teams dedicated to healthcare lending, offering finance packages tailored to doctors. (In addition to doctors, banks will typically also have programs that cover veterinarians, optometrists, and dentists on the same or similar terms as those offered to doctors.)

Process

Navi gating this process can be lengthy and complicated if you don't have the right team in place. Assembling a team comprising a broker, a banker, and a contractor with specific and relevant experience in the area will significantly streamline the process. They can provide you with an idea of what to expect in terms of timeline and budget and assemble the team to cover any contingencies not explicitly addressed by their areas.

Always check with your agent to ensure they have experience with other healthcare deals in the past. This is nice somewhere where you want to give somebody a chance. In this case, it will save you time, energy, and heartache to find a professional who knows what they're doing.

If you have any questions, please don't hesitate to contact us about our services and the individuals we have helped in the past. If we can’t help you, we're happy to point you in the right direction.

If you've made it this far, thank you for taking the time to read. Our team can be reached by text or call at 780.920.8019.

We look forward to hearing from you.

How to set up your commercial property for sale

Wed, 05 Mar 2025 21:41:17 GMT

How can you increase the value of your property

What is the magic formula for maximizing commercial values?

You should sell when you have the highest possible lease rates and when your cap rate is relatively low.

That’s it. It’s simple.

Your two levers are this:

Net operating income (the income the property makes after all expenses related to the property have been paid) / Cap rate (a market metric determined by location, interest rates, the quality of tenants, and the asset type)

To increase your value, you must improve all these factors.

Increase rent (keep up with the market, maintain the property so tenants want to stay)

Quality of location (good locations are easier to lease and sell, decreasing risk, and increasing liquidity)

Favorable interest rates (good timing)

Improve the quality of tenants (national tenants are good, tenants with a long history of leasing in the plaza are great because both qualities decrease risk for the buyer).

Asset class (the specifics of the market will impact this if there is a high vacancy rate in the asset class you own, then this increases the risk to a buyer, and so decreases value)

Right now, our current market is favorable for sales, but many landlords need help in correcting legacy issues caused by the pandemic, or less favorable leasing conditions from a few years ago.

The most common issues we see are:

Below market rent
Improper accounting for operating costs (this usually starts with the best of intentions, but if operating costs are not collected in full, this will negatively impact the net operating income of the property because the undercharge in op costs comes out of net rent)
Deferred maintenance (purchasers will expect a discount if the property needs a new roof, HVAC, parking lot, etc)
Gross leases (not always a problem, but if the accounting is out of wack, then the value is in question)

Our team has a track record of setting up assets for sale, and we would be happy to discuss how we can work with you to improve your value and take a property to market.

Thanks for reading - and by the way, this article was written by an actual person. Feel free to reach out to us to discuss your property - 780.920.8019

Case Study - Diamond in the Rough

Thu, 13 Feb 2025 00:03:36 GMT

How we created upside in a distressed retail site

Case Study – Diamond in the Rough - 3-minute read

I was recently hired to list a retail property for lease by an inexperienced landlord, in a tough area in the city. This area in the city struggles with crime, and the City had substantial construction planned in the area for an undetermined period of time which would drastically impact access to the site.

In our initial meeting after touring the property, I asked him what he was hoping to get for the property. He hoped to net $10 - $12 for this property but was open to virtually any deal. This property had been vacant for a couple of years before we were hired to take this on, so he was feeling the vacancy. He was in the property for around $700,000, and a $10 lease rate would support his value on cap rate – so this was a reasonable ask.

We took on the listing, but after about a week of investigation, I called the landlord, told him I thought I could get more for the property, and suggested a new asking lease rate of $18 net. He told me to do what I thought was best, so we increased the asking rent and marketed this to a very specific tenant that was underrepresented in the area.

After one month on the market, we had three offers on the property. We picked one of these groups, and signed them at $18/sqft with escalations applying over term. The landlord had to put in about $100,000 of incentives to make this deal a reality, so he was now in the property for around $800,000.

This new net lease rate, calculated at the same cap rate as above, gave the property a valuation of $1,270,000, so the landlord enjoyed a lift of over $450,000 of his investment, in addition to a strong lease payment coming in every month. This allowed the landlord to refinance the property and pull out his initial capital investment, allowing him to pursue other deals.

The key to this deal was identifying the highest and best use for the property , marketing aggressively into this tenant group, securing multiple offers to improve negotiating leverage, and finally putting the deal together.

Real estate services, like legal or accounting services, are expensive, but they are nowhere near as expensive as the DIY approach taken by some owners. The landlord would have left almost half a million dollars of value on the table if he had secured a tenant at the reasonable rates he had initially expected.

How commercial real estate is valued with cap rates

Sat, 22 Jul 2023 04:44:09 GMT

Cap rates and valuation

General info:

A cap rate is a figure used to determine the approximate value of commercial real estate, expressed as a percentage, and determined by the asset type (retail, industrial etc), interest rates, the economy and market fundamentals.

Cap rates can be anything depending on the market, but Edmonton typically trades around a 7% - 8% cap rate, given the current lending environment. The floor for cap rates is usually determined by interest rates in the market.

If you were an investor buying a tenanted property with 6% interest rates and an 8% cap rate, your cash flow would be around 2% on the asset (in very general terms since the equity in the deal will move the figures around).

If a prime interest rate is 5%, then the absolute minimum you’ll see is a 5% cap rate. If you see properties trading for cap rates below the prime rate, it’s typically because the property has some other upside. Alternatively, buyers who purchase properties without debt (such as some REITs or pension funds) will be less sensitive to cap rates since they don’t have to worry so much about the cost of capital.

Usage

The way the cap rate is used is that the net operating income of the building is divided by the cap rate to determine market value. For instance:

Let’s suppose a 5,000 sqft building is rented out for $20/sqft on a triple net basis (meaning the tenant pays all other expenses). This gives the property a net operating income of $100,000 annually (assuming no further adjustments are made).

At a 7% cap rate, a building with a $100,000 annual income would be worth $1,428,571.

$100,000 / 0.07 = $1,428,571

Breaking this down to a per-square-foot basis means that every $1 in net rental value converts to $14.28 in building valuation for a sale or refinancing.

It is for this reason that both banks and ownership groups are highly sensitive to face rates paid by tenants, and many sophisticated landlords will “buy” a face rate with other incentives. At the same time, less experienced owners (or owners with different priorities or with no debt) will tend to be more willing to negotiate on price.

Applied to a deal:

Therefore, if you’re paying $20/sqft in net rent, this amount supports a $285 building valuation for your part of the building at a 7% cap rate. If the space is 2000 sqft, then we’re looking at a building valuation of $571,428 for this section of the building,

(2,000 sqft X $20/sqft = $40,000 / 0.07 cap rate = $571,428 valuation)

and for every $1 discounted or added, they lose/gain $36,285 in building value up to “top of the market” rental rates.

The maximum value you can squeeze out of your deal will be capped by whatever “top of the market“ rent is, and investors and bankers alike will purchase or finance based on fair market value if rates are well above market.

Practically speaking, this factor is used to create leverage in a real estate deal and is usually where we have the most room to create value in the transaction for both the tenant and the landlord.

How does commercial leasing work?

Thu, 26 Jan 2023 21:40:01 GMT

How leasing works - a practical guide

If you have a new business and you’ve never leased before, the process can seem daunting. There are legal terms to understand and implications of risks and costs that may not be apparent when you start. But, as with any large task, you eat an elephant one bite at a time. In this article, I will try to break down the commercial leasing process into a step-by-step summary so you can eat the elephant.

The first thing to understand is that every landlord is different and the behavior of every landlord will depend on:

Their building
Their experience in the industry as a landlord
Their history with past tenants

It may take some landlords days to get back to you, even weeks, and others will respond to you within a few hours.

The level of accommodation will also vary dramatically with the landlord and their tolerance to risk.

When you’re dealing with a large institutional landlord, there will be a process that they will plug you into, and you will be expected to jump through their hoops to satisfy their requirements for tenant review. The thing to understand is that these landlords are accountable to a board of directors and their investors. So it’s in their best interest to ensure that any tenant that they put into the space will be a good fit for the property and will stay there long term with a minimum of fuss.

The essential thing to understand in a deal is that it will probably happen if everybody wants to do it. And if one party doesn’t want to do the deal, the deal almost certainly won’t happen. The key is to reach an agreement on all terms acceptable to all parties so that everybody is comfortable proceeding with the deal.

So the first thing is the willingness of all parties .

The second item is going to be the contract. I am not a lawyer, so none of this is legal advice.

The contract is a written representation of what is agreed between the parties. The contract is useful in ensuring that all terms are observed and in ensuring that the parties remember all terms to the agreement. If there are a lot of specifics, then the offer document should go into detail about what is agreed to. If it’s not in writing, then it may not happen. This is not because of any manipulation or bad faith on either side of the deal but it simply because during the negotiation, many things will be discussed many things will make it into the offer, and many things will not and the offer document is the written agreement of what will be going into the deal. Again, many things are discussed during a transaction, but the offer document governs the agreement.

There are many terms in the offer, and all of these terms can matter and the appropriate circumstances but generally speaking only a few deal terms really do matter.

Before getting into specific clauses, you should understand that a deal will have terms and conditions . A term is something that is agreed to by the parties. A condition is something that must be satisfied by one or both of the parties before the deal is binding. So while the length of the lease being five years is a term, a review of the formal lease document prior to signing would be a condition. The review must be completed and satisfied before there is a deal, whereas 5-year length of a deal is something that is agreed.

So jumping right into significant terms, in a lease agreement, one of the main terms is going to be the length of your lease, otherwise known as a "term" of the lease . In a standard commercial lease, this can be anywhere from 3 to 10 years, but it can be anything as long as the parties agree to it. So this can be done in months in days in years doesn’t really matter as long as the parties agree.

The next term is your rental rates . This is how much money the space will cost you. The way that this is calculated is a rental amount expressed as price per square foot. So if your space is $20 per square foot and the size of your unit is 2,000 square feet, then your annual rent is $40,000. This is broken down into monthly rent by dividing into 12 months.

$20/sqft X 2,000 sqft = $40,000/year = $3,333/month (plus GST)

Your rental amount is typically broken down into two figures. This is basic and additional rent . Sometimes the additional rent is called operating costs, so if you see that, chances are you talking about the same thing. Your additional rent or operating costs cover things like taxes, maintenance insurance, utilities and several other items that go into the property, such as management. Basic rent is going to go into the pocket of the landlord. So working off the above example if the basic rent is $20 per square foot and the additional rent is $10 per square foot for the 2000 square feet, you’re paying the landlord $40,000 per year annually and you are paying $20,000 per year in expenses.

What is included in the operating costs will vary from landlord to landlord and building to building , so it is essential to ask what is included in the operating costs anywhere you go.

Additional important clauses include signage which will dictate where and how you can advertise and how much it costs.

Another clause you will likely encounter is a parking clause which will dictate where you can park, when you can park, and how much it costs to park.

You’re also likely to see an assignment and subletting clause . What this cause does is it allows you as the tenant to find another tenant to take over your space should the need arise at any point during your term. This provides some protection in the event that you go out of business and grants you the ability to assign the lease if you sell the business.

You can expect to pay a deposit as well as part of your leasing process. The deposit will vary again with the landlord and with the amount of risk that they perceive in the deal. Sometimes the deposit is a couple of months of rent and sometimes, it’s much more than that.

Another way that a landlord can mitigate their risk in the deal is to ask for a personal guarantee . What this does is it removes the protection granted by a corporation to the individual. So if Tom incorporates Alberta 123 LTD and signs the lease under the company then if the company fails the landlord can sue Alberta 123 LTD. However, if Tom personally guarantees his company, the landlord can sue Alberta 123 LTD and Tom. This assures the landlord that the tenant will perform its obligations under the lease.

So those are some key terms that you’re likely to encounter.

On the condition side of the deal, a few protections can be wise to employ depending on your circumstances.

First is a contractor estimate condition. This would say that if you get quotes for construction far exceeding what you expected to pay, you would be able to terminate the lease agreement without further recourse from the landlord. This is a good idea if you expect construction costs to be high or if you don’t know what construction costs will be.

Next, is a city licensing and permits condition . This will vary in every municipality, so you will have to rely on your contacts at the respective municipality and your agent. Cities typically utilize a zoning bylaw which will determine what business can go and what location. This originated from past decades and centuries when residential neighborhoods were located directly adjacent to heavy industrial workshops including coal-fired manufacturing plants. This caused health issues in the cities, so local municipal governments would break up the city into zones where certain activities could occur. The result of this today is that specific uses can go into certain commercial spaces while they can’t go into others. This is an area in which again, you can rely on your agent for direction. Beyond zoning bylaws, there may also be health codes specific to your business which will impact where you can go and what kind of improvements must be made within the space. This is especially true for healthcare restaurant owners and anything that deals with toxic chemicals or exhaust.

Just like terms, you can have a condition for anything. If you want your dog to walk through the space and bark it’s approval you can have that condition as well, but the major conditions will be for contractor estimates and to deal with any permitting issues. Other less common but still relevant conditions could include board of directors review, third party review, lawyers review, etc.

So that is terms and conditions. You may think you’re done but there is one more step.

Most landlords will use what’s called a formal lease agreement or standard lease agreement. This is a long-form document that will incorporate the deal terms included in the offer to lease. In addition to the deal terms , the formal lease agreement will also deal with issues such as default, which is the tenant breaking the lease in some way, and exactly what is included in maintenance. What’s critical in the formal lease agreement is to review rules and regulations for the building to ensure that these agree with whatever your activity is going to be in the building. If there are rules and regulations that put you into default, you probably want to adjust them so that that doesn’t happen.

The formal lease agreement tends to sit in the drawer, and while the document can seem daunting and overbearing, it usually has minimal effect on all parties, provided the tenant pays its rent. The real litmus test for the lease is if the tenant acts in good faith, is he likely to run into problems with this lease agreement? If the answer to that question is yes, you probably want to make changes to change that. If the answer to that question is no and the tenant paying rent will be sufficient to maintain a happy relationship, then there’s usually no problem.

Again, you should seek the expertise of a consultant or a lawyer who has experience in these matters.

The process can seem daunting, but the way that you eat an elephant is one bite at a time.

When should I sell my commercial property

tom@lizotterealestate.com (Tom Dean) — Mon, 21 Feb 2022 19:44:41 GMT

Developing your crystal ball

When is it time to sell your property?

It doesn’t require a crystal ball.

Some people will say that you make your money when you buy a property. However, the reality is that you only make your money when you sell (or refinance) your property.

Is there ever a good time to sell?

The answer is yes.

But this yes is largely circumstantial and depends on a few internal and external (or environmental) factors.

First – internal factors

Lifestyle:

One of the benefits of commercial property is that fewer tenants and longer lease terms generally mean that even a sizable portfolio of commercial properties is less management intensive than a residential or multi-family portfolio.

Even so, the commercial portfolio itself may become a full-time job if one decides to undertake the task of self-managing.

If you manage a diversified portfolio, it may be less time-intensive to be less diversified, and the real estate may have to go to make this happen. This is not a statement of the quality of real estate versus other investments, just that every investor will have their priorities and assets that they’re more comfortable with. If the real estate game is no fun anymore, it may be time to make an exit.

Retirement:

Retirement is another lifestyle factor that ties into the considerations named above. Specifically, if you don’t want to hire a manager, and you’re overworked, it may be time to make changes.

Real estate can be great for funding retirement, but it can also become a job during your retirement. Whether this is a good thing or a bad thing depends on you.

Likewise, some business owners decide that while they want to continue to run the business, that doesn’t mean they have to keep the real estate they own. Some business owners I’ve spoken to say they’re their own worst landlord! In these cases, a sale-leaseback is a good exit that allows the business to continue running, while getting the business owner out of the real estate. We’ve written extensively about this type of transaction in past articles .

Taxes are a major consideration, but not one that we’ll cover here. Speak to a reputable accountant to break down the tax implications of a sale, as they are likely to be considerable in any transaction.

External factors

Market factors

These are the macro conditions.

Market conditions will impact your sale. For example, suppose you have an office building with a WALT (weighted average lease term) of 10 years and no vacancy, and your office market has a 30% vacancy rate and new buildings under construction. In that case, you should probably decide to sell or to hold within the next five years. As you get closer to the expiry of your lease terms, the risk goes up to a potential buyer, and the value goes down.

