What s Typical? Term, generally any length Breaks Renewal Rent Gross Free rent Escalation Security Fit-out Landlord often contributes or builds Tenant broker Landlord pays Right to sublet Common Transparency High CBRE Offices Calgary +1 403 263 4444 Edmonton +1 780 424 5475 Halifax +1 902 492 2090 London +1 519 673 6444 Montréal +1 514 849 6000 Moncton +1 506 386 3783 Ottawa +1 613 782 2266 Saint John +1 506 648 3422 St. John s +1 709 754 1454 Toronto Downtown +1 416 362 2244 Toronto North +1 416 494 0600 Toronto West +1 416 674 7900 Vancouver +1 604 662 3000 Waterloo Region +1 519 744 4900 Windsor +1 519 252 4095 Winnipeg +1 204 943 5700 For More Information About CBRE www.cbre.ca/ About CBRE Research http://www.cbre.ca/en/research/ For Local Market Reports http://gkc3.cbre.com/search/search.aspx Contact Roelof Van Dijk Research Manager, + 416 847 3241 Roelof.VanDijk@cbre.com Page 1 of 5
LEASE LENGTH Term The lease term is negotiable and can be for any length. A term of 5 10 years is most common. Large tenants often negotiate terms of 10 15 years with specific rights for renewals, for expansion, and for input on specific operating issues. Termination or Break No right to terminate (break) or extend exists unless included in the lease. Termination options are not typical. When included they often provide for a penalty payment or termination payment if exercised. Renewal An option to extend usually includes a provision for determining fair market value, which may be subject to arbitration in the event of a disagreement. SPACE MEASUREMENT Definitions While is officially a metric country, office space is measured in square feet, except for government leases. 1 square foot = 0.09232 square meters; 1 square meter = 10.763104 square feet. Rentable Area: Landlords usually quote rentable square feet, with washrooms and other common areas allocated to each space leased, so that the rentable square footage exceeds the usable square feet. Most landlords measure usable area using the BOMA (Building Owners and Managers Association) Method. Carpetable Area: Space planners normally measure the net usable area, sometimes called carpetable area, which is the floor area of space occupied exclusively by the tenant. It excludes primary circulation (space between elevators and tenant space) and excludes space occupied by washrooms, exterior walls, and convectors. Gross-Up Factor: In, the term gross-up factor has the same meaning as loss factor in the U.S. Gross-up factor = (Rentable area usable area) / Rentable area. Efficiency Gross-up factors vary from location to location. In Toronto: The gross up factor depends on which BOMA standard the landlord uses. Older buildings generally use BOMA 1980. New ones use BOMA 1996. The gross-up factor can vary from a low of 5% for a full floor tenant under BOMA 1980 to as high as 20% for a multi-tenant floor under BOMA 1996. In Vancouver: 12 18% is typical. In Calgary: 12 20% is typical. In Toronto: 11% is typical. In Montreal: 13% is typical. Page 2 of 5
OCCUPANCY COSTS Rent Rent Quoted: Landlords quote Base Rent in Canadian dollars (CAD) per rentable square foot per year. Net Rent: In most Canadian cities, rent is expressed as net, not gross, rent. Net rent excludes operating costs, real estate taxes, building insurance and utilities. Rent Payable: The tenant normally pays rent monthly in advance. Rent Increases: Leases may include negotiated increases over the lease term or may be indexed annually. Free rent and other incentives: Incentives are negotiable, and may include one or more of: free rent, tenant improvements, move allowance, takeover of rent at previous building, and/or furniture allowance. Operating Expenses The landlord estimates operating expenses at the start of each year. The tenant pays operating costs monthly, along with the rent, based upon these estimates. The landlord reconciles actual costs at year-end, then charges or credits the tenant based on final totals. The landlord typically amortizes capital improvements using generally accepted accounting practices. The tenant may have the right to review the landlord s summary statements and supporting documents. Gross occupancy cost = rent + operating costs + taxes + hydro. The term hydro means electricity used in the tenant s premises. The term gross rent is rarely used in. When used, it has the same meaning as gross occupancy cost, but unlike in the U.S., it includes the cost of electricity. Taxes Property Taxes: The tenant typically pays a proportionate share of property taxes. If the assessed taxes are not final at the start of a lease year, the tenant pays them based upon the landlord s estimates, and the account is reconciled at year-end. Goods & Services Tax (GST): This is equivalent to VAT in other countries, and applies to all rental amounts and operating costs, and is payable to the landlord. GST is 5%, effective January 2008. Provincial Sales Tax (PST): Some provinces charge PST additionally. Harmonized Sales Tax (HST): A few provinces combine GST and PST into an HST. Utilities The tenant pays for electricity (known as hydro) and all other utilities to operate the premises. The landlord uses one of three methods to calculate the electricity charge: (1) Proportionate share: the landlord charges for electricity per rentable square foot. (2) Direct meter: the tenant pays the utility company directly, based on an electric meter. (3) Submeter: the landlord buys the electricity from the utility company. The tenant pays the landlord, without a mark-up, based on the landlord s meter. Some landlords provide suite/floor specific metering. Tenant Improvements Landlord Work: The landlord normally pays for base building improvements such as suspended ceilings, ceiling lighting, HVAC distribution, sprinklers, and common washrooms. Tenant Improvements: The tenant pays for its own improvements including hard costs (construction) and soft costs (architect, engineers) for the tenant work. For small installations, the landlord usually handles the design and construction. For space not in move-in condition, the landlord normally provides an allowance. For larger installations, the tenant normally hires an architect or designer and a contractor. Landlords require pre-approval of the contractor and may direct the tenant to select from a short list of approved contractors. Landlords typically charge for the review of the design documents and require some supervisory rights over the improvement work. Tenant Improvement Costs: Costs in CAD per square foot for Class A or Prime buildings are as follows: In Toronto, Montreal, Ottawa, Halifax, and Winnipeg: tenant construction: CAD 45 100; furniture: CAD 30 60, IT wiring: CAD 4 10, design and engineering: CAD 4 12. In Calgary, Edmonton, and Vancouver: tenant construction: CAD 60 80; furniture CAD 30 60; IT wiring: CAD 3 20; design and engineering: CAD 7 12. Page 3 of 5
