Real Estate For Business Owners with Riccardo Di Donato | E043
What to know when leasing and buying real estate.
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, and writer, interviews Rick Di Donato, the Director of Development for Red Berry Restaurants, a massive multi-brand restaurant franchisee located in Canada!
Episode Highlights:
1:02 – Rick Di Donato introduces himself and Red Berry Restaurants.
2:36 – What are the things business owners need to look out for when negotiating their first lease?
4:32 – How is commercial leasing different than leasing an apartment or home?
6:49 – Rick discusses the most ridiculous clauses that he has seen on contracts from landlords.
11:00 – How should leasehold improvements play into the rent negotiations?
13:43 – Jason and Rick discuss how COVID has shown business owners the true colors of their landlords.
15:12 – Rick dives into business owners that pay for a ‘turnkey’ property.
16:42 – There are a few important concepts to focus on when negotiating a commercial lease.
18:49 – Rick talks about the worst situation he has seen with a Continuous Operating Covenant.
20:11 – What are the best practices when a renter needs utility upgrades?
21:48 – Rick dives into the unique clauses that need to be included when signing a lease in a plaza.
26:32 – What should business owners be aware of when purchasing a property?
3 Key Points
It’s vital for business owners to have a lawyer present whenever reviewing a commercial leasing contract in order to avoid getting undercut by hidden clauses.
For renters who are putting in all the capital for leasehold improvements, negotiations should be made to soften up the rent.
Business owners should always avoid a Continuous Operating Covenant because if they are gone for any unforeseen reason, the landlord can reclaim the premises.
Tweetable Quotes:
“I think one of the things that may lull people into a false sense of security is the misunderstanding around leases in general.” – Jason Pereira
“A lease is essentially a marriage contract...It sets the rules out for how you’re going to live your life together as landlord and tenant.” – Riccardo Di Donato
“If you can make a verbal agreement with someone, they should have no issue putting it in writing.” – Riccardo Di Donato
“When you’ve outfitted a location for a certain type of business, it becomes immediately more appealing to anyone looking to get into that kind of business.” – Jason Pereira
“It’s about doing the homework upfront knowing what you need and making sure that it’s inserted into the lease so that your landlord agrees to it.” – Riccardo Di Donato
Resources Mentioned:
Facebook – Jason Pereira’s Facebook
LinkedIn – Jason Pereira’s LinkedIn
Woodgate.com – Sponsor
FintechImpact.co – Website for Fintech Impact
jasonpereira.ca – Jason Pereira’s Website
redberry.ca/ – Website for Redberry Restaurants
Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello and welcome to Financial Planning for Canadian Business Owners. Today's show, I have Rick Di Donato. Rick is the director of development for Redberry Restaurants, and I brought him on because he's got an extensive history in everything you need to know about real estate and business. So I brought him on to just give us some general tips and understanding of what you need to worry about as a business owner when dealing with real estate. And with that, here's my interview with Rick.
Jason Pereira: Hey Rick, thanks for taking the time.
Riccardo Di Donato: Hey Jay, how are you?
Jason Pereira: Good, good. So, tell us a little bit about who it is you are and what it is you do.
Riccardo Di Donato: Yeah, so my name is Rick Di Donato. I'm the director of development for Redberry Restaurants. We are a very large multiunit QSR restaurant company. So we are the largest franchisee of Burger King in Canada and we are the largest franchisee of Pizza Hut in Canada. In the past, my past life, I worked a number of years doing real estate corporately for Starbucks Coffee Canada, Prime Restaurants and Tim Hortons. So I've been doing this for almost 20 years and I've always looked after corporate real estate development for QSR and restaurant brands across Canada.
Jason Pereira: So it's safe to say you've negotiated hundreds of leases at this point, possibly
Riccardo Di Donato: I have negotiated hundreds of leases, that is correct.
Jason Pereira: All right.
Riccardo Di Donato: Some good ones and some awful ones.
Jason Pereira: Oh, what fun. Excellent. So, we'll talk later about the franchises that need to move closer to my house when we're done, but that's a common conversation [crosstalk 00:01:58].
Riccardo Di Donato: I think we've pretty much covered that everywhere you've moved, you've gotten a Starbucks put near your house.
Jason Pereira: I did and I appreciate that. [crosstalk 00:02:04]
Riccardo Di Donato: Yeah, we'll work on a Burger King down the road at Mill Road very shortly.
Jason Pereira: There's one that delivers not far from here, so that's not too bad.
Riccardo Di Donato: There you go.
Jason Pereira: The Pizza Hut, but you'll see. It's too bad you don't work for Popeyes Fried Chicken. There's two that are close but they could be closer. Anyway, moving on. So, business owners when entering into a lease. Let's talk about leasing first. This is a particularly somewhat nerveracking thing, especially for new business owners who've never had to do this before. So, what are the important tips or things to look out for when negotiating your first real estate lease.