Conversely, if you have a WALT of 3 years and were going into a market with a historically low vacancy rate and upward pressure on lease rates, you have a few options. You can hold the property, get some upside on the lease rates as tenants renew, and refinance the property. If you’re nervous about what the market will do, it may be an excellent time to sell since a more bullish investor will regard the 3-year WALT as an opportunity to get upside on renewals.

Markets with fewer industries will also face greater volatility. If you’re in a market like this (and if you’re in Alberta, you’re certainly in one of these), then the broad patterns of the industry will impact buy and sell cycles. If oil is up in Alberta, prices are high, and people are bullish, and filled with optimism. If oil is down, people talk about leaving the province, there is an air of doom, and investment is seen as risky at best.

Yet we’re told to buy low and sell high. Most people will do the opposite and will tend to make no money in the market.

Of course, there’s no guarantee that any market will come back, a prime example of this is the rust belt in the United States.

Nobody has a crystal ball, but you make the best decision you can with your information.

Asset factors

In the previous section, we talked about WALT as it relates to market factors, but the WALT itself is an asset factor that dramatically impacts the value of a building. WALT is an indicator of when the risk enters into a deal. A short WALT means a higher risk of vacancy for an incoming buyer – it’s an opportunity to renew at a higher rate, but it’s also a risk.

Lease rates are, of course, another heavily weighted factor. If lease rates are above market with renewals coming up, then there’s more risk for a buyer and likely less willingness to pay a full cap rate on income. If lease rates are below market, this indicates potential upside for a buyer, and they may be willing to buy at a lower cap rate than what’s dictated by the market. In both cases, you’ll see buyers gravitating to “market rent” for their property evaluations, and market risks will play more of a role in the valuation.

The tenant’s covenant (financial and corporate strength) is another factor. A sky-high lease rate means nothing if the tenant cannot pay it. Again, any such leases will tend to correct towards a market lease rate to mitigate the buyer’s risk in coming into the property.

The building’s condition also factors into the sale, especially with older properties. A cash flow investor will bleed the value of his building to save money, but the chances are that money is lost when the prospective buyer realizes here’s buying a dog. This is called capital expenditures, or CAPEX. Things like the roof, RTUs, parking lot, sidewalks, structure, anything that requires significant investment are potential landmines to a buyer. If the building has been well maintained, this factor will likely not impact valuation. If the building has been cash flowed for death, CAPEX can pile up, and when a buyer comes to buy the property, they’ll discount the roof, mold, RTUs, boilers, and anything else that’s been let go for too long.

In Conclusion

So again, there’s no clear-cut answer to the question of when to sell. Any it will likely be a combination of these factors.

When making the decision, using an analytical framework can help come to a good answer.

A simple example would be writing down all the reasons to sell the property and why not to sell the property. If each one of the reasons is assigned a particular weight, based on its priority, you have a rational decision-making process that can aid you in making the call. Here’s a link to an article on this decision-making process.

If you’d like a market valuation of your commercial investment property, as always, please feel free to reach out to our team.

How do leaseback sales work

tom@lizotterealestate.com (Tom Dean) — Sun, 30 Jan 2022 18:07:50 GMT

A taste of the mechanics

So you’ve decided to sell your property as a leaseback. How does this work?

Well, let’s take an example from a previous article and expand on it.

Sally owns a physiotherapy practice she’s been operating for the past 15 years and is ready to get out of the business. She was prudent when selecting business partners, and one of those partners is prepared to buy her out of the business, and continue operating.

Sally owns the real estate as well and wants out of it.

Sally’s partners see value in the location and plan to stay there long term if the lease rate is in line with the market.

The property has the following specifications:

Freestanding 5,000 sqft building in a secondary market
The property’s exposure is good, but more importantly, there’s ample off-site parking available to customers at no cost.
Market lease rates for a property like this range between $14 - $18 per square foot on a net rental basis.
Because Sally owns the property and the business, the lease rates she paid to herself were $20 per square foot to facilitate faster debt paydown.
Most building systems are in good condition.
Market cap rates in Sally’s market hover around 7%

At first, Sally hopes to achieve $1,425,000 for the property based on her current lease rates, but after speaking with her banker and a real estate agent, she decides to list the property for $1,285,000.

After some time on the market and some excellent advertising, she receives an offer for $1,142,000 if the company leases back the property for 10 years at $18 net (7.8% cap rate).

After some back and forth, they reach an agreement to purchase the property for $1,195,173, and the company will leaseback the property for 10 years at a rate starting at $16 and escalating to $19 over the 10 year term (6.69% cap rate to 7.95% cap rate).

After a couple of months of hard work and review, an agreement is reached, and the deal closes. The physio company goes on with business as usual, and the investor is getting a healthy return on his capital, and Sally finances the next chapter of her life.

This is one way a leaseback transaction can go, and is a vanilla example. The reality of a trade like this can be much more complicated but is well suited to address complex scenarios with multiple ownership levels.

Our team has navigated this process from deals for $450,000 to $12m. We’re always happy to discuss the possibility of a sale-leaseback with owners.

What is a leaseback

tom@lizotterealestate.com (Tom Dean) — Sun, 30 Jan 2022 18:04:50 GMT

Lease it back

Put simply, a leaseback occurs when the seller of a property becomes the buyer’s tenant.

Here’s an example:

One wrinkle in the plan is that Sally owns the real estate and wants to get out of it to finance moving across the country and starting a new career.

Sally finds an investor who believes in the long-term viability of the business and the success of the partner taking over the company. He agrees to buy the building from Sally at a price and rate of return that are in line with market conditions.

Sally is still in a management position within her company. The partners agree to a long-term lease and lease rates that will facilitate Sally’s sale while giving the company long-term stability in their lease rates.

Here’s another example:

Don owns ABC Grocery. He has 10 locations across Canada but leases eight of his locations, and owns two.

The Grocery business is booming, but he doesn’t love the real estate aspect and has decided to sell the real estate.

The two locations he owns perform very well, and are long-established, so he doesn’t want to give up the locations.

Don decides to find an investor who will buy the buildings and become his new landlord. The process is called a sale-leaseback (also covered in a previous article) .

An investment firm, called “Superrich Investments,” takes an interest in the property and buys the property.

I’ll spare the mechanics of the transaction, but what happens is that ABC will enter into a lease agreement with Superrich which will both give ABC the security to continue operating the stores long term, exiting the real estate, and also give Superrich a long term tenant and a guaranteed ROI for the term of the lease agreement.

Factors

When looking at a leaseback of a property, several factors have to be in place for this to be an appropriate option.

First, the company must have a strong covenant, and long-term viability. A track record of success is critical, but if an owner is leasing back because he’s getting out of the business, the buyer will want to know how successful the company will be under new leadership. If there are doubts about the incoming team, this will impact valuation because the risk in the deal increases.

Another factor will be the valuation of the lease agreement. Because the lease portion of this transaction directly affects the value the seller pulls out of the property, it must be in line with current market conditions for the bank to finance the deal. This only means that you can’t leverage an astronomical lease rate to pull out equity above what the market will bear, even if the income theoretically supports the valuation of the building.

Another factor is the term. Leasebacks can be short or long. In multi-tenant retail or industrial, a short-term leaseback from a significant owner/occupier can facilitate the sale by giving the buyer some time to fill a future vacancy. Long-term leasebacks provide the incoming owner security but can also limit upside potential in the property if the lease is undervalued.

The factors are different in every transaction, and the “right thing” to do will depend on the buyer and seller’s priorities.

If you’re a business owner and own the real estate you occupy, then a leaseback is often the right way to get out of your real estate for the maximum value since you have many great levers at your disposal to impact the value.

For more specifics on the mechanics of a sale, please see the following article.

What is Tenant Representation?

tom@lizotterealestate.com (Tom Dean) — Mon, 20 Dec 2021 21:03:54 GMT

Or a tenant rep

Put simply, tenant representation is the act of having someone represent the best interests of a tenant in a commercial lease transaction (a "broker" or a "real estate agent").

Most commercial agents have done tenant representation at some point in their career, and some make it their job to work only for tenants.

If you're a tenant, this amounts to having someone else do all the leg work for you. You'll tell them your budget, give them criteria of what you're looking for and where you'd like to be located. The agent will then tell you if what you're looking for is realistic. If there's a meeting of the minds, and all parties are happy, the tenant rep broker will likely ask the tenant to sign a representation letter, sometimes called a mandate.

This document typically does a few things.

It is a written agreement stating that you will exclusively work with the agent on anything they present to you, and
It sets out how the broker will be paid

On the matter of payment, there are several ways that this works, and there are benefits to each one.

In most cases, the tenant representative will be paid by the landlord, and is only paid when the transaction is completed. This will be the case in 90%+ of all deals with a broker representing the tenant.

The landlord will not want to pay a broker for the deal in some cases. This is the case with small or private landlords or off-market properties. In this case, the tenant rep broker may come to you (hat in hand) asking you to pay their fee. There is value in engaging with a tenant rep broker. The cost associated with the fee is almost always covered in saved time and money on the deal.

Less common is for the tenant to put the tenant rep broker on retainer, pay them a flat fee whether or not the deal closes, and have the representative agree NOT to take a commission from the landlord, even if it's offered. This arrangement is the purest form of tenant rep since it means the broker will represent your interests and is compensated regardless of whether you close a transaction. The downside of this is that you're out of pocket for the cost of a broker.

Some people will decide to act without representation, thinking that they know enough or how to negotiate. The issue with this is that you don't know what you don't know and will almost always leave money or other incentives on the table.

Your leverage as a tenant

As you can probably guess, a tenant with more experience and an operating business is more attractive to a tenant rep broker than a start-up. Suppose you're a new business looking for 1,000 sqft for a hair salon. In that case, chances are you'll be working without representation or with a very junior broker (a junior broker will still be better than acting without representation, as they should have some firepower behind them if they're a reputable firm).

For this reason, it may be worthwhile to offer a tenant rep broker a retainer to work with you on finding a space or offer to pay them out of pocket for their services. This way, they have insurance that they'll still make money working with you even if you don't close a deal. It also shows that you're serious.

If you have an established business, you can expect to have more brokers willing to work with you to secure space.

The result is that you should have a less stressful experience and have more options tailored to your needs and realistic expectations on the front end.

What is covered land in commercial real estate?

tom@lizotterealestate.com (Tom Dean) — Wed, 03 Nov 2021 19:55:25 GMT

What is covered land in commercial real estate?

What is covered land?

This is an occasional question we get from real estate investors, especially from those in the space of land banking and redevelopment.

Put simply, covered land produces income to "cover" the expenses associated with a project or the holding period of the property. These expenses can be property tax, debt service, or other costs.

This need not be bare land, and often, it is not bare land. Covered land can refer to a parcel of land with a building on it, where the site is not meeting the criteria of "highest and best use." This means potential upside for a buyer down the line if the property can be redeveloped or is suitable for a future land play.

Another benefit of a covered land deal is that it's often easier to finance. If the property has a building on it that pays income and services debt, then the deal is probably bankable. Compare this to other land deals where you must have significant equity to purchase a parcel.

An example of this is a single-story restaurant business that's been in operation for 50 years in one location. If an investor buys the property as a leaseback with a 10-year lease in place that pays only nominal rent but covers the expenses to the new owner, the investor is essentially covering his costs to buy the land with future redevelopment potential. The useful life of the building may be short, perhaps 10 – 15 years, but this scenario is still preferable to purchasing land at a premium with no income and the intent to hold the property.

Another possible scenario is this. Suppose you own a strip mall on a busy road but doesn't directly abut the intersection. You want to buy the building and land bordering the intersection, but the neighboring building owner operates their business out of the space, and doesn't want to close their business. A covered land deal is a possible "win-win" for the parties. The strip mall owner could buy the parcel on a "net and carefree" lease basis. The seller gets to cash out now and perhaps has an agreement in place that the site may only be demolished after the owner retires or dies (or some other sunset criteria). This also secures the buyer's interest in the property and will increase the value of his neighboring strip center.

The risk with this investment type is the same with any other investment. If you overpay based on cap rate or the strength of the operating business, you may find yourself upside down when your tenant leaves, or it's time to sell. The key with a covered land deal is that you're buying the land, not the building or business, so the entire play needs to be based on a land exit. If you miss the mark on your speculation, you'll lose money.

Overall this is a safe investment strategy if done correctly and, in my opinion, preferable to a greenfield land bank play since a covered land deal should cover the expenses.

If you have a deal you'd like us to look at, reach out to myself, or Chuck for help.

Retail, office, and industrial real estate - what's the difference?

tom@lizotterealestate.com (Tom Dean) — Wed, 03 Nov 2021 16:46:40 GMT

Pros and Cons with Commercial Real Estate Asset Classes

Commercial real estate presents endless opportunities for investors, but when it comes to picking the right asset, each one comes with its own risks and plus-points.

Most investors will eventually settle on one or two asset classes into which they specialize. What asset they choose has a lot to do with the individual investor's priorities, temperament, and risk tolerance.

There are endless ways to delineate investment real estate, but we will focus on five main classes for this presentation, these are land, multi-family, retail, office, and industrial real estate.

Land

Don't wait to buy land, buy land and wait.

This is a bit of common advice among land buyers.

The play with a land buyer is typically simple. They will purchase the land, wait for it to appreciate, then sell it to another investor with a health upside – that's the plan anyway. Usually, this is a safe asset class, and unless the entire marketplace collapses (think Detroit), the land can usually be sold. Even in a situation where land value collapses, the investor will be in a good position to hold it, since property taxes will no doubt collapse as well. Most of the time, a simple appreciation play will work, given enough time.

Land is typically bought with cash since many banks will be unwilling to finance land. The only real income that will come from land is renting it as yard storage or allowing farmers to harvest hay – both of which will do little more than pay the property tax.

Some investors will also move the land forward towards development, thus making it faster to turn a profit. In Edmonton, the land development process looks like this , and a similar pattern will be followed in many major cities:

For example, a developer may take a piece of raw land, rezone the property, provide services up to the property line, and rough grade the site. This is work that any developer would have to do. The investor putting in this investment (sometimes considerable in both time and money) saves a future buyer from doing this work and adds value to the site.

Most investors fall into the land banker category, but some will be willing to take on the additional work in moving the property towards development.

Multi-family

Multi-family is probably the category most familiar to investors. Many small investors start their investment journey with single-family homes, moving into duplexes, fourplexes, and forward into larger projects.

The beauty of multi-family is that it isn't going away, and it is immune to disruption. People will always need a roof over their heads, and multi-family has been a requirement for humans since we emerged from caves.

So the asset is very safe, and for this reason, there is a high demand for this asset class among investors. This pressure drives value down, so the main factor in determining appropriate cap rates for multi-family assets will be the cost to finance the property. Returns will generally be modest, but there will be returns. Management intensiveness in small portfolios is the greatest challenge with this asset class, but this improves as the portfolio grows enough to justify using a professional property manager.

Multi-family has subcategories that do not share the fundamentals of a typical multi-FAMILY building. For example, student housing is a different category of multi-family. This shares the characteristic that many people live in the building, however, students go home to their families, creating a periodic vacancy. Student housing is fundamentally tied to another industry (education) that is going through massive disruption. Most of these properties will not easily be able to pivot to make up for these changes.

Retail

Retail splits up into several subsets, so much so that when someone says they invest in retail, it will be ambiguous as to what this means.

The main factor in all retail types is the disruption of online shopping. This has caused most categories of retail outside of QSRs and restaurants to pivot to survive.

Strip malls are the most common form of retail property. These were developed in the early 20th century to make a retail marketplace more friendly towards automobiles. These tend to be highly efficient and well-oiled machines, with the perfect ratio of parking to usable floor area. These plazas are highly in demand, so cap rates on retail plazas tend to be lower than in most other asset classes.

Urban street front is a subset of the strip malls above and is really a smaller version of the same concept, using public property for parking. This asset class will typically be mixed-use, having a residential or office component on the upper floors.

Enclosed malls are another retail creation. This is an enclosed market street front with no cars. People park in the acres of parking surrounding these centers and go inside to shop in a space not exposed to the elements. This asset class has been disrupted in recent years and is pivoting into a more experiential retail model .

Office

Office is yet another asset that's been disrupted by the digital revolution. In most markets across North America, there is more office space than can be absorbed. The result is that the office market is risky.

Costs associated with replacing tenants constitute a significant consideration in this asset class. In Edmonton, lease transactions are currently being completed around $0 net effective rent , meaning that the landlord sees minimal money out of the deal. As a result, demand is low, and cap rates and returns are relatively high, but those high cap rates come with risk.

