Leasing commercial real estate is a big step in the life of any business. It indicates that whatever you’ve been doing until now has been successful, and you’re ready to realize your company’s full potential. Where you decide to locate your business is important, but negotiating a lease with costs and terms that won’t impede your company’s growth is just as crucial.
Our 10-step beginner’s guide to leasing commercial real estate in Canada is designed to help you better understand and prepare for the process so you can negotiate a winning deal.
1. Get Familiar With Common Commercial Real Estate Leasing Terms and Market Trends
Becoming better-versed in common commercial real estate leasing terms and current market trends doesn’t take a lot of time, but it’ll save you plenty of it as you deal with accountants, lawyers, bankers and landlords.
2. Do a Business Review. Assuming you’ve already done a strategic analysis to find the best location for your business, determine the amount and type of space you’ll need now and for your company’s planned growth over the next three to five years. A space that allows you to add staff and equipment without substantial renovations will usually make financial sense. Still, if you anticipate extremely rapid growth, a landlord that allows you to negotiate a short-term lease may make even more.
Work with your accountant to develop a preliminary budget for your lease, then identify an optimal move-in date. Make sure you have enough time to do upgrades or renovations, and you won’t be rushing to sign documents or slog boxes during a peak sales period.
3. Create Your Lease Team. Leasing commercial real estate can be a complex and time-consuming endeavour at the best of times, but in Canada’s currently highly competitive commercial real estate market, properties can surface and disappear in an instant as waiting hands quickly grab up all available space. Without resources in the market on a daily basis talking to owners, landlords and developers, you’ll be left scanning online commercial real estate listings that could be loaded with properties that are actually no longer on the market.
Your team should consist of:
- An accountant who can create your preliminary leasing budget, run the numbers on various options as you get closer to choosing a final location and prepare the financial documents you’ll need for your bank or other types of financing.
- A banker who can verify that your budget includes enough leeway to cover typical cost overruns associated with occupying a new space, including renovations, moving and equipment costs, downtime and contingency costs. Your banker will also ensure you don’t overestimate what you can afford to pay for the entire process, so you don’t end up with debt that swallows vast chunks of your cash flow while you’re busy gearing up your business post-move.Even if you already deal with a trusted banker, shop around so you know you’re getting the best loan rate, renovation or build-out cost coverages and loan repayment terms.
- A commercial real estate agent or broker who knows the area, your business requirements and your business sector and who’s experienced enough to be able to advise you through the entire process – from finding locations and creating offers to helping negotiate the final lease and closing the transaction.
- A lawyer specializing in leasing commercial real estate negotiations can help explain the implication of various lease clauses, craft offers to owners or landlords, do due diligence regarding zoning and do a final review of the lease before you sign. If your landlord fails to fulfill all or part of the lease agreement, your lawyer can also represent you in a lawsuit.
- A contractor who can help you review spaces so you can quickly craft an offer and not miss out on a promising location and who can plan and execute renovations prior to occupying the space. As always, request and interview your contractor’s references and make sure to see their past up-close work as well.
4. Leave Your Preconceived Notions at the Door. When it comes to leasing commercial real estate, whether you can envision it or not, several types of commercial real estate buildings and spaces will likely fit your business needs.
Keep an open mind as your agent or broker identifies possibilities and focus on using the initial site visit to check out the space and the building’s owner, landlord or property manager. If you anticipate needing pay-as-you-go terms, financial help with leasehold improvements or substantial tenant inducements, you’ll need to ensure that the powers that be are open to them.
5. Use a Scoring System to Help You Evaluate Properties. Don’t just go with your gut regarding leasing commercial real estate decisions. Make a list of must-haves and nice-to-have features for the building or space you want to inhabit, weigh each factor appropriately and create a spreadsheet that lets you evaluate each property objectively.
Narrow down your list to the top two or three properties, then schedule a follow-up site visit with your contractor (or architect) in tow so they can better estimate upgrades, renovations or build-out costs, do a cursory inspection of the property and advise you in conversations about maintenance, landscaping or other lease costs your landlord may want you to pay.
6. Negotiate. Negotiate. Negotiate. Unlike residential landlords, landlords understand that negotiation goes with the territory when it comes to leasing commercial real estate and is actually part of landing a satisfied tenant. They also expect prospective tenants to have done their homework (aka market analysis) before making an offer.
Let your landlord know theirs isn’t the only property on your shortlist so they can add tenant inducements such as a period of free or reduced rent and complete or partial payments for leasehold improvements. This is especially important to negotiate – as if your business moves – the leasehold improvements you make will typically stay with the building, adding to its value in the future. If your business bears all the costs, you’re essentially paying for the right to help your landlord make more profit when they lease or sell the building later.
Also, verify the lease holdover rate that will apply if you overstay your lease term, and aim for 125% of your monthly rent or lower if you can.
Once you present an offer, the owner or landlord will make a counteroffer, and the process will go back and forth until both parties reach an agreement.
7. Revise Your Budget and Head Back to Your Bank Before Signing. Since the next step in our guide to leasing commercial real estate is to set up your financing, revise your budget to include new costs that surfaced during the lease negotiation process, such as your share of leasehold improvements, property taxes, insurance, utilities and maintenance, then let your banker review your budget so you know what type and how much financing you can count on going forward.
8. Finalize Your Financing. Small- and even medium-sized businesses often struggle to keep month-to-month cashflows flush. Don’t make the mistake of using your business’s working capital to pay for big-ticket lease costs.
Financing options are available to cover everything from moving expenses and leasehold improvements to equipment purchases and hiring staff. Consider increasing your line of credit so you’ll have added cash on hand.
Lastly, ask your landlord if they offer vendor financing. Building owners and landlords may offer it to seal the deal with a prospective tenant whose reputation they know will cause others to commit or whose business is especially solid.
9. Plan Your Move. Once you sign your lease, the clock starts ticking. You already planned your move-in date; now’s the time to prepare for the actual move.
Here are a few hints to keep you on schedule:
- Create a timeline that works back from your move-in date. When leasing commercial real estate, renovations have the biggest potential to throw you off schedule, so monitor them carefully. If you time it just right, you can stagger your move into your new place by allowing for a week or so of overlap, where you run part of your operations out of two spaces for an easier transition.
- Engage the services of an experienced moving company, who’ll examine your timeline, help you prioritize what to pack up and when, and provide secure containers you can label as you fill.
- Assign team leaders for each department or timeline task.
- Create business cards and other marketing materials with your new address and phone number, and determine your outdoor signage needs while being mindful of zoning restrictions regarding size, lighting, etc.
- Spec out the lead time required to purchase and deliver any new furniture or office equipment.
- Determine if you’ll need to build up product inventory so you can hit the ground running once you move in.
- Sell off any product inventory you don’t want to bring with you.
- Communicate your new location to vendors, suppliers, clients/or customers.
- Be mindful of heightened emotions as staff, vendors, suppliers and clients/or customers deal with the many disruptions a move causes. Give all stakeholders time to acclimate to your new location.
10. Celebrate a Lease Well-Done. Leasing commercial real estate is no picnic, even for companies practiced in the process. Celebrate your company’s new digs with all your stakeholders at a “grand opening” event.