Riccardo Di Donato: The first thing you'd need to look out for and ask yourself is, do you have the know-how how to do this? And the most likely answer in your head is, "Yes, I can do this." The reality is, would you operate on yourself? No. The same principle. You should not be doing this by yourself unless you have a number of years of real estate experience. There is so many people out there, that the first mistake that they get themselves into when they end up in a bad situation on a lease, whether it's they can't complete the deal or down the road in the future in an engaged lease that they're involved in, they're not happy with the terms or they feel they've been put over a barrel by the landlord, it's because they did it themselves.
Riccardo Di Donato: So, first thing's first. Ask yourself, can you do this? If you can't, and you don't have the experience, not the courage or the confidence, the actual, hard experience, then you should get yourself someone who can help you. So get a chartered real estate broker to help you do this. Yes, you will have to pay them a fee, or the landlord will pay them a fee, but it will be money well spent so that you're not putting yourself in a bad situation from the beginning.
Jason Pereira: Yeah, it's funny you say that because ... Well, first off, a lot of this is about educating people, but also educating them on how they do need advice on so many key factors. The entire concept of courage, that makes a lot of sense because frankly there's a lot of courage involved with starting your own business, but when it comes to things like leasing, it's funny, there's a lot of ... Courage is interesting but courage also ... there's a lot of dead people because of courage, right?
Riccardo Di Donato: Cemeteries are full of very courageous people.
Jason Pereira: Yes, exactly. Very courageous people. It's very courageous to climb that mountain until you fell off, right? So that morbid point aside, I think one of the things that may lull people into a false sense of security is the misunderstanding around leases in general, that these aren't exactly standardized contracts, right? It's not like when you rent an apartment or condo. Those are pretty much, correct me if I'm wrong, standard Ontario ... [inaudible 00:04:26] at least Ontario, OREA lease contracts. They just fill in the blanks, but when it comes to commercial leasing, different ballgame.
Riccardo Di Donato: Commercial leasing is a bit different. There is some standard concepts that are all the same in terms of measuring of the space and such that are generally accepted principles within the industry, but realistically it is a document that is up for negotiation between the parties. That being said, that leads to my second point of when you do get past the "I have engaged the landlord and we're starting to put together a deal" stage and you move to a lease, you need to make sure you have a lawyer, because you should not be reviewing a commercial lease unless you are a lawyer. A lawyer will be able to give you the guidance and understanding of the legal concepts that are involved in a lease.
Riccardo Di Donato: The lease essentially is a marriage contract. That's the way we view it. It sets the rules out for how you're going to live your life together as landlord and tenant, who is responsible for what, and what the consequences are if you do something bad. So, actually, when I really think about it, unlike marriage this spells it all out for you.
Jason Pereira: I was going to say, we've had the family law conversation and the vast majority of marriages do not have that spelled out.
Riccardo Di Donato: So this one, you don't have to learn as you go. This one, you already know day one what to expect and how to follow the process with the landlord.
Jason Pereira: I will say, like a poorly negotiated marriage, a poorly negotiated lease can cost you quite a lot of money.
Riccardo Di Donato:Considerable amount, considerable amount, and you never find that out realistically, Jay. From most business owners, people who I've come in contact with that are small business owners and such, you never really come into find that out until you're in a situation where you're against the wall, and then you have this "oh crap" moment. "Why am I in this? How did I put into this clause? I can't believe that section says this." And so that's what it comes down to about starting this out with proper professional guidance.
Jason Pereira: Yeah. I think there's a lot of fatigue in general towards contracts and everything from end user license agreements to "click yes to use this software." The number of people who blindly sign paperwork is the majority of people, quite honestly, and with some cases, especially the standard paperwork, like standard contracts, I can understand the lower barrier to entry on doing that, but when it comes to someone that can be, from the sound of it, generally bespoke. I mean, it's somebody you cannot take a chance with, you need the proper advice on.
Jason Pereira: Let's talk about some potential horror stories. What are some of the things you've seen landlords try to insist upon that were just completely offside in your mind?
Riccardo Di Donato: I have seen leases that have clauses in them that allow landlords to basically terminate the person's lease after the first day they open their business, and people have no idea that that's in it. I have seen leases where landlords can demand a financial statement and if it's not satisfactory to no asset test other than their own, terminate the lease. So picture yourself as a restaurant owner. Let's pick the most costly experience possible, a restaurant or a dentist. High capital entry cost, fit out in excess of $3, $400,000, let's say, of your space.