In most markets, downtown office vacancy will be lower than suburban, but the entry barriers (cost) are high to get into the market. Vacancy can be a significant consideration, and planning an exit or repositioning an asset can be challenging and costly. With all of that said, owning office buildings, especially towers, comes with a level of prestige that is not associated with other asset classes.

A subset of office space is medical office. This space shares most of the characteristics of the standard office noted above, but the numbers tend to be larger, and the tenants changing costs (buildout for their spaces) can be astronomically high, giving the landlord increased leverage in negotiations with existing tenants. The costs to acquire new medical tenants also tend to be very high.

Industrial

This category has two distinct subcategories, one is manufacturing/production, and the other is distribution.

Distribution focuses on central transit/commercial nodes, including highways, intermodal train yards, and airports. These spaces tend to have dock loading for ease of loading and unloading containers. This is an up-and-coming asset class with astronomical potential as it disrupts conventional retail. The challenge with this investment is that there aren't as many small distributors, thus making meaningful investment in this asset class a costly venture.

Manufacturing and production are just what they sound like. These are the factories, chemical plants, laboratories, and auto shops. Anything that produces something tangible is in this asset class. Like medical, the switching costs for tenants tend to be high, and once the equipment is set up and operations are established, these businesses tend to stay in place long term and not require any work on the part of the owner. The risk with these spaces is when your tenant does move or go out of business, it can be years before the space is filled again.

Additionally, there are environmental risks with some tenants. These risks may not have been regulated throughout the business time of the tenant. So there may be multiple violations and issues that need to be remedied before a bank lending money on a contaminated asset.

As an asset class, industrial real estate enjoys health cap rates due to lower demand than some other asset classes. This is partly due to the risk of the asset class and the optics around some uses and "dirty" buildings. For this reason, there are many good opportunities in this investment class.

Conclusion

How much money do you have? How much time do you have? How much risk do you want to take?

Those are the big questions for investors.

Investors need to do some soul searching before investing in properties. Do they want a passive investment, such as land, industrial or medical space can provide, or are they looking for a second job, such as multi-family assets can provide.

Barriers to entry are another consideration. Again, multi-family is the most familiar and can be relatively easy to finance, whereas industrial space and land can have high costs in the beginning and can be hard to finance.

There are endless opportunities in this arena, and it's a great industry to take part in.

What do start-ups need to know about commercial real estate

tom@lizotterealestate.com (Tom Dean) — Sun, 27 Jun 2021 19:11:32 GMT

The basics of commercial leases

Check out our frequently asked questions at the bottom of this page.

What should you know about commercial leasing?

At first, this can seem like a long and difficult process, but if it’s approached correctly and someone with experience guides the process, it can greatly ease the process.

But before we jump into the process, you must understand something as a start-up.

The risk of working with startup / new tenants - from the landlord's perspective

As a start-up, you first need to realize that you’re an opportunity and a risk to your prospective landlord. If this is an arms-length transaction, you must recognize that the landlord doesn’t know you. The only thing to give them a comfort level is the information you’ve provided and other factors, such as who is representing you and the strength of the offer.

So before you get started in looking for space, the best thing to do is thoroughly understand your requirement. This means you have a business plan, you have revenue projections, you know your margins and how much revenue you have to generate to break even, and you have a roadmap of how you’re getting there.

This may sound like a lot of work, and it is. If operating a business was easy, then everyone would do it. There’s a risk to it, and there’s a reward. The more prepared you are for a business, the greater your chance of success.

So here is what to expect and what to think about as a first-time tenant.

Know the costs associated with the deal

Deposit:

The cost of real estate is usually not the largest expense in most businesses, but you do need to know your total costs on the front end. If your total costs for a new space are $5,000/month, and you’ve signed a 5-year term with a landlord, you may have to pay a deposit of $10,000 - $15,000 depending on what is required. If you’re doing a short-term pop-up store, the landlord may request that you pay the rent for your entire term up-front.

Tenant Insurance:

So that’s your deposit. You’ll also need tenant insurance. This is generally a small cost and won’t break the bank. There are many different commercial insurance providers, such as Lloyd Sadd, HUB International, and Sadler Insurance. If you have an existing business policy with an insurance provider, they can probably add the required insurance to your policy – but as always, check with your provider.

Permits:

A business license is another cost, and in Edmonton, the price of a development permit and building permits will also be a consideration. This is a small cost for most businesses, but can become expensive if there are building permits, etc. The thing that typically hangs people up on permits is the timelines. If you don’t want to be bothered with this at all, development consultants can be hired to run the process.

Construction:

The next item to consider is the premise’s state and what work needs to be done to make the space suitable. Most landlords will require that a certified contractor do all the work because they don’t want amateur trades damaging their buildings. Selecting contractors comes with its own set of challenges.

The cost of any buildout is highly variable based on the selected finishes. If you have a 1,000 sqft space, your cost for flooring can range from around $3,500 on the extreme low end to tens of thousands of dollars, depending on what flooring is selected. For the 1,000 sqft space, your costs can quickly run up into the $100,000s depending on the business and the required renovations.

It will be relatively cheap if your design is simple – four walls, flooring, ceiling, and a bathroom. If you add items specific to your use, your costs will quickly increase. Let’s take a hair salon as an example. In addition to the four walls mentioned above, you’d need hair-washing sinks, upgraded power for dryers, upgraded plumbing such as an extra hot water tank, cutting stations, some cabinetry, a reception desk, and a seating area. You may also want laundry, a color bar, a staff room where people can eat lunch, maybe specific spotlighting, some paint, and a few accents to make the space more unique.

Understanding the costs is critical to successfully launching the business. It's good to have a general idea of your costs and then apply them to the specific space you’re looking at.

Depending on the anticipated costs and your budget, you may be better off renting something similar to what you’re looking for rather than taking a loan to construct the space. Finding a space ready to go (we call this “turnkey”) will significantly help reduce your upfront costs. Still, there will be less room to negotiate in the deal, and you may have to sacrifice some other important elements, such as location.

Step 1: Offer

So now you’ve toured spaces and found one you like. Next, we will look at what kind of deal we can do. This not only includes price (and very often, the price is a fixed feature of the listing), but it also includes deal structure, length of term, incentives on the deal, and any security that the landlord will require.

To some degree, any deal must work for both parties to be viable. If there is a deal to be had, it’s called a “zone of possible agreement” or a “ZOPA.” If a deal is agreed to outside the ZOPA, it will lead to future problems, and one party will often have to terminate the lease. So, a deal has to work.

Keeping interests in mind, we say no deal is better than a bad one. One party may negotiate a deal that’s bad enough that it will be impossible to honor, and the tenant will end up in default. For this reason, knowing your budget and applying common sense when negotiating a deal is essential.

The deal is written and is usually signed by the tenant first. This “offer” is then presented to the landlord, who will have questions and may adjust terms based on their priorities. Once all the adjusting and negotiating are completed, both parties will sign an identical contract. We have a deal.

Step 2: Conditions

Sometimes, the deal will come with conditions, such as a condition for permitting or a general contractor’s construction estimates.

You’ll likely have to deal with some permitting as part of your conditions. This will usually be a business license, a development permit, and possibly inspections from a local authority, depending on the type of business you’re operating. Applications can take several weeks, so the conditional period in your offer should reflect this.

The City of Edmonton has recently changed its zoning bylaw to simplify and expedite this process. The criteria for what businesses can go where is clearer now; we expect this will lighten this requirement.

The landlord may also have a condition to review the tenant’s “financial and corporate covenant.” This means they can request a credit check, business financials, corporate documents, etc.

And finally, we have the formal lease agreement. This document cancels the offer document and becomes the new agreement between the parties. It will include all the terms from the offer to lease and terms that deal with what happens when there’s an earthquake, when the tenant stops paying rent, etc. These documents can vary in length from 4 pages to over 100 pages.

Step 3: Unconditional deal

Once the formal lease is signed, you do have a deal. The next stage in the agreement will be possession; in this stage, you’ll take over the space, do any work that needs to be done, and open it for operation. Typically, the landlord will want the deposit, proof of tenant insurance, and utilities to be switched over into your name before possession.

One thing to note is that no commercial real estate contract is standard. You should read and understand the document to know what you’re getting into, including understanding the dates and all financial commitments you have to the landlord.

If you want more details, or if this isn’t your first rodeo, here’s another article about what to expect when you’ve been in business for a while.

FAQ

We often get asked many of the same questions, and here are some of the most common questions from new tenants.

“I see all of these vacant properties. Isn’t it better for a landlord to do a deal and get some money than to let it sit vacant and make no money?”

There are several reasons for this. First and foremost, having an undervalued lease in place will devalue the property. Commercial properties are valued based on the rental rate, and if the landlord discounts the rent in the building, they are taking a more significant hit on the value of the building. Sometimes, their bank won’t allow them to agree to a lease under a specific value because it impacts the bank’s ability to handle the property if it goes into receivership.

Some landlords will let a space sit empty rather than lease it out. It will depend on the specific situation.

“Is my deposit refundable?”

In our offers, the deposit is refundable up until the point when conditions are removed. At this point, this becomes a non-refundable deposit.

“What happens if I have to break my lease?”

Usually, you will lose your deposit at the very least. The landlord may seek additional recourse under their lease agreement if this occurs, but it will depend on the landlord and the situation's specifics. If trouble is coming, it’s best to talk to your landlord early to try to work it out. If you break your lease or do a midnight move, be prepared to get lawyers involved.

“Can I get out of my lease early?”

Generally, no. If you commit to a term, you’re committed for that period. However, most leases give the tenant the right to sublet the space, meaning if you can find someone else to take over the space, they will cover most or all of your rent.

“Can my rent increase after the first year?”

This depends. There are two kinds of leases, which are covered in another article. If basic rent and additional rent are separated, then your basic rent is fixed – it will be whatever is in the contract. Additional rent is not fixed and can change annually to reflect the actual costs associated with the property. This doesn’t include mortgage payments but can consist of taxes, maintenance, building insurance, and sometimes utilities.

Want more information? Reach out to me at tom@lizotterealestate.com or text me at 780.920.8019

What are some Commercial Real Estate Investment Strategies

tom@lizotterealestate.com (Tom Dean) — Tue, 30 Mar 2021 05:26:59 GMT

Generic Strategies for Real Estate Investing

Commercial Real Estate Investment Strategies

Commercial real estate has the characteristic of being both very generic and very specific. Generic strategies can be applied to properties and portfolios overall, keeping in mind that the strategy's specific application must be tailor-made for the properties.

Most first-generation millionaires will make their first million investing in real estate, be it commercial or residential.

The first thing to understand is that there will be three generic strategies for real estate plays. Core, value add, and deep value add – this is true both in residential and in commercial.

A core investment will be low risk, stable, and offers long-term but often modest returns. Value add is a property with some level of distress that adds value to the property if it's corrected. Deep value add is a property with substantial distress that requires considerable effort and work to correct; this often comes in the form of high vacancy rates, deferred maintenance, and environmental issues.

These are generic strategies for real estate. What follows gets more specific but is by no means an exhaustive list. Here's a whirlwind tour of some common real estate plays

Owner-occupied

This is extremely common and is how many people get their start in commercial real estate. Why rent when you can own?

They key advantage to this strategy is that you're always in control of your tenant. If the business is viable long-term, you'll have a long-term tenant that always pays rent. The owner can adjust rental rates to increase the value of the real estate asset, or to lower rent to get the business through a tough market.

Additionally, if the business fails, you still own the real estate asset and lease it out to another business, providing additional security for the investment.

The owner-occupied property also provides additional exit opportunities such as the sale-leaseback which has been featured in other articles.

Long term buy and hold

One of the advantages to commercial real estate over residential is its relatively low labor intensiveness in many scenarios. The long-term buy and hold allows the investor to buy into an asset with some security attached to it and pull cash out of it long-term while building their equity.

Commercial tenancies are often 5+ years, with some leases in the 20+ year range. This means that if the owner charges net rent and recovers operating costs over the term of a long-term tenancy, you can basically just collect a cheque. You have to make sure some reserves are in place, and that maintenance is being performed, but a long-term buy and hold can effectively set the investor up for retirement.

The best strategies here have an exit plan at a particular point in time or an exit planned when a specific criteria is met. Another advantage here is this class of investor will often cash-flow the asset while they pay it off. When it is paid off, the asset has not only paid for itself but often enjoys some appreciation – and so the hold grail of cash flow AND appreciation becomes a reality.

The low management intensiveness also means that the real estate asset doesn't consume so much time that it pulls the investor away from other concerns in their life, such as work and family.

Development

Here we venture into the more lucrative and riskier areas of commercial real estate. Developers deal with value add plays that can involve investors and significant capital investments to get projects off the ground.

This could include land development, taking raw land, and developing homes or commercial developments on the land. It could also include redevelopments, such as building conversions or projects taking an existing building on one title and splitting the title to convert the building into condos.

Development can fit into any asset category, and developers tend to specialize in one particular asset class. This can range from a home builder who builds on speculation, right up to a highrise developer, or a shopping mall magnate, or an industrial park builder.

The key with any development project will be an abundance of vision and persistence in bringing that vision into reality. It often requires juggling multiple parts, including construction trades, banking, sales, and managing investor relations.

For every developer who makes it big, ten have lost their shirts in this arena. It's an area of incredible potential in which the developer can make their dream a reality, but it's fraught with danger and not for the faint of heart.

Land banking (the buy and hold for land)

Land banking is putting a bet on the improvement of a particular area and investing heavily in that area. The maxim for this group is "don't wait to buy land, buy land and wait."

This play often involves buying land on speculation that a particular area is up-and-coming or that a specific project will be approved, giving a lift of value at a future date.

A friend of mine bought 40 acres of land in an area that he anticipated he would see future residential development. He purchased for around $30,000/acre and sold less than a decade later for over $150,000/acre. The land didn't cash flow while he held onto it, and if the area didn't improve, he would still own the land today.

Land deals often can't be financed, so investors either need to be cash-rich or have cash-rich friends to come in on the transaction to put these deals together.

Keep in mind that this is by no means an exhaustive list. These plays overlap and intermingle depending on the specifics of the property.

If you'd like some feedback on a project or want to run a property by us, please reach out to us below. We love looking at deals and would be interested in helping in any way we can.

Tom

tom@lizotterealestate.comNew Paragraph

How do personal guarantees work in commercial real estate

tom@lizotterealestate.com (Tom Dean) — Tue, 02 Feb 2021 15:52:19 GMT

Skin in the game

We're not lawyers, and nothing we say in this article is to be taken as legal advice. Always seek the advice of a knowledgeable and experienced lawyer. Check out this article from Dentons for some great information.

So with that said, let's talk about personal guarantees.

What is a personal guarantee?

Investopedia defines a personal guarantee as the following:

"The term personal guarantee refers to an individual's legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay the debt, the individual assumes personal responsibility for the balance. Personal guarantees provide an extra level of protection to credit issuers who want to make sure they will be repaid."

In Alberta, all personal guarantees must be drafted by a lawyer, and parties must seek legal advice about what they're agreeing to.

In a lease context, the extent to which the guarantee affects the tenant depends on how the guarantee is written, and what its limits are.

A lease will typically be signed in the name of a company and not of the individual. So, 12345 Fake Alberta Ltd. will be on the lease, rather than Jane Doe. The tenant will have certain obligations under the lease agreement. Suppose 12345 Fake Alberta Ltd. (the tenant) is a corporation, and the corporation goes bankrupt. In that case, the landlord will have little recourse against the director (Jane Doe) without a personal guarantee in place. A personal guarantee can remove much of the protection the director of the corporation enjoys from being incorporated.

The landlord may ask for a personal guarantee for any reason, and whether or not it happens will depend on the tenant's willingness to sign.

If you have a clean and straightforward deal, there may be no need for a personal guarantee if the landlord believes the tenant has a strong covenant. But if the covenant is not great, and the landlord has been asked for work or other incentives, he may ask for a personal guarantee.

Some landlords will seek a personal guarantee for the full amount of the lease on every deal. This gives them a great deal of protection but may eliminate some tenants from wanting to lease with them.

Suppose a landlord provides a substantial amount of money for construction (TI allowance) or free rent (also known as fixturing periods) at the start of the term. In that case, they may seek to guarantee only this amount and accept the risk on the remainder of the lease. Typically a guarantee like this would cover all incentives on the deal,

"Jane Doe (the "Guarantor") agrees to personally guarantee the Tenant (12345 Fake Alberta Ltd.) for the landlord's cost of all incentives on this deal, including the value of free rent, all tenant improvement allowance, the landlord's work, and the broker's fees on the deal."

