SMALL BUSINESS

Dianne Buckner

What's the deal with commercial real estate?

Last Updated: Tuesday, November 30, 2010 | 12:50 PM ET

By Dianne Buckner, CBC News

Patrick Hebert needs some space. His business is growing. Isn't that a good problem to have?

Not exactly.

"We're looking for retail space, but we're being very cautious," says Hebert of Barrie, Ont. "I'm amazed at just how much landlords are demanding."

Along with his brother and fiancée, Hebert runs cellcycle.ca, an on-line company that collects and refurbishes used cellphones for resale. And he figures it's time to expand his year-and-a-half-old, internet-based venture to an actual bricks-and-mortar location.

"Our volumes are up significantly, and we've been recognized by a couple of international websites as one of the only Canadian websites that pays cash for used cellphones," says Hebert, noting that having a physical presence would give cellcycle that much more credibility.

But when he discovered that a kiosk-style spot in Barrie's busiest mall would run him $18,000 he was taken aback. And that was just the cost for the three months leading up to Christmas!

"Considering how prices have softened up in the residential real estate market," Hebert laments, "I'm not sure why something similar hasn't happened with commercial real estate."

Avoiding the crush

And it's not just prices that business owners have to worry about. Looking for "a place to happen" — to quote the Tragically Hip — is one of the biggest decisions an entrepreneur will make. Location is hugely important, and it's a significant operating cost. I've heard more than a few stories over the years about entrepreneurs being crushed by the monthly payments on their space, perhaps counting on a balance sheet loaded with rosy sales figures that just didn't materialize.

Hebert also points out that many landlords want entrepreneurs to sign personal guarantees to back up their commitment to the property with their own finances. Plus, he has had experience getting dinged with unexpected additional costs.

"I had a space for a previous business," he says, "And when the furnace had to be replaced, the landlord wanted to put it into the cost of my rent!"

Sadly, he may as well be complaining about the

'Sublets are the best way to go. Furniture is often included, and you can save 30 to 50 cents on the dollar with your rent.'—Colin Ross, DTZ Barnicke

colour of the sky. Many of the factors that are so worrisome about commercial real estate are just the way it works — although I did speak to some people in the business who have some suggestions for entrepreneurs to try.

"Sublets are the best way to go," says Colin Ross of real estate brokerage DTZ Barnicke. "Furniture is often included, and you can save 30 to 50 cents on the dollar with your rent."

Sublets aren't the easiest things to find, though.

"Unfortunately, commercial real estate isn't great for on-line searches," says Ross.

But if you know that's what you want, a real estate agent should be able to help. Ross points out that right now the market is in a state of equilibrium. Neither tenants or landlords have the upper hand.

"A lot of people expected vacancy rates to shoot through the roof when the economy went down," he says. "That didn't happen."

Vacancy rates do vary across the country, and Ross says it is indeed common for landlords to want a personal guarantee.

"With startups especially they prefer to have it that way. But sometimes you can get around that by paying a little bit more up front."

Instead of just laying out first and last month's rent, a tenant who pays the first three months rent may get a landlord to relax their rules about guarantees.

As for holding tenants responsible for any leasehold improvements (the way Patrick Hebert was when his furnace broke down), Ross says that practice is also common. "But it should be amortized over a length of time so that it doesn't make the payments out of reach," he says, adding that it's wise to have a lawyer review any contract before signing.

Knowing the game

Ron Hoggarth knows both sides of the story. The former NHL referee (1971 to 1994) was an entrepreneur in the off-season, running his own pool business. In the early days he needed a warehouse; later he opened a retail store, at various points employing as many as 40 people. Nowadays he's a commercial real estate agent in Barrie.

Former NHL referee Ron Hoggarth officiated at games involving some of hockey's greats, including Wayne Gretzky. And maybe it's his referee's nature that gives him a balanced perspective.

"A lot of landlords are small business people themselves," he says. "And they need to maintain the value of their investments. They can't lower their rate for one tenant — there are no secrets in our world."

Hoggarth says word always gets out when there's any kind of a break on the rent, and then the person next door wants the same deal. "You're better to not rent a unit than to lower your rate."

He suggests that if an entrepreneur can afford it, buying could be the best bet.

"That's what I did," he says, "I bought a property and had our business pay the mortgage."

He points out that a lot of new Canadians use this strategy, sometimes purchasing a mixed-use property that has a residence upstairs that can be rented out. Banks love mortgages where there's a rental property as part of the financial picture.

Unfortunately, buying isn't an option at this point for Patrick Hebert's growing business. And despite all his legitimate concerns, I can't help but think that anyone who has done as much homework as he has will be OK. He has his own suggestions on how to catch a break.

"What I've found is you can counter-offer, you can negotiate on base rent and TMI," he says (and if you're thinking like I did, that TMI is ' too much information', please be advised it's actually 'taxes, maintenance and insurance'). "You can say how much you're willing to pay."

Good luck to him! Just remember Canada's landlords aren't quite as hungry as you might think.