Montreal’s next hot spots (1 of 3)

Posted on 8 February 2011 | No responses

One of the great thrills one gets from working in commercial real estate is the sense that you are helping to build something over the long-term. A single real estate transaction can sometimes create such value that it can help transform an entire area. Being at the forefront of tenant demand gives us the unique privilege of sensing what areas in Montreal are poised for resurgence.

Tenants with a keen eye have taken advantage of areas that have not yet peaked in terms of ‘coolness’ by locking in low before rents escalate to meet demand. In this three-part series we will highlight areas to watch out for in the coming years:

Griffintown

One of the most talked about areas in our city seems to finally be on its way to becoming a reality. Between Devimco’s District Griffin project, Prevel’s Lowney and Bassin projects, and the Gallery Sur Le Canal project, over 2000 residential units will be delivered in the area by 2012. However, the area does not currently have enough existing office inventory to meet the demand that exists and that which will follow.

Quartier Des Spectacles

The city’s favorite pet project has seen the light of day thanks to a $120 million government investment and residential developments such as the Louis Boheme, Lofts Des Arts and Le Concorde. The office vacancy in the area is already extremely low and so an office development on the vacant land at the corner of Bleury and Ste-Catherine would be a welcome feature to complete the neighborhood’s transformation.

Microsoft joins trend and opens Xbox Kinect ‘Pop-Store’ in Les Ailes

Posted on 28 October 2010 | No responses

In late August, Cushman & Wakefield was mandated by Microsoft to source high-traffic locations in Montreal, Toronto and Vancouver to open ‘pop-up shops’ to launch their new Xbox Kinect device-an interactive gaming console where the human body is the controller.

Pop-up retail is the growing trend of opening short-term sales space in high-traffic locations. Pop-up retail is specifically an idea or mindset that allows a company to create a unique environment that engages their customers, as well as generates a feeling of relevance and interactivity. It can also be for the duration of a peak in demand anticipated to be short. The trend involves “popping-up” one day, and disappearing the next. These stores, while small and temporary, can build up buzz by consumer exposure.

We presented solutions to Microsoft including high-street locations on Ste-Catherine as well as indoor locations in the downtown malls. The ultimate decision was a location next to Forever 21 at the busy metro level of Les Ailes de la Mode for a two-month period from October 1st to November 30th. Traffic has been very heavy and buzz for the console is through the roof.

How long ahead of my office lease expiry should I begin looking at my options?

Posted on 21 September 2010 | No responses

The answer to this question will be very different for large space users, smaller users and ‘high growth’ users. Larger organizations tend to occupy significant chunks of space and are locked into long-term leases, typically with 10-year periods. The larger the occupant, the more strategic the consideration and the more time is required ahead of lease expiry to begin planning. In a small market with low vacancy rates like Montreal, there are fewer options remaining for large tenants to consider in terms of relocation. It is possible that if their current building cannot handle their expansion, that they may need to have a new office building constructed on their behalf. Construction of a new office tower can take up to 3 years and therefore planning should begin at least a year before the 3 years to properly consider all options. If this same large company is simply planning to renew their lease, 24 months prior to expiry should allow the tenant enough time to study the market and negotiate fairly with their landlord, using the market as leverage.

Notwithstanding the above, one of our clients, a large accounting firm hired us to begin the process 3 years ahead of lease expiry to negotiate a renewal with their existing landlord as well as looking closely at new build opportunities. As the lead time began to evaporate, the existing landlord became less competitive as they felt their tenant would not have enough lead time to relocate. A deal was finally negotiated to relocate 2 years ahead of lease expiry taking advantage of today’s market softness and a particular building’s vacancy problem.

Smaller companies as well as ‘high-growth’ users can afford themselves slightly more time in their decision making as the supply of smaller spaces are in greater abundance. In fact, some may even be rewarded for their patience as they can capitalize on opportunities in the sublease market, which typically have shorter terms and come at great discounts to ‘rack rates’. The downside of waiting for that perfect sublet opportunity can result in the tenant feeling pushed into a corner by their landlord as time to expiry begins to wind down. In short, small companies and high-growth companies should begin to look at their situation about 18 months before expiry, and should have an idea of what they are looking to do a year before expiry but if they are really looking to stretch the timeline, they should afford themselves 1 month to find a space, 1 month to negotiate an offer and lease and 2 months for renovations (2 weeks for move-in if the space is built-out already) for a total of 4 months.