Other verbiage may include the total value of the guarantee declining over time as the landlord assumes more risk and the tenant establishes a track record of payment.

"Assuming the Tenant has not been in default of any terms of the lease, the personal guarantee will decline annually on a straight-line basis for three years. Starting from the full value of the guarantee, and declining by one third until it reaches zero at the end of year three."

Personal guarantees don't need to be personal

This is an odd statement, but a guarantee can come in many forms. If 12345 Fake Alberta Ltd, from the previous example is a holding company (a "holdco") with no assets, then the landlord may be willing to accept a corporate guarantee from the operating company (the "opco"). A guarantor is really just a cosigner who will be on the hook if the party entering the agreement fails.

Is a personal guarantee good or bad?

A personal guarantee is always to the benefit of the guarantee holder (the "obligor" or "principal"), but that doesn't mean it's bad. If signing a personal guarantee gets you a more favorable lease from your landlord, which results in the survival or thriving of the business, then signing the guarantee was a good thing. When it becomes a bad thing is when the business fails, or the landlord has to collect on the guarantee for some reason.

Are there alternatives?

It depends on the landlord and depends on whether the guarantee is a matter of policy or has to do with mitigating the landlord's risk somehow.

If the guarantee is about mitigating risk, then there should be alternatives. Here are three possible ways to eliminate the need for a guarantee associated with risk:

1. Reduce or eliminate incentives on the deal, thus minimizing the landlord's risk

2. Increase the deposit on the deal, so the landlord sees more skin in the game

3. Provide third party feasibility studies over and above and due diligence materials already provided (such as business plans, etc.)

You can also ask the landlord to roll the dice with you. But, they may see this as an unwillingness on your part to roll the dice on yourself! "If you have confidence in the business, then what's the issue with a guarantee?"

So what's the final verdict on personal guarantees

The personal guarantee can be a lifeline for the landlord, and the difference between taking a deal from a marginal tenant and not taking the deal. For the tenant it can be a risk, but only if the tenant fails to perform their obligations in some way.

And finally, a personal guarantee can be a tricky document, and a lawyer should be consulted if a personal guarantee is in play.

How to select a commercial property for investment

tom@lizotterealestate.com (Tom Dean) — Tue, 26 Jan 2021 23:10:34 GMT

Choosing wisely

There are many considerations to take into account when deciding what commercial property to invest in.

Deciding on what your priorities are and what the right strategy is for you, is key to long term success. Commercial real estate investing is not "get rich quick," but it is "get rich for sure" if done correctly.

With that said, here are some of the main considerations that you need to think about.

Management intensiveness

Commercial real estate is not always a passive investment, and most of the time it will require significant time and effort to make it work. One of the key things when considering the property is how much time you want to commit to the property and how it will fit with other areas of your life.

For instance, self-managing a single tenant industrial building on a long term triple net lease will require very little time compared to a 20 unit multifamily building. Multifamily, in general, will be more hands-on than just about any other class. This can be mitigated by using a property manager to take care of the "tenants, toilets and termites" associated with multifamily, but this usually requires many units to make sound financial sense.

Office has historically been a low maintenance asset class. However, with the changes in recent years towards more co-work, and short term leases, these assets require more care than ever before. Similarly, retail requires little time to manage, but if a plaza has some vacancy or occasionally takes on pop-ups, this will need more management to run successfully.

Industrial assets and land leases are generally the most hands-off when it comes to management. Most industrial leases will place much of the responsibility for the maintenance squarely on the tenant, often using "net and care free" leases to put the entire burden of property management back onto the tenant.

Again, management intensiveness goes down dramatically with a property manager. This will make the most sense to established investors and those with large portfolios, as time will become their number one consideration and priority with their buildings.

Single-tenant vs. multi-tenant

Single versus multi-tenant buildings will also form a significant consideration for most investors. A single tenant operation often requires less time to manage than a building with multiple tenants, but there are serious tradeoffs in this equation.

Most notably, the single-tenant scenario creates a lot of vacancy risk for the owner, and in a commercial context, a single vacancy can a long time to fill once the tenant has vacated. If you own a 12,000 sqft retail plaza, and you lose a tenant, chances are you still have a majority of tenants paying you rent while you fill the space, and you'll continue to service the debt without an issue. If you have a 12,000 sqft industrial building with a single tenant - and you lose that tenant - you have 100% vacancy and no income to service debt.

The same goes for residential investors. The single-family home is great when it's leased, but when you lose that tenant, you must scramble to get someone in quickly or risk losing all of the gains you've built up since purchasing the property. If you're a multifamily owner and have even just a fourplex, your prognosis is much better if you lose a tenant, and the others will be able to carry much of the property's cost while you fill the vacancy.

Financial Covenant

The financial covenant (the strength of the tenant) is both a positive and a negative feature. Every sensible landlord will want a tenant who can pay rent and has a history of successful operation behind them. A long and proven track record and solid references from past landlords can serve to give the new landlord a comfort level with existing tenants – this is a good thing.

Historically, the strongest covenant has been the "national" brand, a company with multiple locations and a national or international presence. Where you can run into issues with these tenants is when they decide not to pay. The landlord will still have recourse in the event of non-payment, but if this is a major tenant (a single-tenant scenario or an anchor tenant such as a grocery store for a retail plaza), they may have the ability to outlast the landlord in a legal battle. If a billion-dollar company decides not to pay you, you may be hard-pressed to collect compared to smaller operators.

As the saying goes, fools rush in where angels dare to tread.

Risk and return

A very successful real estate investor once told me that, if he had to do it over again, he would have purchased more properties with a lower cap rate.

To new investors, this will seem counterintuitive because the cap rate indicates the rate of return on the property, but the reality is that it also suggests the risk. For example, many small-town investment properties will trade at a high cap rate, often in the mid-teens. This is a high rate of return. Bit, it assumes that everyone pays their rent, that tenants continue to rent, that things go well for the town (many small towns are dependent on a single sector or industry such as oil, forestry, pulp, mining, etc. so if the town loses its primary industry, it may take decades to recover). So, assuming everything goes perfectly, this is an excellent investment. But, the moment things go sideways, not only does the asset lose value, its liquidity goes out the window as well.

A lower cap rate indicates a smaller return, but if it's a realistic price, then typically, these are well managed, highly desirable locations with strong fundamentals and lower risk. It also means that there will be greater liquidity for the product when the time comes to sell. It's also likely that the property will have a higher average lease term and will be less management intensive due to crime or vacancy issues.

If you've ever seen the start of Schitt's Creek, the reason that the government seized all the family's assets but not the 4,500-acre town they owned is because of the hilarious illiquidity of the asset, and the governments inability to sell the property either! It was a boat anchor, and had no value without substantial work.

Cap rate matters, but what matters more is the owner's ability to service the debt and come out ahead on the investment. Overall, the investment has to "make sense."

Appreciation or cash flow

Another consideration with the investment is whether appreciation or cash flow is the strategy. There are ways to do both, but when investors talk about appreciation vs cap rate, they're talking about something more specific. If you make a great play, the asset will appreciate and cash flow.

However, this strategy refers explicitly to how the property will be run, on what time horizon, and the projected exit (disposition or an eventual sale of the property).

For example, let's suppose a cash flow investor buys a retail plaza that's had decent management over the years and still have some useful life. They may decide that the best strategy is to do only maintenance which is absolutely necessary, and pull out their money over time. The goal may be to depreciate the property to virtually zero, and sell as a redevelopment to someone who will then turn around the property. When this investor goes to sell, the property will almost certainly be worse off than when they bought it.

This is where the appreciation investor comes in. This is someone who perceives an "upside" or "value add" in a particular asset and buys it with the expectation of realizing value on a pre-determined time frame. This investor may purchase the same retail asset, now distressed, with deferred maintenance issues and vacancy, expecting to fix the problems and add value. They may improve the façade of the building, improve common areas, and fix long-standing issues. The goal may be to sell the property (flip) quickly or it may be to add value, increase rents, and hold long term, or refinance the property once the value is realized.

There's no right or wrong method, but each of these will have its own particular challenges and long-term implications to an investor. Chances are an appreciation type investor will receive more community support than a cash flow investor, who may come to be seen as a slum landlord.

In conclusion

The right asset to invest in is dependent on the buyer. Each buyer must take specific considerations into account that will be completely different than every other investor. Factors such as lifestyle, personal expertise/past employment, business history, willingness to commit time to the investment.

If you'd like to have a conversation with one of our team, about what can work for you, please reach out to me at tom@lizotterealestate.com

New to the game? Check out:

https://grantcardonetv.com/channel/realestateinvestingmadesimple/

https://www.biggerpockets.com/podcast

http://commercialrealestatepodcast.com/adam-paul-first-capital/

Are Commercial Real Estate Prices Falling?

tom@lizotterealestate.com (Tom Dean) — Sun, 17 Jan 2021 21:21:56 GMT

It depends...

Every day we have people ask us, are prices falling because of COVID, the economy, or any other number of reasons. Real estate buyers are always looking for a deal, but is this the best time to buy, or are we going to see prices drop as we move into 2021.

Bottom line up front: It depends.

The price of any asset will be determined by market conditions and the product of individual motivations. Generally, as COVID goes on and we see contracting economies and rising unemployment, we will likely see real estate prices go down in the mid-to-long term.

Put simply, the price of any real estate asset is determined by what the market will bear (motivation level of buyers) and the seller's motivation level. Supply and demand.

Let's take these one at a time.

What will the market bear?

Any buyer has to weigh a lot of considerations when buying a property. They have to evaluate what fair market value is for the property – this is often done by looking at other comparable properties. The buyer may have to consider the cost of buying a piece of land and building something specific versus their finding something in the market that is already suitable for their needs. If the cost of building from the ground up is similar or lower, the buyer will have to weigh the time and inconvenience of building against the value of buying something "turn-key" and ready for occupancy.

Suppose the cost of buying an existing building is more cost-effective (which it usually is). In that case, the user might make some sacrifices in their ideal space, for practical and monetary reasons.

These considerations will be driven mainly by what inventory (buildings) are available in the marketplace and those options' suitability. Suppose there are many suitable alternatives (most office space fits this category). In that case, it drives prices down as more inventory is available on the market that will be suitable to a general user. Cost leadership becomes the primary driver of absorption in these situations.

If the business seeking space is highly specific, then a suitable space will have increased value for the particular business in question. But, it will have a lower value to the market as a whole, putting downward pressure on values since the seller has a small buyers pool. In these cases, the building's replacement value, or construction cost of a new build, and land cost will be primary drivers in pricing. This applies to all highly differentiated commercial space.

Looking at seller motivations

Another factor that affects every transaction is the seller's motivation. Why are they selling, how motivated are they to sell in the short term?

Real estate has low liquidity, and commercial real estate especially so. This creates a wild card when looking at the seller's level of motivation.

If they want to sell quickly, the price is generally reduced to open up the pool of qualified buyers and make the given asset (building) more appealing than other properties.

If the seller is already highly liquid or disposition (selling) of the asset isn't a major priority, then you can expect the property to stay on the market longer until the seller gets an offer they're happy with or their motivation level changes.

So, are commercial real estate prices falling?

From a buyer perspective, an increase of seller motivation and the availability of a lot of inventory will drive down prices.

We see a decrease in sales volume over the last two quarters coupled with asking prices generally stable or down slightly. Deals are available, but not in the numbers that were imagined when the pandemic started.

Landlords have generally worked with their tenants to ensure that partial payments have been met. Owners and banks have also worked on arranging alternative payment schedules in some situations.

Owner-users are typically in a more dangerous situation, especially if their income has taken a hit. Some of these are under threat of bank action, but many banks are holding off of foreclosures and legal action because they are, themselves, unwilling to sell into the market at a depressed (market) rate. Many banks are therefore playing a waiting game as well, which has helped to steady the market.

In cases where the owners are new, they may now be "upside down" in their mortgage (meaning they owe more on the building than the building is worth or can sell for in the current market). These sellers may be motivated, but they may also be unable or unwilling to take a loss on the property, preferring to be foreclosed on than to take a large capital loss.

Owners with little or no debt on their buildings can go either way, they may be willing to sell the asset to make an exit and pull out what money they can, or they may try to lease the building out or simply hold it until market conditions improve. Optimists will tend to hold on, expecting prices to rise, and pessimists will prefer to sell – before the bottom drops out of the market or banks begin legal action against delinquent owners.

As time goes on, we also see the gradual erosion of buyer confidence. Most brokers have had the experience of having much interest in their inventory, but a lack of offers or of deals closing on investment property. Almost all banks have also tightened their lending criteria, and some banks are only interested in taking deposits rather than the issuance of new debt. For this reason, a growing problem in the marketplace will not only be more inventory but fewer buyers.

In conclusion, as with everything in commercial real estate, the answer to this question is as specific as the ground the building occupies and the ownership group of the particular asset. Generally, yes, prices are going down, but we're likely to see the most "deals" upcoming when banks start to take action against their borrowers. If this happens, it could cause a flood of property onto the market, which will either be sold at a dramatically reduced price, or sit on the market for years as the market struggles to absorb the new vacancy.

Development Permits and the City of Edmonton

tom@lizotterealestate.com (Tom Dean) — Wed, 12 Aug 2020 22:50:11 GMT

Development Permits in the City of Edmonton

A few months ago, I helped a client get city permits on a particularly tricky deal. The business's use was "not contemplated by zoning," so we had some issues getting a development permit. It was so bad that at one point, we were told to resubmit our floor plans, and when I asked if that would be sufficient to get the used passed, the city agent told me "no, the use isn't allowed so we're going to deny it anyway." After six months of dialogue with the city, we managed to get her the permits she needed to operate her business.

Yesterday I was interviewed by the city as part of their permit and licensing improvement program because of the struggle we had on this file. It was a good conversation, but one thing I found disappointing was the feedback from small and medium-sized business owners was that their agents actively avoided participation in this process with the city.

Almost all of the agents I know in the commercial space are active in this process with their clients when needed, and I think this highlights why it's so important to have competent representation when dealing with commercial transactions.

In any event, my main feedback to the city was as follows:

· The licensing and permits process takes too long, when compared with the surrounding counties, we are simply not competitive in this area

· The process for new business owners is unclear and counter-intuitive

· Using 311 to get information on licensing is IMPOSSIBLE, if you don't have a contact at the city, you'll have a hard time getting information

· The permitting process is inconsistent, and your success in applying for a permit will depend on who you get at the city

· Some zonings are cumbersome and unnecessarily restrictive in many cases

Not all of my experiences have been bad, and the licensing and permitting team at the city does have a few rockstars in it, but about half of the time, it will be a nightmare.

Would love to hear about other people's experience with the city.

Meditations in A Crisis - Covid Strategies for Landlords and Tenants

tom@lizotterealestate.com (Tom Dean) — Tue, 02 Jun 2020 19:34:56 GMT

Navigating the murky waters of COVID-19

By now, most people are tired of hearing about COVID-19, and they are making the best of an awful situation. The effects of this disaster are truly unprecedented.

With that said, I wanted to write an article about how landlords and tenants could both deal with the situation in a mutually acceptable way and to help all parties better understand their counterpart's position.

First and foremost, all parties must communicate. If you haven't heard from your landlord or your tenant yet, you should probably give them a call. Start a dialogue and seek to understand their situation.

For Landlords

For landlords, the need to communicate is paramount. If your property is leveraged, you must communicate with your lender. Market conditions and new vacancies can cause the value of your building to fluctuate, and can even push you into technical default. Your banker will want to know that you're on top of the situation and that you will continue to pay your mortgage. Remember that it's also in their best interest that you continue to pay the mortgage. Right now, market risk is so considerable that banks will not generally want to foreclose on the property if it can be avoided.

Communicate with your tenants. Understand that your tenants' businesses are closed for an unknown period; the additional uncertainty of an uncommunicative landlord creates apprehension and concern. Your tenant may be worried about going out of business, which could have long-term implications to their credit, their future, and their family. They may have to worry about home payments and will prioritize food and shelter above paying business rent.

You also want to keep your tenants. Even if they become delinquent, you don't want to come out the other side of this without any tenants in your building, and facing an uphill battle to fill space in a market that could be flooded with new vacancies.

If you have an extensive portfolio or multiple units, a uniform response may be best. Realize that if you offer one tenant free rent, you may find yourself in a position where you'll have to explain to your other tenants why they're not getting the same deal. Despite this, you may have to deal with some tenants on a case-by-case basis to avoid vacancies.

