A Life on Lease

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By Shannon Moneo

Had enough of working for someone else? Outgrown the home office? Do lip-smacking friends demand you open a bakery? Suddenly the priority is finding commercial or office space for what will become, in effect, a second home.

For a fledgling business, securing that make-or-break location and then sealing it with a lease shouldn’t be entered into lightly.

“Leasing is a real integral part of a business plan,” says successful Victoria clothier Philip Nyren. So many people launch their business by writing notes on a napkin or envelope. Someone without a strong business plan and a secure lease is doomed to fail, he says, even if the entrepreneur is really good at front-end service or is a snappy dresser. Nyren rented a high-traffic spot downtown for 16 years, and his business flourished and didn’t become one of those grim statistics that predict only 20 out of 100 new enterprises will survive the first five years.

“The key is to negotiate a good lease to begin with,” says Nyren, who understood the ins and outs of the agreement.

“Don’t have a 10-year lease. If at the end of five years, if you’re closing, you have to buy your way out or sublet.” Nyren’s key recommendation? Get advice from successful businesspeople, accountants, lawyers, and realtors. “You need to talk to someone who’s been through it.”

A lease can be a 35-page document full of unfamiliar terms and binding commitments. A five-year lease at $3,000 per month costs out at $180,000 over the full term. It’s worth spending $300 to have a lawyer fine-comb the lease, says Rick Pettinger, managing broker at DTZ Barnicke.

At Colliers International’s Vancouver Island office, managing director Andrew Turner says, when leasing, to heed the mantra of location, location, location. “Businesses will fail if not in the right location,” he advises. Generally, locale depends on what’s being sold. A widget dealer doesn’t need to be on Government Street, but someone peddling tourist trinkets certainly does.

As for office space, there isn’t a big distinction between downtown and the suburbs, says the 25-year real estate veteran. But it is important to ensure the correct zoning is in place for their type of business. Before a tenant can hang out a sign, they need a business licence, and if the zoning doesn’t allow their type of business, there’s no licence to start up.

Other details include whether the proprietor will commute to the business premises. If they live in the West Shore, opening a business in Oak Bay isn’t the wisest move. Is public transit readily accessible for staff and for customers? Is there enough parking? Staff parking costs can range from about $50 per month in suburban areas up to $300 per stall per month in the newest Class A downtown buildings, says Amanda Crowder, a leasing specialist with DTZ Barnicke. It may be a part of your monthly lease that you might not know about unless you ask.

The ABCs

Looking for office space, you’ll quickly learn your ABCs. Buildings are rated according to quality. Turner says, “most landlords think their buildings are Class A,” and use that rating as a way to negotiate higher rents. There are fewer than 10 Class A buildings downtown — the best in town, well-maintained with modern amenities — and they command the highest rents. These include St. Andrew’s Square (home to numerous investment firms) or the Atrium now under construction, where B.C. Ferry Services Inc. will locate its head office later this year.
Offices in such top-rated buildings can cost $30 per square foot. For Class B and C buildings, it drops $5 to $10 per square foot. That’s an annual rent, so a tenant paying $25 a foot for 1,000 square feet will pay $25,000 a year, or $2,083 monthly.

Most government offices are found in B buildings, adds Turner. They’re a few notches below Class A, perhaps a bit older. A good example is the Richard Blanshard building on Blanshard Street that houses the Ministry of Health.
Class C buildings are older yet, often lacking air-conditioning or elevators — usually not more than four storeys tall — and sometimes located in less desirable areas. The century-old Dean’s Block at 777 Fort Street, which does have an elevator, would be C premises.

For office rents, there isn’t a big distinction between downtown or suburban locations, Turner says. It has a lot to do with the building itself. Class B space in Broadmead’s office park along Chatterton Way may cost just as much as a downtown B building.

Spelling Out Costs

Tenants must ensure their per-foot costs are clearly spelled out. A base rent could be $18 per square foot. But operating costs can add $6 to $10 per square foot for taxes or maintenance, making the lease what’s known as a “triple net.” The bottom line question for any tenant is, what will it cost per month? Crowder says.

Tied to cost is the size of the space itself. For an office, allow at least 200 square feet per person. Sometimes improvements are necessary, maybe a wall has to be knocked out or walls painted. “It’s very rare for a tenant to find space that’s perfect,” she says.

