Premise Lease Negotiations

Tenant to Landlord Transition – A Case Study

By

Ian D. Toms

on

February 28, 2019

February 28, 2019

Many tenants, especially those faced with challenges including high rent, a demolition clause or no options to renew, wish they had relocated into premises that they own. We say that the “grass is always greener”; just how green is that grass in terms of economics, administrative time and long-term investment opportunity?

This article presents an actual case study where an orthodontic clinic relocated from leased space into owner occupied space in Kanata, Ontario.

The Original Premises

An orthodontic clinic was built in 2000 in leased premises in a professional office building constructed in the mid-1980s in Kanata, Ontario. The 3115 sq.ft. practice was built to the standard of that time and was located on the second floor, with access by stairs or elevator.  The base rent was modest but was calculated on an inflated premises area measurement, and additional rent was significant including allocated costs and an administration fee.  Free, but sparse, parking was available. The building was not available to patients outside standard office hours. The signage was limited to standard podium style signage.

The practice was purchased, lease assumed, renewed and amended. Then, the clinic was extensively renovated in 2009.The decision was made in 2014 to relocate the practice, despite expenses associated with land purchase, building construction and relocation including new leasehold improvements due in part to frustration with high rent, impaired parking, lack of signage, building hours, long-term stability and a potential investment opportunity,

Transition

In 2016, a parcel of 1.75 acres (77,000 sq. ft.) of vacant development land was purchased on the same street in Kanata, approximately 3 km by road from the existing location. This area was chosen because of the proximity to the original location to minimize patient attrition associated with the move, and also to take advantage of the rapidly-growing and affluent potential patient demographic both immediately around the clinic and in the surrounding areas. Development plans for a 10,500 sq.ft building, parking and landscaping were drawn and development permits obtained. A business plan was developed to inventory, quantify and manage the original land acquisition and construction costs to ensure that the fair market rent collected from the tenancies would provide an acceptable return on investment. A standard lease was developed for use by all tenants in the building. The building was constructed and completed in July of 2017. The landlord leased approximately 6,000 sq. ft. in the new building to his professional corporation as tenant. The tenant prepared plans and obtained permits for the new clinic which was constructed and opened in February 2018. Approximately 2,000 sq. ft. was leased to a periodontal practice in March of 2018. Approximately 2,500 remains available for lease, ideally for a pediatric dentist, oral surgeon, or anesthesiologist.

The property is large enough for a total of 20,000 sq. ft. of office space. The decision was made to build the space in two phases. The total cost of the project is justified by the fair market rent paid by the tenants.

There are advantages to being the landlord including tax and debt principle repayment. In short, part of the rent payment becomes equity over time. Being an owner occupier provides an opportunity to be immediately aware of the condition of the property and manage day-to-day affairs such as snow removal and landscape maintenance. However, disadvantages of being the landlord include managing tenants, operating costs, and knowing that in 40 years, the style of building will no longer be current.

The New Premises

The new building and premises present a new modern look and feel. The building is designed to current high efficiency standards effectively reducing operating costs and therefore, rental costs. More than one oral healthcare discipline practicing in the same building offers practitioners visibility to potential patients without an actual business relationship.

The convenient location with immediate access to the 417 (Queensway) and close to the junction of the Queensway and Hwy No. 7 provides access to a large and growing primary potential patient population within a 5-minute drive. The population is highly educated with an average age of 41 years, a median household income of $108,032 and a very high employment rate. The annual spending on dental services is $543.51 per household. The current total population of 13,963 includes 3,544 people less than 20 years old. The population is projected to continue to grow at 19.67% per year over the next 10 years.

The potential secondary patient population resides within a 15-minute drive of the property and consists of 259,493 highly educated residents including 61,713 people less than 20 years old. The median family income is $111,741 and the annual spending on dental services is $502.32 per household. The total population is projected to grow annually by 5% over the next 10 years.

Future Plans

The first priority is to lease the remaining 2,500 sq. ft. to a tenant that is acceptable to the owner/landlord. The space is bright, with large windows, and ready for occupancy as of the date of this publication.

The second phase of the project will include construction and tenanting of a separate two-story building, with 5,000 sq. ft. per floor and additional parking to suit the future tenants.  The landlord is currently considering proposals from “build to suit” prospective tenants.


Ian D. Toms, B.Sc. (Hons) is President and Broker of Record, Realty Lease Consultants Inc. He has more than 30 years of lease negotiation experience, has been a multi-unit tenant and is a landlord. He can be reached at 877.216.1013 or at iantoms@realtyleaseconsultant.com