We're so early into the COVID crisis that many landlords are not yet considering discounts. After all, most reputable tenants will have a few months’ cushion for unexpected events. If you decide on a rental relaxation, offering options can be a good approach. One landlord I know offered the following to his tenants:

Option 1: All rent is deferred, but you will have to pay it all back at a later date

Option 2: Pay half rent this month, and the balance will be written off as free rent

See what creative alternatives you can come up with to offer your counterpart options to help them deal with their specific challenges. Perhaps there is a non-monetary service such as free advertising or promotion, which can help the tenant keep their doors open and continue paying full rent.

For Tenants

Communication is, likewise, important. It's critical to understand that these events will also harm your landlord. Landlords MUST service their debt, maintain the building, pay common area costs or condo fees, and pay taxes. It costs money to own property, so your landlord will be feeling this pressure as well. You should also understand that most formal leases will state that the landlord is under no obligation to offset or deduct the rent.

With that understanding, you should let your landlord know what to expect from you over the coming months so that they can plan accordingly. Work with your landlord, be flexible, and try to come to an agreement that you can both live with. Remember that this pandemic affects everyone. Your landlord most likely wants to keep you as a tenant and will try to work with you to ensure you get through the crisis and can continue to pay rent on the other side. Dealing with tenants requesting rent reductions can pose an administrative burden for large landlords, so they most likely have a uniform response planned for inquiries.

Much of the same advice for landlords applies here. Offer your landlord options, try to understand their specific concerns and pain points. A lot of times, in a negotiation, both parties can come to a mutually beneficial agreement without giving anything up. Listening to and understanding the other's position is critical to making breakthroughs.

Some strategies for specific assets:

Blend-and-extend

If you have (or are) a tenant with a long term track record, and it's likely they would consider staying on longer-term, consider a "blend and extend" as a possible win-win for both parties. What you will do is extend the length of the lease agreement, and incentivize the extended term in the front end. The landlord will take a short term hit by offering free or discounted rates. But, provided the tenant survives, they will increase their income from the building and gain value in the future.

The tenant will mitigate their costs and rental risks in the short term while paying only a marginal increase in rent in the long run.

Move down in product

For multi-family landlords, consider moving people to a smaller unit if they can't afford a two or three-bedroom suite anymore. Then you can maintain vacancy rates while still addressing the situation without discounting the rent. As mentioned above, offering one tenant free rent can lead to a domino effect of all tenants demanding free rent. You want to avoid this situation.

Use the deposit

If both parties don't have any room to move, and the tenant paid the last month's deposit or damage deposit, consider amending your agreement (always in writing) to apply the deposit to rent now, rather than using it to the last month of rent.

Delay payment

Payment deferral is what many landlords have done in the first month of the COVID shutdown. Basically, you don't pay today, but you will pay me back later. This is a short term fix, and will certainly work in many cases, but depending on your long-term forecast, a blend and extend may be a better long term option, depending on the strength of your tenant.

Landlords should also consider their tenant's history of payment when considering this option. If the tenant has struggled to pay rent up to this point, how likely is it that they will have the surplus to pay back the deferred rent in the future?

Free rent

Rental forgiveness is one option, but I would steer clear. There are better alternatives to both sides.

Offers services, labour or repairs

Offer something that only you can offer, in exchange for rental forgiveness. What business are you in, and how can you use that to your advantage.

Examples:

Contracting companies could offer some sort of maintenance package, or do deferred maintenance in a building

Law firms could provide some free legal services

Accounting firms free tax preparation

Surveying companies could offer an updated site plan or RPR to their landlord

Retail stores could offer some sort of long-term discount on services.

In conclusion, be creative. I would love to hear other ideas of what people have seen out there.

How to market your commercial real estate property?

Sun, 11 Aug 2019 05:09:05 GMT

"Good luck is when opportunity meets preparation, while bad luck is when lack of preparation meets reality." - Eliyahu Goldratt

So you have a vacancy in your property, what now?

Companies often stumble when they try to be all things to all people, and when they abandon their core competency. Resolving this identity crisis and knowing what you are, and more importantly, what your not, often leads to the clarity and purpose necessary to be successful.

If you’re a landlord, the most important thing to understand with your property is determining the highest and best use for the property, and what the market is most prepared to absorb. This process determines what the right size, configuration, and price is for a space, all while taking market considerations into account.

If it’s a single vacancy, then you work with what you have, but if you have multiple vacancies or a very large space, you need to consider what role size will play. In Edmonton, the average office lease is about 3,000 Sq.Ft, so getting your space close to this size is often an excellent place to start.

In cognitive psychology, there’s something called the “ endowment effect ” where a person places more value on a thing after they’ve possessed it, than when they never owned it. To give an example of this, many homeowners become attached to their homes for emotional reasons and tend to overestimate its value. These same homeowners will try to grind on price when they buy a new home. It’s crucial for landlords to accurately evaluate their properties. There are many commercial buildings that sit vacant for years because their owners have refused to adjust their approach to account for market realities.

So with that intro, let’s jump into the highest and best use.

Users

So often, the harder the building is to lease out, the easier it is to determine the highest and best use. A good understanding of various businesses, and how they are laid out, is key to making this determination. For spaces that are leased “as-is” where the landlord doesn’t want to make changes, understanding the business layout is critical. As with all commercial real estate, the end-user is the key.

In situations where the layout is easily changed, where the landlord is prepared to do a turnkey deal and build out the space for you (in other words, all things being equal), then highest and best use will come down to location and local amenities / surrounding businesses.

In Edmonton, many businesses choose to locate in the west end because of proximity to major suppliers. So flex users will cluster around distribution “anchors” for logistical convenience. The same holds true with medical doctors, who serve as a medical anchor which other businesses cluster around. In retail, grocery stores have traditionally been anchors, but as delivery services and pre-ordering services take off, retail landlords are increasingly looking to entertainment users and medical users to fill this anchor gap.

For landlords with office towers in a market with high vacancy, the best thing is to look at the gaps in the marketplace. Underserved markets are everywhere, and if there’s an opportunity to capture a piece of the market, the long term benefits can be extraordinary.

Office tower landlords often find themselves in an amenities arms race, where you have to keep up to be marketable. Depending on the market, it may be advantageous in this scenario to drop out of the race and become a lower-cost alternative and compete on price. Alternatively, if you own several buildings in the same area, it may be worthwhile to share amenities between your buildings to offer a more attractive overall package.

The absence of certain features will also impede certain users. I’ve written before about how internet service is really another utility, and insufficient internet will keep users away from certain areas where they would otherwise be key. Other services are key to different asset classes, power is critical to manufacturing businesses, while warehousing and distribution may be dependent on off-site features, such as access to major transit routes.

A diligent real estate agent will guide you in effectively marketing your property, what it is, and more importantly, what it’s not.

Unique Spaces

As mentioned above, the more unusual spaces are often the easiest ones to market, as they will have a very narrow appeal. This doesn’t mean they will be easier to lease, but it does mean that marketing is more focused.

Basement space is one example of a difficult space to lease, and because of limitations on users, it’s a good sample for determining highest and best use. If a basement has a low ceiling, poor lighting – a “dungeon” for lack of a better word – can be next to impossible, but there are some users that will lease the space. Government, institutional, medical, and law firms often still store hard copies of old files, these files might be needed once or twice a year, so access is not an issue, insurance in these cases is very important because a water leakage in these situations can be disastrous. Server farms are also a good option if your basement is sealed and has ample HVAC capacity and power, mall basements or the basements of office towers are ideal for these users. Some users won’t care about being in a basement, Escape Rooms, laser tag, some IT companies, boxing gyms, workout facilities, and many others can all be a good use for your basement space.

Another example is a Church building. The highest and best use for a church building is as a Church, and the issue is that church services only run a few times a week and churches are increasingly unable to support the cost of operating the building and have to turn to other users to cover their expenses. Churches have mitigated their operating costs by accommodating other users, others acting as a part-time community hall, or conference center on their off days. As religious service attendance drops off, more of these buildings are finding their way onto the real estate market, and investors and developers have to find creative solutions to make use of these buildings.

There are many metrics in assessing commercial real estate to determine the best uses for a space.

Market Demand – Is there a demand for the offering? How significant is the demand in your market and how do you capture it? A good book on the subject is “Competitive Strategy” by Michale Porter and is an excellent book to read for insight into defining and capturing markets. This comes down to the business fundamentals and its placement on the broader market.

Need for exposure – Does the site offer exposure? How much value does that exposure have? Keep in mind, not all exposure is created equal if you’re on a high traffic corridor, but there’s no way to stop, or there’s no parking, then the exposure you have won’t drive traffic to your site. If you have high exposure to a high-school, it may be a great place for a QSR or candy shop of some kind, but may not offer the same advantages to a liquor store.

Building services – Does your building offer services that are unutilized? Data Centers often locate in office tower basements because of these buildings usually have very heavy power and proper ventilation. Alternatively, if you have an industrial building with light power, your building is likely better suited for warehousing, distribution, or even office space, than it is for fabrication.

Demographics/Workforce – What are the local demographics, and how do they jive with your particular use? City cores tend to have a higher daytime population than suburbs. If you’re in a retirement community, you may have abundant local population, but your age profile and median income will be skewed toward older, fixed income couples with no children. A QSR in a downtown core will have significantly different hours and customers than the same QSR in a retirement community. Labor pool and the availability of skilled labor will also be vital in determining the placement of businesses that require a specialized workforce. Companies that require highly trained workers will be capped by the capacity of their market to provide that workforce.

Availability of Suppliers – This extends beyond suppliers, and can be made to apply to any business that is highly dependent on another business. Accountants and lawyers can create good synergies, the same goes for real estate and finance. You are disproportionately likely to do business with people in close physical proximity, so who do you want to do business with?

Price – Some businesses have tight margins, and as such, are price-conscious. In addition to the demand, exposure, services, workforce and suppliers; the costs can drive enterprises and capital out of one community and into another. We see that in Edmonton is large companies relocating to the counties to escape high commercial tax rates imposed by the city. This creates a vicious cycle of increasing taxes and an exodus of business.

Landlords must be conscious of the fact that tenants don’t care about net rates and operating costs; they care about their total real estate cost – the gross rental amount. When tenants compare buildings, they’re comparing gross rental rates. If your building has unusually high operating expenses, you need to adjust your total rental rates by lowering net rental amounts to be competitive.

Deal Terms

Sat, 20 Jul 2019 21:38:45 GMT

The longest post on this website!

Welcome to the Deal!

In commercial real estate leases, understanding deal terms and navigating the lease process can be daunting even for experienced business people, not to mention those that are new to the business.

Contracts have several key requirements that must be met to be valid. These include:

- Offer and acceptance

- Consideration

- Capacity

- Consent

- Lawful purpose

For a more thorough explanation of each one of these elements, see this document from the Government of Canada . I am NOT a lawyer, and you should always seek legal representation when finalizing any business agreement, including lease agreements.

An offer to lease will typically have terms and conditions. The terms are the basic building blocks, and they are the items that are agreed to in the contract and will govern the relationship and obligations of the parties during the agreement.

Conditions are items which must be removed or satisfied for the deal to proceed. Take a look at the following scenario:

- Jerry hereby agrees to sell Bev his 2015 Honda Civic for $15,000 (terms) subject to Bev’s sole satisfactory approval of an independent inspection of the vehicle (condition).

Bev must waive this condition in order for the sale to proceed.

Formal Lease

With leases, there are typically two documents. There will be an initial Offer to Lease or a Letter of Intent (LOI) which outlines deal terms. These agreements are binding and sometimes constitute the final contract between the parties, but most often there will be a second document drafted by the landlord’s lawyer which outlines in detail the obligations of the parties and the steps that must be taken to resolve a breach of the lease or a dispute.

It’s essential to recognize that lawyers are protective of their clients, and as such, the formal lease agreements will almost always be in favor of the landlord. I have clients who have three standard lease agreements for their buildings, one that favors the landlord, one that favors the tenant, and one that is balanced. It’s in the landlord’s best interest to use the strongest lease agreement available to them. While the lease agreement will favor the landlord, if a dispute ends up in court, the courts will tend to favor the tenant, so it’s often in the interest of both parties to resolve any disputes amicably if possible.

Terms for the offer document or LOI should be included in the formal lease document. Formal leases often contain a clause stating that the formal lease constitutes the “entire agreement” between the parties, and will supersede all previous offers or terms that were agreed to, so you must ensure that the terms from the LOI and offer to lease are the same as those contained in the formal lease. Most of the time, when there are differences, this is an error or omission, so having it changed back to the agreed-upon term shouldn’t be a problem.

The lease will go into detail about remedies in case of a breach, what happens if the building burns down etc etc etc… Formal lease agreement will range in length from 4 pages to over 100 pages.

Here are major deal terms you need to be thinking about:

Term

With term, all things are possible. Many landlords look favorably on long term leases, as it gives them long term stability in their properties and is less management intensive than dealing with turnover. Leases can range from a single day, as in the case with some pop-ups to 99-year leases. A typical office lease is between five and ten years.

It’s also important to note, that if you’re a start-up, or have a weak covenant, the long term is by no means reassuring to a landlord. Increasing the term increases how creative the deal can be structured. Depending on the landlord’s time horizon for maturing the asset or potentially exiting the property, a tenant can reach a very favorable agreement with the landlord, which will significantly benefit both parties.

Renewal and Arbitration

Once your primary lease term has elapsed, you may have an option to renew your lease. You will usually have to renegotiate your base rent when this occurs, and you also have the opportunity to add or remove other clauses from the contract. During the renewal, it’s advisable to negotiate a further right to renew as part of the renewal agreement.

If parties aren’t able to agree on base rent, then the lease generally will account for arbitration where a third party, usually an appraiser, will determine market rent for the property and this determination will be binding on both parties. When the tenant exercises this right to renew, the landlord can no longer terminate the agreement. If the tenant misses their window to exercise the right, then they do not benefit from the possible advantages of an arbitration clause. Typically the lease will stipulate when this right has to be used, it can range from 3 months to a full year from the lease expiry, so it’s critical to know when this is coming up.

Lease Rate

I’ve written about lease rates in another article which details gross leases, triple net leases, and everything in between. You can see that article here .

As a tenant and a landlord, what’s critical to understand is that the face rate of the property impacts the valuation. A below-market lease has the potential to lower the overall value of the asset, so if possible, it’s best to negotiate on other terms, such as free rent, or tenant improvement allowance, so that the building retains its value. This arrangement can create a win-win for both parties.

If a tenant improvement allowance is desired, it can be good practice to amortize the value of the allowance into the lease rate. (For example, if base rates are $14/Sq.Ft, and the tenant wants a $10/Sq.Ft tenant improvement allowance on a 5 year term, this equates to a $2/Sq.Ft per each year of the lease so can be covered by increasing the lease rate to $16/Sq.Ft.) This can help to increase the value of the building to some extent, but if rental prices are significantly higher than market rents, the banks will take this into account when it comes time to refinance.

Operating Costs

Again, operating costs are covered in another article . This clause will which costs are the responsibility of each party in the deal.

Conditions

Conditions can be for the benefit of either party and are present in almost every deal we do. A condition gives a party a way out if one of these items can’t be satisfied for any reason. Conditions will have a date attached to them and must be removed before a pre-agreed date for the contract to remain valid.

Typical conditions for the landlord are:

- Review of the tenants financial/corporate covenant

- Board of directors approval

- General contractor estimates for turnkey deals

Common conditions for tenants are:

- Receipt of all necessary licensing and permits for the intended use

- Review and approval of the formal lease

- Lawyer’s review of deal terms and/or the formal lease

- Contractor’s estimates for tenant improvements if the tenant is building out their space

- Board approval

- Blanket “due diligence.”

These are some of the most common conditions, but a condition can be anything as long as the parties mutually agree to it.

Other Clauses

Some of these clauses will eventually get their own articles, but for now, here’s a brief description of some other provisions you may find in a lease agreement.

Early Occupancy and Fixturing

Both of these incentives will occur before the lease commencement date. In the case of fixturing, it’s usually intended for the tenant to build out or otherwise retrofit their space in the time provided. Fixturing is generally, but not always, free of basic and additional rent, but the tenant will have to prove that its insurance is in place prior to being granted possession for the fixturing period.

Early occupancy is almost the same thing, but the purpose of the period is not so explicitly for buildout and improvements, but instead can be opened for business during the early occupancy period. This period is also free of basic and additional rent. I typically recommend using language for early occupancy clauses because it gives the tenant more flexibility with its time.