But before redecorating, it’s crucial that the tenant finds out who’s paying for improvements. Most often, the tenant pays, but if a landlord is eager to rent, costs may be shared or even fully paid by the landlord.
Another factor in the lease’s total cost is whether the premises have common areas used by all tenants, such as lobbies or stairwells. In a 20,000-square-foot office building, the tenant in a 2,000-square-foot office pays one-tenth of the expenses for the common area, such as the costs to heat and light the space. In old buildings, such costs can be a problem, says Pettinger, citing stories about tenants getting a whopping winter bill for common area costs.

Some companies with many stores across Canada (most often in malls) have dedicated staff who audit what is paid for common areas, an indicator of the role it plays on the bottom line, says Bruce Richmond, associate broker at DTZ Barnicke, specializing in mall leasing.

Mall Space

Malls are creatures unto themselves, says Richmond. There’s a reason big chain stores dominate — they have clout, he adds. Mall owners like dealing with a company that can fill 20 or 30 stores. Prohibitive rental costs sometimes deter small independents. A Colliers 2008 report pegged total occupancy costs at regional malls like the Hillside at almost $70 per square foot. A community mall like Shelbourne Plaza runs about $40 and farther out, the West Shore Town Centre may charge about $30 per square foot. Strip malls collect about $26 per square foot. By comparison, on Government Street, which commands the highest rents for stores locally, retailers pay up to $75 per square foot. It’s high but reflects the pedestrian traffic counts.

At Mayfair shopping centre, with 122 businesses, chains reign. Brokers for the stores deal directly with the landlord (Ivanhoe Cambridge) at the Montreal head office, says Mayfair manager Lorna Park. Much research goes into which businesses suit a mall’s personality. Mayfair is strong in fashions, and many of the retailers are looking for female teens, she says. Still, Mayfair offers “specialty leasing” that allows retailers with carts or kiosks to sell trendy, impulse-buy products that aren’t available at Mayfair’s permanent stores. Rates for these small spots range from $600 per week during the quiet post-Christmas season to $1,600 per week in the busy holiday time. Specialty leasing has been an incubator for businesses that can turn into permanent mall retailers, Park says.

Down the road from Mayfair, the impending arrival of Uptown’s first phase of commercial and office space this spring will ripple through Greater Victoria. The 112,000 square feet of office space are expected to rent for about $42 per square foot, while the h
alf million square feet of retail will likely be higher.

Colliers predicts the flood of retail space will bring Victoria’s shopping centre vacancy rate up to about three per cent this year. The office vacancy rate will also rise to over five per cent in 2010. Roughly 60 per cent of office space is rented by government, typical for a provincial capital. But big demand doesn’t translate into better deals because office space is subject to commodity-type pricing, Turner says.

Sidney’s business community is already feeling the fallout from major malls. Since the end of last summer, many “for lease” signs hang at retail spaces in Sidney’s downtown, says Elaine Hughesman, a chartered accountant and member of the Saanich Peninsula Chamber of Commerce. “People are shopping less locally. They’re going to big box stores,” she says, a result of tighter budgets and deal seeking.

Yet with more supply, rental prices don’t drop, as Meredith Maddern discovered. In January, she closed her Calling All Cards shop because rent had jumped significantly over 13 years. With her went five jobs at the Shelbourne Plaza. Before Maddern opened her card store in 1996, she did a full renovation at her own expense of the 900-square-foot premises. Things looked promising when she signed her first five-year lease, then a second for five years, and in 2006, a three-year lease.

But by then, profits were thinner. When the lease expired in July 2009, Maddern wanted a month-by-month agreement. By September, landlord Morguard Investments, the company behind Uptown, said no.
Now, a pizza place is going into her premises. “I couldn’t afford to hire a big, high-paid lawyer to negotiate a lease,” says Maddern, whose future plans are uncertain. Known as “Blondie” to loyal customers, she’ll miss them, and they’ll miss her unique items not found in big box stores.

Lease Terms and Subletting

As Maddern knows, the term of a lease is crucial. Landlords try to fix their mortgage payments to five or 10-year terms, Turner says. Leases rarely go below three years, and many are for 10. “It provides certainty for the landlord,” Crowder adds. If things go bad and a tenant can’t make the payments for the remainder of their lease, they can sublet, which happens often, Turner says.

