If you are an entrepreneur operating your own business and require some type of public access for sales, storage, design, manufacturing, etc. then at some point you will be in need of an industrial, office, and / or retail space for your business. This article discusses what commercial lessees and purchasers should be aware of (and what questions to discuss with your Commercial REALTOR®) in order to make sure your next industrial, office, or retail purchase or lease is successful.
Below are 30 questions that I believe every commercial tenant or purchaser should discuss and obtain satisfactory answers in advance with their REALTOR® on a lease or purchase. If you are a property owner, these questions should be discussed with your REALTOR® from the landlord / Seller’s perspective when deciding the best strategy for leasing or selling:
(1). What are the location boundaries (i.e. how far North, East, South, and West would you want your business to be located for customer and staff commute distances) for your new space?
(2). How important is it for your business to be located in a visible, high-traffic, and easily accessible location and what premium would you attribute to each of these characteristics?
(3). If you are buying or leasing an empty space, how much will it cost to renovate and construct the space to the standards for your business? Expensive renovations can include adding washrooms, a kitchen, extra power supply and electrical lines, extra A/C or heating units, etc.
(4). What will your business be using the space for, and what is the allowable zoning for the space (i.e. for which other uses may be prohibited)? Taking the City of Edmonton as an example, different applicable zonings include but are not limited to the following: CNC – Neighborhood Commercial; CSC – Shopping Centre; CB1 – Low Intensity Business; CB2 – General Business; CO – Commercial Office; IB – Industrial Business; IM – Medium Industrial; IH – Heavy Industrial; IS – Special Industrial; and DC – Direct or Site Specific Development Control District or Provision. [For more details on zoning, please review my January 5, 2010 article: The Importance of Municipal Zoning for Investors].
(5). What minimum size of warehouse space, mezzanine space, size of reception area, number of offices, number of washrooms, size of storage yard, etc. does your business require and, if the current space is not suitable, are you financially and otherwise prepared and able to take out permits and carry forth construction to expand or renovate the space to suit your needs?
(6). What ceiling height and width clearances and load capacity (i.e. for goods stored on slabs, mezzanines, roof, etc.) does your business require?
(7). Does your business require single or multiple overhead door access, docks, ramps, cranes, and / or minimum truck turnaround radii, widths, heights, and capacities for loading?
(8). What power supply characteristics does your business require and if this is insufficient are you able to upgrade the power supply with limited restrictions?
(9). What levels of heating, ventilating, and air conditioning (HVAC) does your business require and if this is insufficient are you able to upgrade the HVAC systems with limited restrictions?
(10). Are you seeking a stand alone building (more rare and expensive) or can your business operate in a building connected to other businesses either as tenants or as part of a commercial condo?
(11). Is the level of parking provided sufficient for your business, both for staff and for customers inside and outside the building?
(12). If leasing, how will the building insurance, property taxes, and landscape / snow removal costs and arrangements be covered?
(13). If leasing, does the landlord have additional rules on the lease for maintenance including responsibility for light ballasts, glass, exterior, interior, HVAC systems, filters, plumbing, electrical, overhead doors, mandoors, janitorial, etc.?
(14). If leasing, what lease options and rights do you want to negotiate for lease renewal, future lease amount ranges, number of renewals allowed, and deadlines for renewals?
(15). If leasing, what leasehold improvements do you want to negotiate for the landlord to complete before possession?
(16). If leasing, does the landlord insist upon additional lease rules for usage (i.e. beyond zoning) such as prohibiting activities that void the landlord’s building insurance; are illegal; may cause physical or noise disruption to other tenants; etc.
(17). If leasing, what rules for responsibility on meeting fire protection regulations do you want to negotiate (i.e. provision of fire extinguishers, smoke detectors, heat detectors, fire alarm and light systems, fire protection barriers, emergency exits, FD keybox, security monitoring, etc.)?
(18). If leasing, what tenant leasehold improvement options do you want to negotiate?
(19). If leasing, what rules for changing locks and providing keys do you want to negotiate?
(20). If leasing, what rules for displaying all types of signage do you want to negotiate?
(21). If leasing, what rules does your business want to negotiate for sub-leasing unused space?
(22). If leasing, what specific lease rules does the landlord insist upon for damage deposit submission, monthly payment rules, and interest or other penalties for non-compliance?