Free Rent

The free rent period is different than fixturing and early occupancy as it occurs after the lease has officially commenced. Typically this only includes base rent, but sometimes consists of both base rent and operating cost. Landlords will sometime spread the free rent period over the term, to share the risk of this incentive with the tenant.

Tenant Improvement Allowance

Tenant improvement allowance is money paid by the landlord to the tenant to build out its space. This allowance is typically calculated by the square foot ($5 TIA X 10,000 Sq.Ft = $50,000 TIA) but can also be a flat amount.

The allowance is seldom paid to the tenant up-front but will be held by the landlord until the tenant has satisfied some conditions. The most common conditions are that the tenant is still in good standing under their lease agreement, that the landlord inspects the premises and that the tenant makes a statutory declaration that all contractors and sub-trades are paid in full.

Landlord’s/Tenant’s Responsibility

This clause will state who is responsible for various items. The tenant and landlord must assure that these expenses are correct, as you don’t want to be stuck paying for something that wouldn’t usually be your responsibility, such as the landlord paying the tenant’s phone bill.

Signage

This clause will detail who will bear the cost of the production and installation of the signage and will stipulate where signage may be placed on the premises. This ranges from a bronze placard in an office building directory, to fascia and pylon signage, whether window signage on the premises is permitted and this clause can even extend to naming rights for the building.

Landlords will sometimes require that they approve the signage before it’s installed, so if you’re the tenant, you want to ensure that what you’re planning to install is possible. Landlords will have to decide if any given tenant’s signage is following the buildings aesthetic.

Depending on the signage, power consumption may be a consideration. Landlords may also stipulate that tenant’s repair and damage done to the exterior of the building by the installation or taking down of signage.

Parking

The parking clause will outline what parking the tenant is permitted to use, and at what cost. Parking can be a significant concern to some users, especially medical users in the City of Edmonton as the city will require a certain number of stalls to be on site for a given use.

In office buildings, stalls are typically allocated per square foot. If a building has a parking ratio of 2:1000, this means that if you lease 5,000 Sq.ft, you will receive ten stalls. Landlords will occasionally grant more parking for a desirable use (such as a doctors office) and will give them a more favorable parking ratio than other tenants to incentivize them to sign a lease.

Assignment and Subletting (Unreasonably withheld)

If you expect that you might expand your business or be selling your business within your lease term or subsequent renewals, an assignment and subletting clause can be critical in allowing you to do this.

When an assignment/subletting clause says “not to be unreasonably withheld,” this is important. Without this, the landlord can prevent the tenant from subletting or assigning their space for any reason, whether it’s reasonable or not.

With that said, there are situations in which the landlord refusing to assign a lease is not unreasonable. If you’re selling a business and want to assign your lease to the purchaser, some reasons the landlord could reasonably deny the assignment for the following reasons:

- The tenant has bad credit

- The tenant has a criminal record

- The tenant has a high probability of failing in the business they’re taking over

If you outgrow your space and need to sublet it, some reasons the landlord may reasonably restrict your ability to sublet, are as follows:

- The new tenant conflicts with another user

- Restrictive covenants

- Zoning issues

- Environmental issues with the users (drycleaners)

- “Moral” or legal problems with the user

Use

The use clause is where you outline what you will be doing with the space. It may also include your trade name, which is the name your company will be known as to the public.

Use is vital to satisfy zoning requirements. In Edmonton, it’s important to know what uses are permitted, discretionary, or not allowed in a particular zoning . If your business doesn’t fit within the zoning it will dramatically increase the amount of time it takes to get city approvals for your business. Sometimes, a company will fit under multiple use categories with the city. If this is the case, it can be advantageous to look at the zoning where you intend to lease, and ensure you select the use that is permitted under that category, rather than discretionary.

Exclusive Use

This protects a user from having other conflicting uses open up shop in the same plaza. If you own a hair salon, you most likely don’t want another hair salon opening up adjacent to you. Exclusive use helps to prevent this, but the clause has to be clear what’s being restricted. If you’re a hair salon, do you need to restrict barbershops or is there a conflict at all? If you’re a Burger QSR, would it be a benefit to restricting pizza users? Donair? It’s essential that the lease stipulates precisely what other uses are limited. If the owner of the building you’re leasing in owns adjacent buildings, you may be able to negotiate that they will also limit competing uses.

Proximity or Radius Clause

This is similar to an exclusive use clause but in the landlord’s interest. This clause is a covenant a tenant makes with the landlord as a promise not to open other locations within a certain proximity. The reason for these clauses is when a landlord collects percentage rent, they don’t want competing sites taking potential profit away from their location.

Franchises and other corporate groups with multiple locations will often impose territories or a radius on their franchisees. This limits the number of sites that can open up in a particular area to help reduce competition. Municipalities will often impose restrictions on specific users to curb competition. In Edmonton, the most well-known example is the 500-meter rule for liquor stores, prohibiting new liquor licenses from being issues to start-ups within 500 meters of an old location. Cannabis retail stores will face similar restrictions.

Deposit

Deposits come in two flavors, there are rental deposits and security deposits.

Rental despots are paid to and held by the landlord once the deal is completed. Usually, these are applied to specified months of rent. There are no rules about how large or small a deposit can be, and I’ve seen deposits range from over half of the value of the lease to there being no deposit at all.

Security deposits work a little differently, they will be held as security by the landlord and not applied to the tenant's rent. Instead, they will be refunded at a pre-determined time, when certain conditions have been met, such as the landlord inspecting the premises for damage upon the tenant terminating the lease.

Personal Guarantees

The landlord may ask for a personal guarantee in addition to, or in lieu of, the deposit. Most of the time, this will apply if the landlord is concerned about the covenant of the tenant, and they want to ensure the tenant has skin in the game. A personal guarantee allows the landlord to pursue more than the corporation in the event the business fails. It’s essential to have a lawyer draw up the paperwork for a guarantee; otherwise there may be issues with enforceability.

There are other forms of indemnity, such as a letter of credit, but personal guarantees are the most common outside of the remedies included in standard formal leases.

Exit Provisions

Exit provisions allow one or both parties to terminate the lease agreement if certain conditions are met. The most common relate the damage to the property which renders it unusable, but there are others.

Demolition or redevelopment clauses will allow the landlord to terminate a tenants lease if they intend to redevelop the property or if they want to do substantial renovations to the premises. These clauses will often leave the tenant with little recourse.

Nuisance clauses are sometimes used as well, although they can be somewhat harder to enforce. Usually, tenants will request that these clauses contain language that the lease can’t be terminated for neighbors complaints if the source of the nuisance is within the normal scope of the business operations. A clause like this may apply to a fitness gym that plays loud music during classes.

Tenants may also have exit provisions for almost any reason, so long as all parties mutually agree on it. Common provisions include terminating the lease if the landlord conducts renovations that disrupt the tenants business. We’ve also written clauses that give tenants an option to terminate their tenancy if operating costs rise over a certain percentage in a year (this was a lease renewal where the landlord had a track record of extraordinary increases year over year).

Shotgun Clause (Another exit provision)

This is an exit provision during the conditional or pending period of the leasing process. This allows the landlord to entertain other offers while the prospective tenant does its due diligence which is never desirable for a tenant but is often better than “no deal” if the tenant requires a prolonged conditional period. Typically, if a landlord exercises this clause, the tenant will have the opportunity to remove its conditions or complete the deal before the landlord accepting the other offer.

First Right of Refusal

Let’s say that you’ve leased space in an office building but are unsure if it’s enough space, so you want an option to lease the adjacent space first before the landlord accepts other offers. This clause gives the tenant the right to match a bona fide offer on a space before the landlord entertains the third party offer. There is typically a tight timeline on this option so that the landlord isn’t handcuffed and is free to consider other deals.

The first right can also apply to the sale of the property if the owner receives an offer on the property within the stipulated timeframe (typically “at any point during the primary lease term or subsequent renewals”).

Options to Purchase

An option to purchase clause gives the tenant the option to buy the property at a predetermined time. Typically the price is not pre-determined and will be determined by mutual agreement. But, I have seen cases where the owner was willing to pre-negotiate the price and sell at the tenant’s option. This is a terrific deal for the tenant, as it transfers risk to the seller. If property values rise, the pre-negotiated price will be to the tenant’s advantage, if prices go down, then this is only an option, and the tenant doesn’t have to exercise this right.

Relocation Clause

A relocation clause can be in favor of the landlord or the tenant. Tenants may request this clause if a more desirable space within their building comes available or if they expand and want to consolidate in the future.

A landlord may want this clause as well to optimize the tenant mix. Relocation is most common in leases in interior malls, and it’s very uncommon to see a landlord relocation clause in other asset classes. The reason for these clauses is percentage rent, by changing a tenant mix, it can create synergies among businesses to increase the mall’s income. Further, if a retailer is underperforming in a valuable, high traffic location, then it gives the mall owner the option to move the tenant to another area in the mall and put a stronger tenant in the prime location.

Morality

Morality clauses are not very common and are most likely to be encountered in older retail assets. The clause essentially allows the landlord to terminate the lease if there’s some question into the activities of the tenant. An example of this would be an “adult” massage business, as businesses like this negatively impact neighboring tenants and the value of the building as a whole.

Insurance

All buildings will require tenant insurance before occupancy. The amount and type of coverage depend on several factors and are best left to a qualified professional. What’s important is that the lease will state how much insurance is required and if the landlord will be named as additional insurance, which is generally the case. It’s usually best to send your insurance provider a copy of the insurance clause in your lease agreement so they can provide coverage accordingly.

This is another expense with your business, so it’s a good idea to factor in this cost when budgeting for your business.

Operating Covenant

This is common in retail leases, where the landlord will want to control what days and what hours their tenants will be open for business. Again, this is in part because of percentage rent, and it also helps promote continuity among businesses operating in a mall or plaza. In leases where operating covenants are in place, there may also be fines for being closed during operating hours.

Recapture Provisions

Recapture provisions can occur in any asset class. This is essentially another landlord exit provision that can be exercised if certain conditions are met. One such situation could be the violation of a proximity clause, if a tenant is underperforming in a location with percentage rent, or is closed for business too frequently, or expresses an intent to sublet or assign the lease. What’s important is knowing what can trigger the clause.

Percentage Rent

Percentage rent is almost exclusively a retail lease consideration. Percentage rent allows a landlord to take a pre-negotiated portion of the tenant’s revenue in a location. This arrangement puts the landlord and tenants interest in close alignment, the situation which will cause issues with this arrangement is when the tenant is underperforming. In these cases, the landlord may terminate the lease or elect to relocate the tenant if it has allowed for this in its lease agreement.

There are lots of ways percentage rent can work, but the most commonly utilized is a “natural breakpoint.” The calculation is similar to a cap rate calculation the way it works is, by dividing the base rental amount by the percentage rent. So if you have a 9% breakpoint and percentage rent on your liquor store, which pays $8,500/month in basic rent, then your breakpoint is $94,444 ($8,500 base rent / 9% percentage rent). Under this arrangement, you would be required to pay the landlord 9% of your sales over $94,444. So if your monthly revenue was $125,000/month, you would pay an additional $2,750 per month in percentage rent ($125,000 revenue - $94,444 breakpoint = $30,556 above the breakpoint, $30,556 X 9% percentage rent = $2,750).

ADR (Alternative Dispute Resolution)

These clauses are sometimes used in cases where there is a high probability of disagreement between parties. A typical lease renewal clause that goes to arbitration is one form of ADR clause, as tenants and landlords almost always disagree on lease rates on renewals.

The purpose of the clause is helping parties reach an agreement in especially difficult or litigious circumstances. Generally, an ADR clause will outline the steps to be taken to resolve a dispute between parties. Often, it will stipulate that parties will seek mediation first, followed by arbitration if mediation fails, in order to avoid litigation. These clauses sometimes include additional penalties if the dispute goes to litigation to serve as a further deterrent to go to court, one such penalty could be that the loser of the lawsuit will pay the winner’s legal fees.

That’s it, my whirlwind tour of lease clauses. If you have any questions or would like additional information, please feel free to contact us .

Site Selection - Location, Location, Location

Sun, 14 Jul 2019 21:31:50 GMT

Things to consider when looking for your next commercial real estate location.

In the game of Monopoly, there are a few properties that, when controlled, move the balance of power in the direction of the owner. When a player owns boardwalk and park place, they have the game in the bag, and it’s only a matter of time before they win the game.

Depending on the business, the selection of the location can prove critical to the eventual success or failure of the venture.

For retail, the selection of the location can be absolutely essential for success, but, depending on the business, office users, industrial users, developers, and others may be impacted by improperly selected location.

Regardless of the asset class, here are some of the considerations you need to think about when deciding on your next location.

Considerations when Looking for a Location

Size

Size is vital when looking at locations. The space has to work for you, not only today but into the future. When signing a long term lease, you need to have the confidence that your location will accommodate you for a reasonable period of time. Rights to expand to be employed, and they will help your business grow in space provided the landlord has more space available. If you think you may outgrow the location quickly, then you must ensure your lease allows you to sublease or assign the lease to another user. See our article on assignment and subletting here.

If you’re not sure how much space you need for your business, a local tenant rep broker should be able to help you make this determination. There are rules of thumb for office users, here’s a link to a company in the states which has an office space calculator that can help make a rough determination for space.

Building Systems

Building systems are also crucial to your business. For office users, the main concern is usually internet speed. Other building systems may help to reduce operating costs, such as LED lights, but these savings are not typically passed on to the tenant in an office lease.

Some users will require additional services for their business. Car washes will use more water than most other businesses, and a fabrication company will require heavy power. For this reason, it’s essential to independently confirm what services are on site, regardless of what the landlord says is available on site. This will come at a price for the tenant, but it’s better to pay this price to ensure the space will work than to find out that the power is insufficient after you move in. The breaker box will not necessarily tell you if the power is sufficient, know that the number on the breaker box tells you what the rating of the box is, and not how much power is going to the breaker box. When in doubt, you should always contact an electrician or electrical engineer to confirm power.

HVAC capacity is also a consideration for some users. Grow facilities and server farms will require not only substantial power but also ample HVAC capacity to regulate temperature, humidity, and air flow.

Point loading can be a consideration for warehouse users, especially if the product you’re distributing is heavy. The building owner may be able to provide building diagrams or engineering reports that detail the foundations point loading capacity. Without this information, you can get an engineering report to test the point loading of the foundation, otherwise you run the risk of damaging the foundation.

Loading is yet another consideration for various users. Dock loading is most common in distribution facilities and is in increasing demand. It’s next to impossible to find warehouse spaces with dock loading under 4,000 Sq.Ft, so most distribution facilities capitalize on economies of scale. Grade loading is typical in bays as small as 1,000 Sq.Ft. There’s a considerable amount of warehouse and flex space around Edmonton with grade loading.

The presence of make-up air is a consideration for restaurants and auto-body shops. Depending on the type of restaurant, or QSR, it may require make-up air to vent exhaust outside the space. This can come at a considerable cost, so users must be prepared to pay for make-up air if their use will require it.

Some areas of the city also don’t have all services, specifically Winterburn. So if you’re looking at a lease or purchase in this area, you need to find out in advance what services are provided, and details about the septic system on site.

Parking and Transit

Parking can be a significant concern for users. If your employees or your customers can’t find parking, it can be hard to retain them. Some locations do well without parking, any area with high density and good access to public transportation don’t necessarily need parking, in Edmonton, Whyte Avenue and Jasper Avenue are examples.

Good parking also comes at a cost. Areas with above ground parkades statistically have higher crime and will suffer from greater homelessness than areas where parking is underground, or where none is available. Cities like Vancouver have density and transit in place to effectively curb the need for personal vehicles, Edmonton is further behind because of it’s relatively low density and poor transportation, and it’s unlikely LRT projects that are currently underway will lead to much better utilization of city transit.

For some businesses, especially those employing younger people, such as software companies or IT, the need for parking much reduced. This generation is receptive to using transit rather than driving. Digital natives often will tell you that they don’t expect that they will ever need to drive, and assume that services such as Uber and self-driving cars will eventually replace personal vehicle ownership as we know it today.

The bottom line is that parking needs will be partially determined by the demographics of your company, and you may be able to get away with less than you think.

Customers

Who are your customers? Where are they? Are they going to be willing to travel to your location? If your business is dependent on customers coming to your site, you need to ensure they’ll be able to do that. Having a solid understanding of your business, who your clients are, how they find you, and what they have to do to use your services or product, are all key to selecting a location.