Restoration Tenants often negotiate the restoration obligations. Specialized leasehold installations generally have specific restoration obligations. Security Deposits and Guarantees Typically, a security deposit can be either cash or a letter of credit. A tenant with a strong credit rating may provide the equivalent of 0 2 months rent as security. A start-up company may have to provide 3 6 months rent. When security is a cash deposit, either the landlord or the tenant receives the interest on it, as negotiated. TRANSACTION COSTS Brokerage Commissions The landlord or sublandlord pays the commission to the broker who represents the tenant, and pays a listing fee to the broker who represents the landlord or sublandlord. In most Canadian cities, the landlord pays the tenant s broker a commission calculated as a flat fee per square foot per year at a rate determined by industry standard, which varies by city. Sometimes the commission is calculated as a percentage of the rental amount over the term of the lease. Commissions to the tenant s broker in larger cities range between CAD 0.60 1.25 per square foot per annum. Legal Fees The landlord pays its lawyer(s) to prepare the lease. Each party pays its lawyer(s) to negotiate the legal terms in the lease. OTHER LEASE PROVISIONS Laws and Practices The Real Estate Business Brokers Act, with provincial governing councils and local real estate boards, regulates the real estate industry. Tenant representation is well developed in. Tenants typically engage a broker for real estate transactions, including major renewals. Landlords utilize in-house staff or engage brokers to represent them. Large brokerage firms often have separate teams representing the tenant and the landlord. Negotiating The tenant engages a broker who negotiates the business terms with the landlord, and summarizes the terms in an Offer to Lease or a Proposal Letter. If both parties execute the offer, it is legally binding, unless the offer states that it is conditional upon subsequent negotiation of a lease and additional due diligence criteria. Following an unconditional acceptance of an offer to lease, the tenant delivers a security deposit (usually equivalent to two months rent), which may be applied to first rent due or the first month s rent, and the balance is held as a security deposit for the term of the lease. If the parties do not execute the lease, the security deposit is normally returned to the tenant, as most agents would provide for this. When the offer is complete, the landlord s real estate lawyer prepares the lease, although in some markets, a large corporate tenant may provide the lease. The tenant s real estate lawyer and the broker review and negotiate the lease terms with the landlord. When both sides have agreed on all terms, the landlord s lawyer prepares execution copies for signature. Standard Lease In (except Quebec), standard tort and contract laws apply. Each landlord has its own standard lease. In Montreal there are specific Articles in the Quebec Civil Code relating to real estate, starting at article 18.51. There are no standard offers to lease, but landlords normally use their own leases, leaving the tenant to negotiate variances. Page 4 of 5
Right to Sublet Subletting (subleasing) is the most common way to dispose of unneeded space. Typically, the landlord agrees and sets forth in the lease agreement not to withhold or delay consent unreasonably. The landlord may retain some or all of the following rights: to approve the subtenant, to recapture the space, to impose conditions such as limiting the number of subtenants, exclude certain business uses, and impose financial and operational restrictions. Option to Expand & Right of First Refusal These are negotiable especially for large tenants with long-term leases. A right of first refusal gives the tenant the right to secure additional space that becomes available during the term of the lease. Late Delivery by Landlord Penalties are negotiable. In Montreal, a typical penalty is one month of free rent for each day the landlord is overdue. Holdover by Tenant. Signage and Naming of Building Exterior signage may be negotiable. Naming the building may be negotiable, especially for large long-term tenants. OFFICE LEASING MARKET Transparency Lease and sales transaction data and other market information are available to tenants through leading brokerage firms like CBRE. Professional real estate providers generally know the deal terms and landlord concessions of recent completed deals, and are willing to share this information with clients they represent. Building Classification Class A: High-quality buildings with high-quality finishes, state-of-the-art systems, and excellent accessibility. The very best buildings are sometimes called premier, Class AA or AAA, or trophy buildings. Class B: Average quality buildings with average rents. Building finishes are fair to good. Systems are adequate. Class C: Buildings of below-average quality and below-average rents. PURCHASE AND SALES Agency Fees In investment deals, the vendor will usually enter into a listing agreement with a broker, who will act as the advisor to both the vendor and the buyer. In the listing agreement, the vendor agrees to pay the listing brokerage a percentage of the sale price of the property or a negotiated amount. Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. Page 5 of 5