Real Estate Insider: May 2018 News Report

Hello there, Real Estate Insiders! Get ready for some of the most important topics we've discovered yet. Why you need a lawyer if you're selling your house, the best way to approach mortgage renewal, and why it's harder for Millennials to buy are just a few of the reads we have in store for you. 

There’s a lot of things you can do to save some money, but skipping out on a Real Estate lawyer when buying a home should NEVER be one of them! Read why it can end up costing you way more than the legal fees if you decide to buy a home without a lawyer. >>

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While owning a condominium in Toronto and renting it out may seem like a great investment, it appears nearly half aren’t getting enough rent to cover their costs. Is it still worth it? >>

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If you sold your home after 2016 and didn’t report it to CRA, you might be looking at hefty fine! Read here to stay updated on all the forms and necessary steps to avoid an unwanted call from the CRA. >>

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If you own a rental property with more than two people, tax season can be tricky! Be sure to know how to split these taxes fairly, and you can start by reading this article! >>

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If you are thinking of investing in your first rental property, this article is for you. Be better prepared to make this decision. Should it be a house or condo? Duplex? Where are you living now? This article has all the right questions you might not have thought to ask! >>

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“My mortgage comes up for renewal this year.” If you are in the same boat as these authors then you should definitely read their mortgage renewal strategy to help with your own! >>

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Think that if you can afford the down payment and the mortgage payments you can afford a house? Think again! There are a lot of costs involved in buying a home and we want to make sure you are financially prepared for all of them. Read this list so there are no surprises on closing day! >>

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Real Estate Lawyers discuss the "5 Things to Know about Government Standard Lease Form”. >>

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The 2018 OSFI stress test has cut Millennial purchasing power by over $40,000! What does that mean for first time home buyers? >>

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With a lot of things now being done online, should dealing with a mortgage broker be one of them? Read the pros and cons of going online for a mortgage. >>

Attention Landlords and Tenants in Ontario – Ontario Standard Leases Are Coming

Are you a landlord or tenant in Ontario? If you are, or are considering becoming one in the near future, we have a timely post for you today.  Mandatory changes are coming to residential lease agreements in the province, and here is what you need to know.

What is Happening With Residential Leases In Ontario?

Landlords of most private residential units in Ontario must start using the standard lease template for all new leases.

When Is This Starting?

These standard leases must be used in Ontario starting April 30, 2018.

Who Decided This?

The Ontario Liberal Government – through the Ministry of Municipal Affairs/Ministry of Housing.

Where Can I Find a Copy of this Standard Lease?

Visit the Central Forms Repository on the Government of Ontario website to download the form.

What is the Purpose of this Standard Lease?

Three primary reasons are stated:

1. To help landlords and tenants understand their rights.
2. Reduce illegal terms in leases and misunderstandings regarding verbal agreements.
3. Reduce the need for Landlord Tenant Board (LTB) hearings to resolves disputes.

What Else Should I Know About Standard Leases?

In the leases, there are mandatory terms (that must be completed and cannot be altered), there are optional additional terms (which allow for unique terms to be agreed to by landlord/tenant) and general information on rights and responsibilities (Ie. subletting, pets, guests, etc).

What Are Our Thoughts On This Issue?

Whether we like it out not it, this will soon be the law. So we will have to deal with it and adapt. First impression is that it will further swing the pendulum towards tenant rights more so than it already is. But fingers crossed that if it doesn’t work the way it is expected to, or if it causes specific problems related to clauses, etc., the government will listen to feedback from the industry and amend this standard lease to get it right.

What are your thoughts on the Standard Lease? We’d love to hear from your landlord/tenant perspective.

Real Estate & Related Terms Explained: First Right of Refusal

As  we wrap up this series on leasing terms for the year, another confusing term/subject is on deck.  Although the definition is pretty literal, the application of it in the commercial leasing world isn’t so straightforward.

What Exactly Is A First Right of Refusal (FROR)?

A right of first refusal is a contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. If the entity with the first right of refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.  In the real estate world, this business transaction refers to the real estate premises in subject, be it commercial space, land, etc.

When Would A First Right of Refusal Apply?

The most common time when you see a first right of refusal applicable would be when a tenant is leasing a space, the landlord decides to sell, and the tenant has a first right of refusal to purchase the property.  Another common application would be when a tenant in a building is growing and as a neighbouring space becomes vacant, the tenant would have a first right of refusal to lease the additional space before the landlord can lease it to another tenant.

What Else Should I Know About A First Right of Refusal?

A first right of refusal is a term of a lease agreement that should be negotiated along with other terms at time of lease negotiations.  It usually states a date that relates to the first right and the mechanism for administering it.  The more thoroughly stated the better, so there are no disagreements later.  

To use an example: if a tenant has a first right of refusal on the building they occupy that states that should the landlord get a bonafide offer to purchase from a third party, the tenant will have seven days to match the terms of that offer.

The actual clause in the lease agreement will be more detailed but that covers the basis of it.

Obviously, a first right of refusal is a benefit to a tenant if they desire to own the building they are in someday.  It is a nice perk.  It is also a benefit to have a first right on neighbouring space, as being able to expand without moving is attractive.

On the landlord’s side, it is sometimes a detriment to have a first right of refusal when selling their building.  If a third party buyer knows that the tenant has a first right of refusal to match their offer, they might decide to not bother.  It really depends on the situation though.