Examples of firms that are customer dependent are tax firms, any repair business, dine-in restaurants, and employment agencies.

Labour Pool

The local labor pool is essential. Manufacturing, skilled labor, tech, all these industries require a robust and educated workforce. This is one of Edmonton’s advantages, as we have a high quality of post-secondary education, and there are opportunities for meaningful employment in the city.

Locating your business with your desired employees in mind will help your business attract and retain talent. Without a labor pool that fits with your business, you won’t be able to grow your business and will be handcuffed by employees even if they aren’t a fit.

Demographics

Local demographics can have an impact on your business. Both the labor pool and potential customers will be affected by demographics. Age, income, and a host of other factors must be taken into account if your business is at all dependent on particular demographics. In Edmonton, one of the significant areas where this is a factor is next to any university.

Assisted living facilities will also affect the overall feel of a neighborhood, and change to the profile of what’s in demand, and what’s not.

Edmonton boasts some of the best labor demographics in the country . When compared with other cities, such as Vancouver, Toronto, or Montreal, we have a distinct advantage in the age profile of our workforce. This is due in part to the fact that people come to Alberta to work, and they retire in other provinces.

Competition

Knowing your competition can be critical to survival as well. I once worked with a QSR user who wanted to put his business in a location with four competing concepts within a block. I pointed this out to him, and he assured me he would put them all out of business.

If you don’t know who your competitors are, where they’re located, and how their operations compare to yours, you’re not ready to pull the trigger on a location.

Strategic Partners

Just like you want to know where your competitors are, choosing a location that has neighbors with synergies can make or break your business. If you’re dependent on specific suppliers or if you do a lot of business with a particular firm in a different vertical, you may want to locate your business with them in mind.

I’ve seen some firms co-locate with each other in the past if there’s a particular relationship that has value to both parties. These are extraordinary circumstances, but if you have “partners” in other firms, it can be worth discussing the possibility of sharing space or locating your business in a place that works for both parties.

Infrastructure

Infrastructure can be critical for various users. Access to dangerous goods transport routes, rail spurs, or proximity to intermodal transportation is key to many industrial and distribution users.

When buying land, you must understand the local infrastructure and services on-site. If the property lacks services, they will have to be brought in at additional cost. There may also be off-site levies that will have to be paid as the land is developed as well.

Major projects may also affect your site, with the new LRT developments, the city has expropriated several properties for the project. If you’re an investor and your site may be on a future transit line or affected by another major project, you will get a better payoff if you exit the property sooner to avoid a payout by a municipality.

Exposure

Visibility can be important if your business benefits from walk-in traffic. QSRs, barber shops, salon services, all benefit from the urban street front and high exposure locations. If the site you have itself has poor exposure, there is a possibility you can make up for this with signage or advertising. Paying more for a high exposure location may seem like the wrong choice for your bottom line, but the reality is that the exposure will save you in advertising dollars on an ongoing basis.

With destination services, where you don’t need exposure, then you probably don’t need to be paying for it. Medical users, or specialty services such as tattoo artist or electrolysis, won’t have a lot of benefit from having exposure.

Vehicles per Day

Vehicles per day (or VPD) is often a decision point for many retail users. Many franchises and corporate locations will require a minimum traffic requirement to consider a location. Statistical data is available from municipalities. High traffic count and high visibility, again, reduced the need for other advertising.

Another traffic consideration is what side of the street you’re on. Urban street front is better if it’s South facing because pedestrians are more likely to walk (or sit in a patio) on the sunny side of the street. The commuter’s direction of travel should be considered as well, liquor stores are well advised to locate on the right-hand side of the road on a commuter’s drive home, so they are an easy right turn into the plaza and another right turn to get out. Daycares must also be mindful of accessibility to parents to and from work.

Legislation

Legislation can affect business. Federal regulations may affect certain users if there’s a concern about a health or safety risk to the public. Environmental law may interfere with the operations of particular users, so it’s vital to have a strong understanding of legislation before entering into a lease agreement, or worse, purchasing a building for your business.

Tax

Unfortunately, in Edmonton, taxes can be a determinant in selecting a location. Many larger industrial businesses are locating and relocating outside of city boundaries to avoid high municipal taxes. This has been to the advantage of Parkland Count, Leduc County, and the airport, where taxes are lower, and the counties make it easy to do business.

If you have a large facility and lean margins, this can be key to ensuring long term success, which is why so many large industrial businesses are leaving Edmonton.

Local Wages

Local wages affect all businesses. Changes in the minimum wage and industry pay standards in a particular location will all affect the bottom line for a lot of companies and can inform where in the country firms choose to locate. Many industries are moving towards increased automation, so if this is the case with your business, then you may not be as affected by the cost of labor.

Zoning

Zoning in Edmonton may be best described as a “barrier to entry,” with the high cost and long term timelines to get permits. The city has made some right steps towards making this process more user-friendly, but overall, the city still requires too much control to allow for real nimbleness and flexibility on the part of business owners.

Every commercial real estate agent in the city has lost deals on account of stringent city policy around zoning and development permits . Each one of these lost deals equals a missed opportunity for a business owner and the local economy. Each lost opportunity loses the city money, time, employment, and sends a message that the city of Edmonton is not open for business.

With that said, the process can be simple, provided your use fits the city’s guidelines for your intended location. With the slightest variance, it can literally set you back months.

Cost

Commercial real estate has a price, and this cost will go up or down depending on the location and the site. Some users will try to reduce their costs by lowering their real estate expenses. If the price is considered in isolation, and you overlook the other factors in this article, then such priorities will only harm the business. The location as an integrated whole must make sense. Cost is never the primary issue, and if everything fits and a deal makes sense, then it’s a good deal. Cheap is not the best.

You

And finally, you!

The location has to be an overall fit, and the deal has to make sense for you, as the decision maker. NO site is ever perfect on every metric, but by systematically using these guidelines, and prioritizing what’s most important, you will make the right decision.

Have questions? Contact us to learn more.

Sale-Leaseback

Sun, 07 Jul 2019 05:15:40 GMT

Recapturing Capital

One of the best reasons for users of commercial real estate to purchase real estate (become an owner-user) is the sale-leaseback as an exit.

What is a sale-leaseback?

This occurs when a business sells the real estate that they’re occupying to an investor, and leases the space from the investor at a pre-negotiated rate.

Why would someone want to do this?

For sellers, there are a lot of reasons to exit your real estate this way. The first is for a capital injection into the business, if times are tight for cash, this can help redeploy capital to support the core business. Of course, the cash injection can be used in other ways, possibly to buy out partners, help fund the opening of new locations, diversify out of your core business or even for owners to retire.

Most cases we see are prudent owners who are ready to retire and want some cash to fund their retirement. They have the legacy of their business, and they have the freedom to pull the equity they’ve built up out of their real estate asset. Users who lease for the course of their business don’t have this advantage, so this is the most common reason we see people exit in this way.

For buyers, the reason to enter into one of these deals is to secure an investment property with a long term tenant. The flexibility in leaseback terms can create upside for both parties to reach a mutually beneficial arrangement. Considerations when purchasing a property in this context are much the same as buying other investment properties.

1. Quality of the asset and any major upcoming capital expenses

2. The creditworthiness of the tenant (covenant)

3. Structure and term of the lease

4. Exit strategy

Done correctly, a sale-leaseback offers benefits to both sellers and investors and can be a beautiful exit for owners.

Have questions about sale-leasebacks? Call Chuck to discuss some of his most recent sale-leaseback transactions.

Where to find commercial real estate listings in Edmonton

Fri, 28 Jun 2019 03:40:19 GMT

How to find commercial real estate listings in Edmonton

Commercial real estate doesn't have an MLS, but in Edmonton, there are a really only a limited number of websites, the links are below, arranged in no particular order. Brokerages, property managers and landlords are included.

Let me know if there's any I've missed, or if any of these links are broken.

Good hunting!

LIZOTTE AND ASSOCIATES

COLLIERS INTERNATIONAL

AVISON YOUNG

CUSHMAN WAKEFIELD

JLL

OMADA COMMERCIAL

AICRE

CBRE

NAI

DEVENCORE

ROYAL PARK

RE/MAX COMMERCIAL

SVN

MANULIFE INVESTMENT MANAGEMENT

YORK REALTY

OXFORD PROPERTIES

MORGUARD

MELCOR

GROUP 3

ONE PROPERTIES

TAG

FIRST CAPITAL REALTY

REMINGTON

BENTALL KENNEDY

BEREZAN MANAGEMENT

DELTA SQUARE

HOPEWELL

AVENUE COMMERCIAL

NEARTIC GROUP

STRATEGIC GROUP

PROCURA

TAURUS

RIOCAN

MHA

FERNWOOD DEVELOPMENTS

GREYSTONE

COLDWELL BANKER

QUALICO

QUADREAL

CREIT

CAMERON DEVELOPMENTS

KIJIJI

LOOPNET

Too many options? Call us.

Edmonton's Edifice Complex

Sat, 22 Jun 2019 21:28:56 GMT

Do new facades turn Edmonton neighborhoods into Potemkin Villages?

In 1787, Catherine the Great of Russia went on a tour of her country. One of her most trusted advisors, Grigory Potemkin, arranged the trip to show Catherine the prosperity that had been the result of her reign. They toured villages and countryside with wealthy peasants, well-constructed towns and wealth and opulence that had traditionally been confined to Moscow and St. Petersburg.

But it was all a lie.

Peasants were given new clothes before the tour, and ornate facades were constructed to cover up the ramshackle huts that dotted the countryside. Potemkin had crafted an elaborate deception to make Catherine the Great think that she was responsible for prosperity that didn't exist.

So how does this relate to Edmonton?

One of the mistakes Catherine made was mistaking form for function. Rather than focus on the things that would actually make the Russian Empire great, she focussed instead on the things that made the Empire appear great.

Another mistake was confusing illusion and reality. Potemkin expertly spun a web of lies that effectively shifted Catherine's perceptions and made her more receptive to something patently false.

I want to start by saying that I like Edmonton's façade improvement program. I think that improving the edifices of Edmonton's buildings is positive and helps create upside for investors and facilitates movement in the marketplace - which is good for everyone. The program is good optics for the city and one of the programs that has some support among the business community.

That said, the city continues to increase commercial property taxes year over year with no end in sight. Zoning regulations and the approval processes for development permits and business licenses continue to be cumbersome and oppressive. In spite of efforts from the city to improve their operations, businesses continue to locate and relocate into the more business-friendly counties outside city limits.

So while the façade improvement program is great, it won't be effective unless the city can resolve the underlying issues that are fundamentally hostile to business. Without the fundamentals behind it, we're favoring form over function and making Edmonton into a Potemkin Village.

Are you a building owner? For more information on the City of Edmonton's façade improvement program, check out the link below:

https://www.edmonton.ca/business_economy/business_resources/facade-storefront-improvement-program.as...

How to renew your commercial lease agreement

Sat, 15 Jun 2019 03:37:27 GMT

Should you stay or should you go?

Negotiating a lease can be a complicated process if you don't know what to look for. Do lease rates always have to go up? Can I get incentives on renewal? What happens if I continue without a lease?

First of all, leases are important. Landlords usually prefer long term tenants, but something I always tell my clients is that leases are for the tenant's protection as well.

To give an example of this, a friend of mine (we'll call him Wayne) owned an art gallery in a great location in a small-town for over 20 years. After the initial five year term, he didn't renew his lease and continue month to month for more than 15 years! Then the building owner decided he wanted to retire and sold his building to a new investor group. What happened to Wayne? The new group went out and found a new tenant. They didn't give Wayne a chance to renew, to match the new tenant's rent and sign a lease. No, they moved him out with no recourse. Without a lease, your landlord has to give you only nominal notice, and you have to move out.

Commercial tenants are not afforded the same protections as residential tenants, so it's essential to be aware of this.

So what do you need to know about your renewal?

The first thing to think about is the option to renew. Many leases have a clause giving the tenant the right to renew. If exercised, this forces parties to reach an agreement over rates, if not by mutual agreement then often through third-party arbitration that is binding on both parties. Some options must be exercised six months out, others nine months, some are a year. Every lease is different, so it's essential to know when you have to exercise the right.

It's also important to be aware of market conditions. If you exercise your renewal right, and market conditions have gone up, you can find yourself paying considerably higher rent because this is "fair market value." This can also be the case if you've signed an undervalued lease or sublease and you want to renew. In this case, it may be best to renegotiate with your landlord without the provisions of the renewal clause and be prepared to move locations if you can't reach an agreement.

One thing you should consider when renewing your lease, is future renewals on the site. If your current rental agreement gives you an option for one further renewal, you should consider negotiating an additional renewal term if you plan on staying long term.

It's critical to have someone in your corner when it comes to renewals. In the past, we've negotiated free rent, TI allowance, rental discounts, and other non-monetary terms to create more favorable outcomes for tenants. Rent doesn't always go up, and it's important to know your options before stepping into a negotiation.

Moving can be a considerable inconvenience for tenants, and it’s usually preferable to stay on-site if the location is still working. That said, there are times when you may have an uneasy relationship with your landlord, or there’s uncertainty in the future of the location (for reasons such as expropriation by government authorities). In these cases, you should seriously consider moving. It’s often better to move when you have options than to be forced to relocate for reasons out of your control.

The more prepared you are, the more likely you are to have a favorable outcome.

Need help with your lease renewal, reach out to Tom or Chuck.

The New Age of Renters

Thu, 06 Jun 2019 04:10:47 GMT

How baby-boomers and millennials drive down home prices

The residential real estate market in Edmonton is low, and it isn't showing signs of recovery.

Why?

Price is not a barrier to entry in Edmonton, with high incomes when compared to the rest of the country, and lower home prices. Then why are home prices down? Demographics in Edmonton are also very favorable when it comes to home-ownership. Believe it or not, baby boomers play less of a part driving down home prices than they do in other Canadian markets.

Baby boomers are the first significant factor. As baby boomers retire, they tend to sell their homes to pull equity out of their houses to finance their retirement. When people sell under these circumstances, they will try to maximize the sale price of their property, regardless of market values.

Millennials don't see value in ownership. In other markets, this is ostensibly due to high home prices making ownership impossible for young people (think Vancouver or Toronto). However, in Edmonton, price is not a problem. There's a growing sentiment among millennials that ownership is unnecessary, cumbersome, and it traps you in one location. Homes are increasingly seen as a liability rather than an asset, and the mobility afforded by renting is more appealing to millennials than homeownership.

Of course, new builds and the flight to quality drive lower prices in older assets. New homes in the market built at costs close to those of used homes have been driving down the value of old product around the city.

That said, there will always be a market for high-end custom homes, but all other categories of single-family dwellings will suffer because of this trend. As this goes on, we are likely to see an increase in infill developments around the city and redevelopment of older neighborhoods into high-density neighborhoods with multifamily buildings.

https://www.edmonton.ca/business_economy/economic_data/economic-outlook.aspx

https://edmontonjournal.com/business/real-estate/looking-ahead-to-edmontons-housing-market-in-2019

Business Networking in Edmonton

Sun, 21 Apr 2019 17:26:24 GMT

A guide

Edmonton offers many opportunities for networking. It’s one of the things that make Edmonton so remarkable is that so many people come to Edmonton to work, making it a community of newcomers both interprovincially and internationally.

Edmonton is, in many ways, a city of strangers, where new people are always coming looking for opportunities. As such, business networking is huge in Edmonton, and most people, including executives, are more accessible than in other cities where there are “old boys clubs”. Edmonton is outsider friendly.

That said, not all networking events in Edmonton are created equal, and you will often find yourself at various events with the exact people you saw last week at an ostensibly different group.

Here are some of the options out there:

BNI (Business Network International) - This group is demanding of time and money and pays members back in referrals. Not so much a networking club as a business referral group. There are over 2,000 members in Edmonton in 33 groups. Very beneficial to some businesses, especially start-ups, who want to get their name out there. Not as useful to well-established businesses and very difficult to be in a group like this if you're in a line of work with a low transaction volume (like commercial real estate).

http://bnialberta.ca/en-CA/index

Chamber of Commerce – Some people swear by it, others don’t. My experience at Chamber events is that it is a networking group and you can make some good connections here. I’ve had excellent luck at these events, and although I haven’t directly made money from a chamber event, I’ve made some good connections.

https://www.edmontonchamber.com/

The "BAs" – SEBA, NEBA, WEBA, DBA, 124 BA, Strathcona BA - These are the business associations, South Edmonton, North and West respectively. Then there are the community business associations such as Downtown Business Association, 124 Street and Strathcona (Whyte Ave).

https://www.yegba.com/#!event-list

https://neba.ca/

https://weba.org/

https://www.edmontondowntown.com/downtown-business-association/

https://www.124street.ca/

www.oldstrathcona.ca/

Vantage Networking Club - Is an independent group, smaller than many others but with fewer time constraints and a strong commercial focus. Seats are exclusive and this group has many benefits to more established businesses, rather than start-ups. The focus here is on networking and business development rather than referrals. For the sake of full disclosure, I'm a member of this group.

https://vantagenetworking.com/

4 Musketeers - This is a networking group for HR people and business consultants, but it draws a crowd from other industries. They meet quarterly and their events are worthwhile.