In January, Artemis PR and Design moved from a Fort Street character house into its new sublet Fan Tan Alley office. Artemis president Maggie Kerr-Southin says it’s been a dream since the company started 15 years ago to
work in a big open space where creative juices will swirl.

After Artemis’s lease expired in 2008, a month-to-month lease was negotiated. Rent was about $3,000 per month for the 1,800 square feet of what Kerr-Southin says was an ineffective use of space. In early 2009, Kerr-Southin and Artemis CEO Kerry Slavens began looking for a new location, using several leasing agents. When they saw something they liked, the price was outrageous, up to $40 per square foot. Or else premises were “icky, old, and bedraggled.”
“The agents weren’t hitting the targets,” she says. To escape their month-to-month limbo, the women applied their creative forces. A day after logging onto Craigslist, Slavens found the third-floor space, formerly occupied by an interior designer who consolidated his business on the second floor. Artemis is paying less rent for a better space.
As discovered in these rapidly changing times, the online world is usurping traditional business practices. “Agents should get with the times,” Kerr-Southin says. Excited about 2010 in Artemis’s new brick-walled, high-ceiling idea incubator, her leasing advice is succinct:

“You gotta put your dreams out there.”

 


 

When buying makes business sense

In Greater Victoria, about 10 per cent of commercial and office space is owned by the business, in most cases restaurants. The remaining 90 per cent is leased, similar to other Canadian cities, according to Rick Pettinger, managing broker at DTZ Barnicke. Still, ownership figures in business plans.

“When the 10-year lease is up, you give the key to the landlord and walk away with nothing. You’ve spent $20,000 a year and you’re not gaining any equity at all,” Pettinger says. But the hunt for space to buy is tough. 

“It’s hard to find at the right location with the right zoning at the right price. In Sidney, for example, you have to be on Main Street [Beacon Avenue],” says Pettinger, one of Victoria’s leading commercial realtors for the last 25 years.

He recalls a 3,500-square-foot building on Quadra Street with a $600,000 price. When the buyer has to cough up the recommended 25 per cent down payment of $150,000, ownership lust cools down. “But five to six per cent interest rates are advantageous. Your mortgage might be equal to lease payments,” he says.

The owner of Philip Nyren Menswear and Womenswear recommends buying premises as soon as you can afford it. “I’m very happy to have bought,” says Philip Nyren. “It allows so much flexibility.”

In 1979, Nyren began working for the high-quality Victoria clothing store, British Importers. One decade later, as storeowner, he signed a 20-year lease with one of Canada’s largest commercial landlords, Cadillac Fairview, for the 4,100-square-foot British Importers store at what was then Eaton Centre.

Before signing, Nyren did his homework and got professional advice. Even with a savvy lease with the big boys, he paid several hundred thousand dollars a year in rent for the choice Government Street location. Business was good and by 2005 — 16 years into his lease — Nyren had enough capital to buy two buildings at 960 Yates Street. Because he was paying less than the market price, thanks to the shrewd lease negotiated years before, Nyren could convince Cadillac Fairview to let him out four years early. It was a strong argument: the national landlord would earn higher rent from a new tenant.

“For landlords, it’s all about the arithmetic,” Nyren says. In 2005, he moved his business from Government to Yates, initially into one building. In time, the store used some of the second building and now all 12,500 square feet are used for retail.

But not every business generates enough profit to buy premises. Some prefer to rent and not have the hassles of owning a building. And owned premises can eventually become too small. One consolation is that if the business fails, chances are that the building is worth more than was originally paid due to inflation, Pettinger says.

Then there are strata properties, most common among medical professionals. “Stratas aren’t for everybody. Retail is one example,” he says. One building may have 20 stratas, each one owned by individuals and run similar to residential stratas. Several strata-owned buildings are near the Royal Jubilee Hospital and at Bear Mountain. Purchase price for a strata property in Greater Victoria is from $250 to $400 per square foot putting the price for a typical 1,000-square-foot doctor’s office at least $250,000. Strata fees pay for utilities.

One concept gaining ground in downtown Victoria is the live/work property. Zoning allows a business on the ground floor and often the retailer chooses to live above their moneymaker, not so far removed from the mom and pop general store.