How tenants can benefit from an Option to Cancel in their lease

Posted on 31 August 2010 | No responses

Following our first blog on ‘How long a lease term should I be signing for’, some of our readers pointed out that an Option to Cancel can also be negotiated and built into the lease to increase the tenant’s flexibility. What the Option to Cancel does for the tenant is that it allows them to benefit from the full benefit of the tenant improvement allowance up front and also allows them to get out of the lease at a later date(s) should they acquire another company, be acquired by another company, grow out of the space, are having financial difficulties or any other reason that may cause them to terminate the lease early.

What should I do if my landlord insists on a personal guarantee?

Posted on 6 April 2010 | No responses

Anytime a landlord is investing money into your premises, whether undertaking a renovation or shelling out money for a TI allowance, they will insist on some sort of guarantee or security. This is true for firms large and small, though larger, publicly traded firms will walk away guaranteeing a smaller portion of the investment as their default risk is generally less than that of a small, private firm.

Medium to small firms do have a host of options they can resort to however. The thing to remember here is that you are selling your company’s financial viability to the landlord in order to give him a level of comfort that you will not pull a “midnight move” leaving him high and dry. One of the easiest ways to give him comfort is to sign with a corporation with a verifiable credit history instead of a shell company. Then show him the financial solvency of this corporation by showing the most recent financial statements and future purchase orders. At this point the landlord should feel comfortable with your company and may offer a less severe form of guarantee. If the landlord still insists on a guarantee, the tools for negotiating the security of the obligations at both parties disposal are the following: letters of credit (bank guarantees on behalf of the tenant), deposits, corporate and personal guarantees. The length of term and the amounts in which these should be used are context dependent.

At the end of the day, there are many possible creative combinations to ‘guarantee’ your lease and you are not limited to a personal guarantee, it is simply a matter of negotiating a situation whereby the landlord and tenant feel comfortable with their risk exposure and their trust in the other party.

What is a TI allowance?

Posted on 6 April 2010 | No responses

A tenant improvement allowance (TIA) or leasehold improvement allowance is essentially a renovation budget.

Many office buildings have a TI budget included in the rental rate they quote to prospective tenants. This is a key point of a negotiation as it could lead to a classic case of comparing apples to oranges. For example, Building A could be quoting a $20/sq. ft. rental rate with a $20 TI allowance, when Building B could be quoting $20/sq.ft. with no allowance. Even though both options are asking the same rental rate, Building A is clearly the better deal as it will cover a large part, if not all of the renovations you will have to undertake. If no work is needed the landlord can rebate the amount in free rent, reduce the rental rate by the amortized value of the TI, or simply write a cheque to the tenant in the amount of the allowance.

Instead of a TI allowance, landlords can also do the work themselves ie. “Paint and carpet” or build “turnkey” to the building’s standards. In these cases, legal documents need to be drafted with extremely precise language to avoid any confusion of who is responsible for what and to what quality.

Another thing to be aware of is that anytime a landlord is investing in your space they will demand some sort of guarantees for their investment (stay tuned for my next blog post for tips on guarantees).

How long a lease term should I be signing for?

Posted on 6 April 2010 | No responses

The answer to this question, as for so many others is, it depends on what your business needs are. Typically speaking, most strategic business plans for companies with stable growth have 5 year visions, missions and goals and therefore the most common lease term these companies sign for is 5 years. Companies with extremely strong balance sheets and a long track record of predictable growth will take advantage of favorable lease rates by locking in long term for 10 years. 15 year terms are less common but still present. Aside from lower net rental rates, locking in long term has another advantage-any leasehold improvement allowance (budget for renovations- see next post for more details) needed in the space is amortized over a longer horizon by the landlord and therefore have a smaller effect on short term cash flow.

For example, if Company X needs $100,000 worth of renovations in their space and they sign a 5 year term, $20,000 a year is amortized over the rent. If, however, they sign a 10 year term only $10,000 is amortized over the rent, thereby helping manage cashflow or allowing the tenant to undertake a higher quality renovation. High growth, volatile companies should be locking in for shorter 3 year terms with several options to renew or longer term leases with options to cancel at various points.

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