Some others worth checking out:

Edmonton Economic Development Corporation

http://www.eedc.ca/

Building Owners and Managers Association (BOMA)

http://bomaedm.ca/

Did I miss a group? Shoot me an email with your favorite networking group in Edmonton.

Workforce Changes put Pressure on Employers

Sun, 21 Apr 2019 16:27:55 GMT

How retaining your "greatest asset" is changing

So you may wonder what I'm doing talking about something that is essentially an HR topic. However, whether you're an employee or an employer, you're faced with this issue all the time.

Jim Collins said that people are NOT your greatest asset, the right people are your greatest asset.

A friend of mine was recently in Chicago for a conference. He works for one of the largest insurance companies in the industry, and one of the main topics of the conference was how to attract and retain quality employees.

The average length of a career is getting shorter. In the 1950s, it was common for people to have the same job most of their life, and most people might have 1 or 2 careers in their lifetime. A more recent article in the financial times said that people should prepare to have five careers in their lives. The American Bureau of Labour Statistics noted that the average baby-boomer would have 11.7 jobs between the ages of 18 and 45.

If millennials are no lazier than baby boomers and are no less motivated, then why the change in perception, and why do they change occupations so frequently?

My friend Jill told me that she applied for several computer programmer jobs before opening her own business. She said to me that continually changing programming languages made it difficult to stay relevant in the employment landscape. After a few years, employers could find someone more qualified in a new programming language than Jill. These new hires were often fresh out of school and would work for minimum wage.

So it's hard for employees to stay relevant in a fast-moving environment. What about employers?

The main challenge in keeping employees is there's so much movement in the labour market. Many employees, fresh out school, find themselves chasing the unattainable goal of the perfect work environment. They want a good work culture, and one where they feel they can grow and are respected - or they'll leave. The issue has become that many businesses have an atmosphere of transience, and it is now socially acceptable to be a workplace transient.

So what do you do if you're an employer?

The main thing that will help is to create an atmosphere where people want to work. The work has to resonate with their values and provide enough stimulation that they will hang on through the rough times. If employees feel a sense of accomplishment and that they are a part of something greater can help with this as well - this is why so many companies talk about their "Mission." A goal, or vision, beyond money that will resonate and create personal alignment with "the cause."

Some famous examples of this are Nordstrom, Tesla, and Google, which promote a cult-like atmosphere. The Army is another place that creates this sense of mission, where people can be part of something bigger than they are, and members participate in something that matters. Environmental and political causes are great at this, too, they provide ideological motivation to members that most often creates lifelong loyalty.

If people feel like they're a part of something greater then themselves, they align with the cause, and there are rewards beyond money, they will stick around. Wouldn't you?

The Future of Flex Space

Sun, 21 Apr 2019 15:43:12 GMT

Inexpensive Flex Space can be the Driver of Innovation

Edmonton has a high volume of vacant “flex space”. Flex is a combination of warehouse and office, typically lower quality, older buildings in less desirable areas. These assets typically have a lower lease rate than comparable office spaces, and in Edmonton, landlords are incredibly competitive because of excess space in the market – especially in West Edmonton.

Flex space has implications for how cities grow and develop. In Vancouver, older flex/industrial space became the basis of one of the most vibrant artistic communities in Western Canada, Granville Island. Initially, low lease rates in an undesirable location (under the bridge) led to the growth of a community where artists could congregate, work and sell their products.

Portland, Oregon went through a similar shift following a downturn in the local forestry industry. The abundance of flex space in Portland led to a contraction of lease rates, and a lower price of doing business in these areas. Tech companies, who could not afford high real estate prices in Silicon Valley, began relocating their operations to Portland, leading to a boom in the local economy.

Whether Edmonton’s flex space will lead to new industries such as high tech, or a revitalized arts community remains to be seen. In many ways, Edmonton lacks the density and centralization that will lead to something like Granville Island, and Whyte Ave will likely stay the closest things to an arts scene in Edmonton. High tech is equally dubious, Don Iveson has suggested that a high tech corridor would help diversify Edmonton’s economy:

“[our goal is to] create an innovation corridor that runs from NAIT to the University of Alberta, through our downtown – a series of places where innovation, entrepreneurship, the arts, creativity and vibrant urban life intersect.”

Such efforts, while well intended, are unlikely to lead to lasting results as prices along this corridor are among the highest in the city. Meanwhile, infrastructure for transit and high speed internet in areas like West Edmonton, where most existing flex space is located, remains unsuitable for many tech businesses.

The City must choose between subsidizing these industries in areas where they would not naturally go, or investing in infrastructure mirroring efforts have been successful in other jurisdictions.

Do you have questions about where to find flex space in Edmonton, feel free to contact us.

What is a net lease vs gross lease?

Fri, 22 Mar 2019 04:24:57 GMT

What is a net lease, what is a gross lease? Advantages and disadvantages to both.

There are two types of lease, gross lease, and net lease. Neither one is better than the other, and both can come into play under different circumstances. As a tenant or a new landlord, it’s essential to understand the differences between them and how these variations can affect operating costs.

Gross Lease

The gross lease is perhaps the most straightforward type of lease, this is the single figure, one all-inclusive rate that’s charged to the tenant. The landlord pays all power, water, gas, building insurance, common area maintenance, etc. This figure may also cover property taxes, which may or may not be adjusted for tax increases year over year. Gross leases provide the tenant with predictable expenditure that doesn’t fluctuate and makes for easy management. The risk to the landlord is that significant increases to utilities, tax, etc. may all be the responsibility of the landlord, depending on how the lease is structured.

If a gross lease sounds too good to be true, they’re generally hard to find unless you’re looking at older buildings. Less experienced landlords will often use a gross lease for ease of accounting, but experienced landlords may employ them as well. Usually, newer buildings will tend towards net leases, while older buildings may use a gross lease to make their offering more appealing to low budget users and start-ups.

Net Leases

The “net and care free” lease is at the opposite end of the spectrum. In a net and care free lease, the tenant is responsible for all expenses related to the building and will pay directly for property taxes, building insurance, maintenance, and even the roof. They’re called “net and care free” because they are carefree to the landlord who simply collects income on its property.

Most leases fall somewhere in the middle of these two extremes. Depending on how spaces are metered, the priorities of the landlord, and the considerations of the landlord’s needs, each lease will be specific. It’s up to the due diligence of the tenant and their agent to determine what costs are reasonable and if it’s standard to what is available in the rest of the market.

As far as other types of net leases, they are as follows:

· Net – Tenant pays property taxes

· Double net – Tenant pays property tax and insurance

· Triple net – Tenant pays property tax, insurance and common area maintenance (CAM)

New buildings tend to be more net because these leases offer the most significant advantages and predictability to the owner.

Operating Costs

It’s crucial to understand operating costs in the context of net leases. Operating costs will cover several different items, and what’s included often depends on the asset class of the building.

TMI (Taxes, Maintenance and Insurance)

Tax

Operating costs almost always include taxes. Most carefree net leases will still charge property taxes to the tenant as an op cost; the reason for this is that the landlord can ensure that property taxes are paid.

Taxes change year over year, and they tend to go up. This cost is passed on to the Tenant, which is why op costs tend to go up every year without fail.

Taxes in Edmonton are determined by the assessed property value. You can see the city’s property taxes here . Depending on the area, taxes can range from $2.50 - $8.00 / Sq.Ft.

Maintenance (CAM)

CAM is “Common Area Maintenance.” This is work charged to the tenant and typically includes such things as landscaping, snow removal, parking lot maintenance, paint, and other services. CAM may also include long term maintenance amortized over the long term. This would be significant capital expenses such as roof-top units (RTUs), boilers, the roof, or other major capital items.

Most reputable landlords budget for large capital expenses and these op costs are generally stable, even if there is an unexpected capital expense. There is a higher risk to tenants in sites where a small local landlord owns the building, and where the landlord may not have budgeted for or even anticipated the expense.

Any building that is undergoing significant renovations may be subject to large fluctuations in op costs. If this is a concern, then it can be advisable to talk to other tenants in the building to see how the landlord has managed operating costs before signing a lease.

Insurance

The landlord’s building insurance is usually charged back to the tenant as well. It’s important to know that buildings generally have multiple layers of insurance. In a condominium, the condo corporation will have insurance, the owners of the units will have separate insurance, and the tenants will be required to have tenant insurance in place before being granted possession.

If you’re a start-up business or want a change of insurance for a new location, your broker will be able to connect you with a reputable insurance provider. Tenant’s insurance will be defined in the formal lease, and often you can send your insurance provider a copy of the insurance clause from the contract, and they will be able to provide coverage accordingly.

Utilities

Utilities are reasonably self-explanatory. There are three utilities – power, water, and gas (heat).

Depending on the space, different utilities may be included in the operating costs. In industrial buildings, services are usually metered separately to avoid disputes between the landlord and the tenants about power usage.

Consider, as an example, a fabrication shop. A fabrication business will use more power than their neighbors so their power consumption should be monitored to ensure costs are changed reasonably to tenants.

Another heavy power user is a server farm or data center. These users draw considerable power, not only for the operation of their equipment but also the high cost in keeping the servers cool with HVAC.

In older buildings, or in buildings that have been demised into smaller spaces since they were built, utilities may be on a single meter. When this happens, it is possible for the landlord to install a check meter to monitor the tenant’s use separately. Check meters are generally inexpensive and are an economical alternative to separately metering a space. The same can often be done for water consumption.

When signing a lease, it’s imperative to understand which services are included in the lease and if the spaces are separately metered or on a single meter. Retail and industrial users are often separately metered while office buildings tend to be on a single meter since differences in consumption of utilities are minimal.

For office users, one consideration to take into account is HVAC hours in a building. While the cost of HVAC is included in the op costs, it may not cover the price if you need HVAC outside of building hours. In many buildings, hours will run from 8:00 am to 6:00 pm, and they will not run HVAC outside of these hours unless there is a special agreement with the tenant. As a tenant, you need to know ahead of time if this will be at an additional cost.

In-Suite Janitorial

This will typically only apply to leases in office buildings. Operating costs can include cleaning, daily, weekly or monthly. In office towers, this generally is an assumed service. Exceptions may occur for users with security concerns, in which case high-security janitors would have to be employed at additional cost.

In buildings where only a few tenants require cleaning, the cost of in-suite janitorial can be high, because they don’t benefit from the economies of scale that are present in office towers. Another consideration is users, such as orthodontists that produce a lot of dust, but may still occupy a medical or office building. These users may pay additional cleaning costs to cover the extra work.

Different Practices by Asset Class

Every commercial lease is different, and it’s the responsibility of the tenant to understand what they’re signing up for when they sign a lease.

There are some general differences between these asset classes which are predictable.

Industrial properties tend to lean more toward net leases. Operating costs will include TMI, but they tend not to include utilities.

Retail properties are much the same but are more likely to include utilities than industrial spaces. Restaurants are more likely to be separately metered because of the requirement for services.

Office properties tend to include TMI and utilities. In office towers, in-suite janitorial is likely to be included in these costs as well.

Interested in learning more about office leases? Read our article on the Gross-Up factor .

The Future of Shared-Space

Fri, 22 Mar 2019 04:16:42 GMT

Get ready to meet your new neighbors...

Do you like living with roommates?

Sharespace has been a significant trend in recent years, In Edmonton, Regus is the dominant player offering single offices for rent on a short term basis. More recently, Work Nicer has come to Edmonton offering its spin on the sharespace model, co-locating tenants where business synergies may exist.

Sharespace is going to other industries as well, commercial kitchens , art space, and hair salons have all been affected by the trend. Industries will face pressure to adapt their business models to sharepsace models where applicable, putting pressure on landlords to keep tenants and employers to keep their employees.

In the coming years, it’s likely that both local and national landlords will adapt existing spaces to accommodate office sharepsace users. The model is management intensive, but helps carry the costs of vacancy in office buildings. As more landlords adopt this model on a local model, major sharespace providers will have to adapt their increasingly precarious models or risk going out of business.

Who has the biggest office?

Thu, 21 Mar 2019 00:00:00 GMT

Here's how different professionals offices stack up.

Overall the size of offices for professionals goes down year over year as more services are automated and less common areas are required. Let’s see how each professional’s office sizes measure up:

Lawyers: 100 SQFT ( 100-120 square feet for associates and 180-225 square feet for partner offices, in larger law firms, it’s not unusual for senior partners to have 400-500 square feet. )

Accountants: 150 SQFT

Engineers: 175 SQFT

Real Estate: 120 SQFT

Those are the professionals, what about some of the other famous offices:

Oval Office – White House 816 Square Feet

Warren Buffett’s office is approximately 200 sqft, and is the same office he’s used for over 50 years.

Elon Musk doesn’t have an office, preferring to work in the trenches, going where his companies need him.

Here's a few floor plans showing different sizes and how they are typically laid out.

(Check out our article on determining the size of office you need.)

What is gross up factor?

Thu, 21 Mar 2019 00:00:00 GMT

Rentable vs usable space in commercial leases.

“Rentable space / Usable Space = Gross Up Factor”

You know how, when you pay your taxes, some of that money is going to roads, maintenance or government buildings, parks and various other amenities in your municipality? Paying this tax is paying money for something that you use, but you don't own it - it belongs to everyone and is for use by everyone. The same thing happens in commercial real estate, and these are called "common areas" and how they're determined in a lease is generally through the gross-up factor.

In addition to renting the space in which their occupying, tenants also pay for a portion of the common areas that they use. Gross-up can include hallways, washrooms, lobby, amenities such as gyms, common showers, bike lock up, etc.

Usable area is space a tenant occupies, what they can “use”. The rentable area includes the gross-up of the space.

As an example, if a building has a footprint of 5,000 Square feet, then the building has 5,000 Square feet per floor of rentable area. If each floor then has common area washrooms and a lobby, all of which measures 1,000 Square feet, then the remaining 4,000 Square feet is the usable space. This space has a gross-up of 25% (5,000 / 4,000 = 1.25). If 4 tenants of equal size occupied the floor, their usable space would, therefore, be 1,000 Square feet, and their rentable space would be 1,250 square feet.

Generally, all calculations in a lease are based on the rentable area. So basic and additional rent are charged on the grossed-up amount, in other words, you pay for 1,250 square feet, while you occupy 1,000 square feet. All tenant improvement allowances and other incentives are based on the rentable area, if you negotiate a $10 tenant improvement allowance, it's calculated based on the 1,250 square foot rentable area.

Gross ups are most common in office buildings, tending not to apply as much to retail strips or industrial buildings. Interior malls tend to increase base rent rather than gross the space up. So mall tenants, especially food court tenants, will have the common areas of the space factored into their lease rates. This leads to lease rates of several hundred dollars per square foot on spaces with a 300 square-foot footprint.

Want to know what a typical gross-up factor is in Edmonton, contact us to learn more.

Introducing Us

Wed, 20 Mar 2019 00:00:00 GMT

Office and medical real estate transactions can be complicated and challenging and it’s our goal to help simplify the process. In future blogs we’ll look at trends in the office and medical fields that will change the way the industry and the city as a whole.

Business is not the same today as it was 10 years ago. Commercial real estate is generally slow at adapting to a changing environment, tending to revert to the old ways of doing business. While other industries march forward and are forced
to either change or face extinction, our industry has largely missed the boat and now finds itself at a crossroads.

Adaptation to a new environment, a new economy and a new generation with a global outlook and global concerns will all inform the face of business moving forward in the 21st century. Inter-connectivity is a significant factor and freedom, or rather, proliferation of knowledge is on the horizon. Specialists and salespeople are less and less in demand as augmented reality, and information at your fingertips becomes the norm everywhere. Commercial brokers will have to invent new ways of adding value, facilitating transactions, and serving their clients or will increasingly lose relevance.

Our intent with this website, is to create a channel to add value to our clients, and potential clients.