As always, make sure to hire an experienced commercial realtor to negotiate terms in your lease, including first right of refusals!  Once again, this wraps up our series on explaining leasing terms for the year.  Hope it was informative.  If you ever have questions don’t hesitate to drop us a line.

THE TENANT PLAYBOOK: Keys to Success

Tenants considering new premises are often overwhelmed by the complexity of the task. In addition, they most often continue to run their operation from their present location, while at the same time planning to move/relocate. Talk about a heavy workload!

As with everything in real estate, DON'T GO IT ALONE! Engage the services of a qualified commercial leasing specialist on Day One. Interview only qualified specialists in your market area and select the one who appears best suited to assist you in finding new premises.

Now that you have engaged your Tenant Representative, what are the key elements of your relocation plan that need to be determined? A typical list would be as follows:

• Lease Commitment Period (5, 10-20 years)
• Locational Parameters (based on your clientele and market priorities)
• Premises Size & Design (sq. ft. range, ground floor/above ground, multi-unit/freestanding)
• Interior Layout (floor plan requirements, staffing size, windows/exterior light)
• Parking Needs (on site, street parking, municipal parking, no parking)
• Signage (facia box, multi-tenant pylon sign, window signage, directory board)
• Accessibility (key in most jurisdictions across North America)
• Networks (fibre cable, high speed internet, satellite)
• Landlord Incentives (rent free period, TI allowance, turn-key/build to suit)
• Availability (to commence both the tenant's work and business operations)
• Options to Expand/First Rights on Adjoining Space

Although not necessarily a conclusive list, this forms a solid basis for the objectives needed to secure new premises. As a tenant, you need to present your requirements in a very clear manner, based on your foreseeable needs. This is a vital part of the Tenant Playbook. It forms the basis of the properties which you consider. It will also ultimately form the basis in your decision making as you create a short list of viable property options and compare them.

Next up from the Tenant Playbook: the most effective approaches in negotiating with the Landlord. As always, we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

PERSONAL GUARANTEE – Landlord’s Perspective

We touched on the subject of a “PERSONAL GUARANTEE” (PG) in an earlier blog, so let’s expand on the subject further from the Landlord’s perspective. This can often be a controversial part of any lease negotiation, so here's a practical strategy and approach to work with.

First, a PG is simply an assurance that the Tenant (likely the principal of the company) will be personally liable financially for the lease agreement and its terms. It can be structured in many ways, for example, time limited, subject to a maximum amount ($ figure), or tied to the Landlord investment towards tenant improvements. It most often becomes enforceable when the company or entity which has signed the lease fails to meet its terms.

As Landlord, you are effectively a creditor and in some situations you may have more financial exposure than just the loss of the rental payments due. Understanding this, it’s good business to construct a PG structure that fits the particular deal you are considering. Think in terms of your risk & exposure in the event of a tenant failure, with a clear assessment of the downside potential. The best practice is to think like a banker and secure the deal accordingly.

In terms of the Tenant expectations and their willingness to accept a PG, none of it should come as a surprise. The informed ones will understand why it is required, the rationale behind it and should negotiate the best terms of a PG accordingly based on their interests. Tenants unwilling to accept a PG are limited in the market options they can consider and are in effect asking you to accept a higher risk by taking them on.

Just a final thought on a PERSONAL GUARANTEE – they never matter much the day that the lease is signed, but they do when the business fails and the lease goes into default!

CALLING ALL LANDLORDS! We would love to hear any great stories on the subject from your experience(s). As always we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

NET EFFECTIVE RENT (NER) – Good Idea to do the Math!

Whether landlords are doing incentives via TENANT IMPROVEMENT ALLOWANCES (TIA) or RENT FREE CONCESSIONS (RFC), the reality is that the stated lease rate is being affected and not necessarily in the landlord’s favour. The TIA involves an actual capital investment on the part of the landlord, whereas the RFI foregoes cash flow for a period of time. In either case there is a determinable cost to the landlord for these type of incentives and a prudent landlord should rightly do the math to understand the net effect.

NET EFFECTIVE RENT (NER) is basically what the lease rate actually looks like, after the incentive is accounted for. Consider the following for either situation on a 1,000’ unit being leased at $10/ft:

• RF Incentive OF 3 MONTHS – 3 x $833.33/mo = 2500 in year 1 
• NER = $7500 / yr. or 7.50/ft. ($10,000 - $2500 / 1000’)

• TI ALLOWANCE  - $5 / ft. x 1000’ = $5000.00
• NER = $5000 / yr. or $5/ft. (10000 - $5000 / 1000’)

It’s important to note that both of the above examples are calculated against only one year of lease income and assumes a one year lease. If the term is three years, both NER rates go up, as the total rent number is three times higher over the full term. It’s all simple math based on the specific deal. More importantly, it not only affects your cash flow but ultimately the return on investment for the property.

If we assume TIAs or RFC are a cost of doing business in your market, landlords need to focus on determining the NER early in the process when assessing any lease proposal. As with everything in real estate, in some cases the projected NER makes sense, while other times it doesn’t.

We welcome your comments about NER realities and experiences within your market. As always, we’re just a click/call away from discussing our investment opportunities here in Windsor-Essex!