David Anderson loved his furniture and textile shop in Toronto's trendy Liberty Village neighbourhood – the concrete floors, the 16-foot ceilings, the fabulous windows. But as soon as his lease was up in 2011, he relocated his store, Haveli Home, to the Junction area.
"For many landlords, they are not concerned about the person on the other end," Mr. Anderson said. "The minute you don't pay your rent, within a week they send a registered notice. Not a phone call – a registered letter saying that they will take back possession in 10 days."
"No one really understands what it takes to run a small business. I work six, seven days a week and have a passion for my business, but it's these silent partners who take the life out of you."
Business owners who don't own their properties are at the mercy of landlords, particularly in trendy neighbourhoods. So should business owners aspire to buy property? And how can tenants be successful?
Most independent businesses simply can't afford to purchase their space, said Mary Mowbray, senior vice-president for the retail group at Colliers International.
"The biggest drawback to owning is the amount of capital required up front – then that capital can't be put into your business," Ms. Mowbray said. "If you need to upgrade equipment or do marketing, you may have had the funds available but they are tied up in the building."
Buying a building can provide a way to build real estate equity. Doing so also means you are not at the mercy of rent increases as the market changes, she said.
Business owners must understand how a neighbourhood is changing and how the landlord operates, Ms. Mowbray said.
"Falling in love with a place is a dangerous way to secure a location. Make sure you understand your lease and the market. It is hard to have a lot of leverage when negotiating in up-and-coming areas, but you can save a lot of heartache if you understand up front.
"The best thing a small business owner can do is to be educated and informed."
Thierry Meret owned the building that housed his restaurant, La Petite Table, in Okotoks, Alta., for 11 years. He also bought the neighbouring empty lot and doubled the restaurant's size.
But owning business property can take a toll.
"With owning, you have an asset. But with the time and effort you put into it, I am not sure it is worth it," Mr. Meret said. "I was running the restaurant and working in the kitchen. I was also shovelling snow and cleaning the gutters. It helps financially, but it takes a toll on your life.
"It's a tough choice. You either pay rent or you pay with your time."
Mr. Meret sold that business, and now he and his partner, Marnie Fudge, own Cuisine et Chateau, in Calgary's Kensington neighbourhood, which provides cooking classes and culinary tours to France. They do not own this property. "We go home and someone else is taking care of the building. You can close the door and go away."
But Mr. Meret does lament the lack of control. "You can't just expand or invest in the building. The landlord can double the rent overnight. I have heard this happen to people who had well-run businesses for 20 years."
To be successful in a lease, Mr. Anderson of Haveli Home recommends going in with a business plan and knowing all of your costs.
"Pick an area that is conducive to your product and then look at the numbers in relation to what they are asking [in rent]. If it doesn't work, you are in for five years of pain," he said.
In his new location, Mr. Anderson says his landlord cares about the building and they work together to maintain it.
"You really have to make sure you have open communication with your landlord," he said. "You need a good working relationship."
Business owners should keep these tips in mind, says Randal Blackwood, vice-president, financing and consulting for the Business Development Bank of Canada:
If you buy
- Get outside advice: Speak to a financial adviser. Talk to your insurance company about liability and insurance. “You are also liable for the environmental impact of your property,” Mr. Blackwood said. “If it was a former dry cleaner and is now leaking chemicals into a wild owl habitat, you will be liable. So get an environmental assessment.”
- Keep in mind total costs, both now and later: Consider lawyer and real estate fees. Remember property taxes, repairs and maintenance. Be prepared with contingency plans for difficult times.
If you lease
- Call in the experts: Have a lawyer review the agreement. A financial adviser or accountant can help you understand what you can afford. Speak to a real estate agent about the area.
- Make the contract work for you: “Keep in mind your goals. If you want to be nimble, you might want a shorter-term lease. If you are looking to lock down a location, you may want a longer term,” Mr. Blackwood said.
- Know your renewal options: If you have the chance to buy elsewhere, can you sublet? Do you have assignment rights if you sell your business? Do you have an opportunity to break your lease under certain circumstances?
- Remember all costs: Keep in mind leasehold improvements, taxes, maintenance and insurance. When it comes to repairs and improvements, what are you responsible for compared with the landlord?