(23). If leasing, what specific lease rules and penalties does the landlord insist upon for liens and / or other instruments that may be inadvertently added to title as a result of your business?
(24). If leasing, what lease rules does the landlord insist upon for removing garbage / refuse?
(25). If purchasing, is your business allowing for the applicable GST on top of the purchase price for commercial properties? [For rules on GST applicability and GST tax rules, Buyers are advised to speak with a chartered accountant and / or lawyer familiar with GST regulations].
(26). If purchasing or leasing, is your business allowing for the cost of a certified commercial property inspection that can often be well over $1000? Like residential properties, it is important to inspect commercial structures including roof; foundation; stairways; mezzanines; plumbing; electrical; HVAC (heating, ventilation, air conditioning); etc.
(27). If purchasing or leasing, does your business or your mortgage broker (for the purposes of financing) require any soil engineering tests; or Environmental Assessment Phase I or Phase II reports? Example situations of concern can include but are not limited to the following: buildings that were previously used for gas stations or chemical factories / storage; steep slopes; etc.
(28). If purchasing or leasing and are requiring a commercial mortgage as part of your financing, have you been pre-approved and is your business allowing for the cost to conduct a commercial appraisal (can be over $1000) that may or may not be included as part of your mortgage?
(29). If purchasing or leasing, does the current space allow adequate room for expansion or is there a good chance you will need to upgrade your space in a few months or years as your business gets larger?
(30). If purchasing or leasing, ask your Commercial REALTOR® to show past sales and leasing of similar properties, if available. Note for industrial, office, and retail space, the turnover and volume is not typically as high as for residential properties and many commercial properties are very unique. As a result similar past sales and leases within the last few months are sometimes not available and commercial markets can vary widely from month to month and year to year. In hotter markets, the smaller supply limits the purchaser or lessee’s negotiating leverage even if the asking price or rent is considerably higher than recent past comparable sales or leases so it can often be the case of locating the right property before evaluating its overall financial viability without placing too much emphasis on ’past options’.
If you are attempting to decide whether or not to lease or purchase, there are a few options. One option is negotiation of a ’lease to purchase agreement’ that gives the tenant the right to lease the property to start with the option to buy out the building for a fixed price at a future date. These types of arrangements are rare since many building owners would not want to undertake this type of risk with market uncertainty unless there is a clear advatange for them.
The most common scenario is either a straight purchase or a straight lease. With a straight purchase, it requires equity cash up front however your monthly payments are going towards the mortgage payments and whenever you are finished with the building you maintain the advantage of possibly selling it for a profit.
With leasing, limited cash is required up front however your monthly payments are going to the landlord and when you are finished with the building you cannot recoup any money paid out for rents. As a result of the advantages, in general many established businesses tend to favour purchasing over leasing, particularly if both options are similar.
Purchasing can also include buying properly-zoned land before taking out building and development permits, and contacting a reputable architectural / engineering firm and general contractor to undertake design and construction of a new building. This approach provides the advantages of having a brand new building and one that may exactly suit your company’s needs. The disadvantages of this approach include having to finance design and construction without enjoying the use of the building until construction is complete, which can takes many months or years depending upon the size of building and complexity and severity of construction issues that must be overcome. Buying land to build would not be suitable for someone who (a). Requires use of the building right away; (b). Is unable to finance prolonged deisgn and construction; and / or (c). Is not experienced in the design and construction process although the 'inexperience’ factor can be overcome with hiring a team of engineering and construction management professionals.
In summary, industrial, office, and retail purchasing or leasing the right property is a big step towards the success of one’s business. By working with your REALTOR® to view and evaluate opportunities that match your requirements and by carefully negotiating the purchase or lease agreement to best suit your company’s goals (combined with review and advice by a reputable lawyer specializing in the field), it will best minimize the risk of unforeseen negative surprises and help maximize your ‘overall business and client happiness’ with your new location for years to come.
[Article written and ©2010 by Kelly Grant, M.Eng., ABR, NCSO, P.Eng. - REALTOR® at Maxwell Devonshire Realty in Edmonton, AB]
Disclaimer: for those readers not currently represented by another licensed REALTOR®, to obtain more information on this topic and / or if you are serious about selling or buying in the Greater Edmonton Area, call Kelly at 780-414-6100 (pager) or send Kelly an email to SOLD@KellyGrant.ca to schedule a confidential appointment.