Monday, October 31, 2016

Real Estate & Related Terms Explained: Renewal Option

Say you are a commercial tenant in a plaza and business is pretty good. You are established now and planning for the future. Before you know it, a few years have gone by and you realize that your lease must be coming up for renewal later this year. But do you really understand what a renewal option is and what rights and obligations you have? Today we are going to discuss the important topic of renewal options.  

What Exactly Is A Renewal Option?
A renewal option is a clause within your lease that outlines the terms for renewing or extending a lease agreement. Obviously this renewal option comes into play as you approach the end of your lease term.  These renewal options are at the right of the tenant and not an obligation.

How Do Renewal Options Work?
Renewal options generally spell out how (usually in writing to the Landlord), and when (usually a time period before the expiration of the lease, ie 6 months), this option can be exercised. There is also usually a number of renewal options (ie. 3 options of renewal), and a lease term (ie. 5 years), tied to a renewal option. This also assumes the Tenant is in good standing not in default of any of the covenants of the lease. The wording of your renewal option will be a clause included in your lease agreement.  Make sure to have your lawyer read over the clause to protect your interests.

What Else Should I Know About Renewal Options?
Sometimes renewals also spell out the rental rate. The rest of the time the rate in the renewal is at “a rate to be negotiated”. This rate to be negotiated is supposed to be at a market rate at the time of the renewal. In Ontario (our market where we practice real estate), in the case where a Landlord and Tenant can’t come to terms on a rate, there is an arbitration process to resolve the matter.

In the event a Tenant doesn’t exercise their right to renew, they end up holding over month to month and lose all additional renewal options. If you’d like to read up on this situation, be sure to read our blog on this topic here.

Renewal options are a negotiating term when negotiating a commercial lease. Make sure you get a good commercial realtor to negotiate your renewal options on your behalf and be sure to understand this renewal option for the future.

Monday, October 24, 2016

Real Estate & Related Terms Explained: Month to Month

In your business travels, you may have come across a Tenant or Landlord that is leasing a space month to month. But do you know exactly what that means and what the ramifications are for both parties? Today we are going to explain month to month tenancies.

On a side note: Our discussion will be in regards to commercial leasing month to month. Residential month to month tenancies is another topic and can get very technical depending on your jurisdiction (ours being Ontario). Read up on your residential Landlord-Tenant laws to learn more about residential month to month tenancies.

What Exactly is a Month to Month Tenancy?
A month to month tenancy is technically a lease arrangement that is terminable by either party on 30 days notice (hence the term month to month). This terminable aspect of the lease goes both ways, for both the Tenant and the Landlord.

Why Would I Find Myself In A Month to Month Tenancy?
You could have entered into a month to month tenancy at the beginning of a lease, either as a Landlord or Tenant, by agreeing to not have a lease term (ie. 1 year) attached to your tenancy. The other way you could be involved in a month to month tenancy, is when the Tenant’s lease term is up and is either out of options to extend, or has decided to not exercise their right to extend, and is therefore holding over on their lease month to month.

What Are the Pros to a Month to Month Lease?
The pros of a month to month tenancy as a Tenant are obviously that should things turn sour in your business, you could close down in 30 days and not be on the hook for a long lease term. Or, if you are a tenant looking for a better location or space for your business, holding over month to month allows you to continue to operate while searching out new premises. The pros for the Landlord would be that it creates flexibility should a long tenant user come along to take the existing tenants space, or if you had a multi-unit building and needed to accommodate a larger user tenant.

What Are The Cons to a Month to Month Lease?
Obviously the con to a month to month tenancy is a lack of security both ways. As a Tenant if you are holding over month to month, the Landlord could at any time lease the space to someone else with 30 days notice. Likewise for the Landlord you could have any empty unit with only 30 days notice to prepare. Also as a Landlord, month to month tenancies will make it harder to finance and sell for proper value.

As always your lease agreement will have clauses in it relating to this topic. Make sure you understand those clauses and how they relate to your situation. If you have a question about your month to month tenancy, feel free to drop us a line!

Friday, October 14, 2016

Real Estate & Related Terms Explained: Tenant Improvements

Continuing on in our series of explaining real estate and related terms, now that you understand the types of commercial leases we are going to touch on some terms you will often come across. Today we are going to be talking about a subject that many potential tenants find confusing: Tenant Improvements.

What are Tenant Improvements?
Tenant Improvements are alterations made to a commercial or industrial premises in order to customize it for the specific need of a tenant. Examples of Tenant Improvements would include walls, flooring, ceilings, lighting, kitchens, paint, etc. Many people in the industry use the short form "T.I.s" when referring to Tenant Improvements.

Who Pays for the Tenant Improvements?
Every situation is different and often it depends on what you are able to negotiate. On one end of the spectrum the Tenant pays for all their own tenant improvements. On the other end the Landlord pays for all the Tenant Improvements (often referred to as a “turn-key”). Often they meet somewhere in the middle. Landlords will sometimes quote a base rent that includes a Tenant improvement allowance built in when leasing over a long term ($15/ft base rent, includes a $25/ft Tenant Improvements allowance on a 10 year term).

What Else Should I Know About Tenant Improvements?
Often times as a Tenant you can make your best deal taking the space as-is and pay for the Tenant improvements yourself. This better deal can result in lower rent over the long term and generous rent free periods at the beginning of the lease. On the flip side, it's possible as a Tenant that you don’t have the capital to fund all your own Tenant improvements or don’t have the time or skill to manage the project.

As a Landlord, there are also pros and cons to participating in the cost of Tenant Improvements. The pros include you can usually command a higher rent and longer terms. This can make your rent roll look good and increase the potential sale price should you plan to sell in the near future. The cons are obviously that you need to come up with the capital and also that you need to be sure to qualify the Tenant and their creditworthiness. Essentially, you're loaning them the money for Tenant Improvements that you will recoup over the term of the lease.

With the cost of construction increasing all over the place, it's important to factor in Tenant Improvement costs and who will be responsible for paying what. A knowledgeable commercial real estate specialist should be able to educate you on the dynamics of your market and how best to position yourself.

Monday, October 3, 2016

Real Estate & Related Terms Explained: Gross Lease

 As we continue on in our series of explaining real estate related terms, the streak of leasing-related topics continues. Over the last few weeks we have discussed triple net leasing and some related terms. Today we are going to touch on the opposite end of the spectrum when it comes to leasing… gross leasing.

What Is A Gross Lease?
A gross lease is a type of lease where the Landlord pays for the building’s operating costs, including the property taxes, insurance, maintenance, etc. From the Tenant’s perspective this equates to a flat fee or monthly rent in exchange for using the space. This is the opposite of how a triple net lease is administered, where the Tenant pays their proportionate share of the building’s operating cost.

How Is A Gross Lease Administered?
A gross lease is either administered as $/ft figure (ie $10.00/ft), or as a flat dollar amount per month ($2000/Month). Obviously from a Tenant’s perspective, a gross lease is simpler as the cost every month is fixed. Naturally, some Tenants prefer this type of lease arrangement, compared to triple net leasing.

What Else Should I Know About Gross Leasing?
Gross leases can sometimes include utilities cost and sometimes they are separately metered. It is important to understand how utilities are charged in the gross lease deals you are looking at. As a Tenant in a gross lease building, even though you aren’t paying additional rent to cover your share of operating costs, you will want to also ensure that the maintenance of the property has been kept up (landscaping, snow removal, etc). This can be done with language speaking to this in your lease agreement.

Sometimes you will run across a building that is run somewhere between a net and gross lease arrangement. These can be referred to as semi-net or semi-gross leases with an adjustment for part of the operating cost (ie. property taxes or utilities). The Landlord will set up a gross lease, but charge you back for your share of utilities or property taxes. Your lease agreement should speak to any special arrangements like this.

On the Landlord side generally lenders and other investors won’t view investment properties with gross leases as favourably. As opposed to net leasing where the Landlord is collecting a net rent yearly, with gross leases the Landlord is responsible for the expenses. This can lead to variability in the net income of the property and therefore leads to a lower applicable cap rate (valuation) when selling or financing the property.

Now you know the difference between a gross and a net lease. If any of these concepts are still confusing for you, feel free to drop us a line. We are here to help!