Riccardo Di Donato: You sign a lease like this and two weeks later your landlord comes to you and says, "Please provide me a financial statement of this business," and you say, "Why?" And then he says, "Well, per this section in the lease, I can demand a financial statement from you for review at any time. 14 days' notice. Here's your 14 days' written notice. Give it to me." You provide it. You're a new business. You have next to no cashflow and nothing in the bank because you're just getting off the ground and you've spent all this money building out your space, and the landlord then says to you, "I don't like this, get," and then uses your capital that you've put into your premises to turn around and re-lease their premises to someone else.
Jason Pereira: At a higher rate.
Riccardo Di Donato: Of course at a higher rate. It's already fitted out for a restaurant. I've also seen [inaudible 00:08:03] particular for restaurants or professional services where they're selling their business. So let's say an eye doctor has a fully licensed facility, tons of money in expensive equipment installed ina premises. He's retiring. He's going to turn around and sell his business. He sells it to the business. There's a transfer clause that says the landlord has the approval rate on sale of the business. Within that clause is further language that says, "If you come to me to transfer the lease and I do not like the person who's taking it over, I can terminate your lease."
Riccardo Di Donato: These are very common and a lot of small business owners do not know that these are in their leases. A sharp lawyer for a landlord will look out for their interest. The good news on this side is that as much as these are common with some smaller landlords, one-offs, generally this isn't the standard operating procedure because generally some of these smaller landlords, the problem is they think they can negotiate and legally do a lease themselves so they tend to put themselves in bad situations as well.
Riccardo Di Donato: So, again, this all goes back to get professional information and advice and do a lease accordingly and properly. Handshake agreements, "Hey, we're buddies. Oh, this is my wife's cousin's friend ..." I think, Jay, both of us growing up in European families know how that ends up. It's a disaster.
Jason Pereira: Yes.
Riccardo Di Donato: And there's too many people that continually operate like that.
Jason Pereira: Yeah, any time I hear, "Oh, we have an agreement. It's not in writing," it's just like, "Okay."
Riccardo Di Donato: That's not an agreement.
Jason Pereira: Yeah, it's not an agreement and now different people have different rights and other people who would otherwise have rights are not defended and it's just not worth it. There's a few things in life you should never skimp out on in cost and I would always argue that a good lawyer's one of those things, because quite frankly if you think it's ... It's the old saying, "If you think a professional's expensive, try hiring an amateur," and for the old saying about a person who defends themselves in court has an idiot for a client. It's [crosstalk 00:10:06]-
Riccardo Di Donato: Right, and I always say, Jay, anyone ... And this includes family. Maybe I'm an awful person for saying this, but if
Jason Pereira: [crosstalk 00:10:16]
Riccardo Di Donato:Yeah, if you can make a verbal agreement with someone, they should have no issue putting it in writing. If they don't want to put it in writing, that means they don't want to stand behind it.
Jason Pereira: Yeah, and God knows I've met people like that in business and have worked for some where it's just ... and frankly if they don't want to put it in writing, to them it's a form of leverage
Riccardo Di Donato: Yeah, 100%.
Jason Pereira: ... So they [crosstalk 00:10:36] not be obligated by stuff.
Riccardo Di Donato: Yep.
Jason Pereira: So yeah, so it's not good. All right, so basically besides the fact you need advice, let's go over some other concepts and provisions. You talked about an important one there, which was [crosstalk 00:10:48] improvements. So you go in, make an investment. The landlord benefits every time you spend money on the space. That is a point of discussion, negotiation and leverage. Can you talk about how that should be thought about in a negotiation?
Riccardo Di Donato: Yeah. There's really two types deals the way ... I mean, lots of people who do this type of job that I do will come at you with all kinds of different scenarios. In the end, it boils down to two things. Capital in, capital out. So, if you, the tenant, are putting in all the leasehold improvements, so you're improving the landlord's space, you're demolishing, you're building new construction inside the premises, you're upgrading new roof, windows, all that kind of stuff, those are tangible things that are not going to be leaving the premises when you leave. When you put that capital in up front, that's reflected in capital in, capital out. So if you're putting that money in, then your rent rate, traditionally, should be a little bit lower.
Riccardo Di Donato: If you are taking a check from the landlord, which is another option, which is called in the business a tenant inducement, then you traditionally are in a sense using the landlord as a bank and you will end up paying them back for that inducement in rent over the term. So you may end up paying a little bit more in rent, but you're using their cash up front to improve the premises. That's really the two concepts of it. It's capital in, capital out. That's how we've viewed it.
Riccardo Di Donato: So, again, if you're putting in the money, traditionally, the leverage is that you can say to the landlord, "I'm putting in all the dough here. You've got to soften up the rent a bit to help me get off my feet and get going, and you're recognizing the benefit of me improving your building." The reality is in ... Let's just use Toronto as an example, pre-COVID. Pre-COVID Toronto was ... the challenge was you had tons of buildings, and I'm not talking about professionally run, large, institutional landlords. I'm talking about the average street corner location. Most landlords drive the buildings into the ground and demand the highest dollar.
Riccardo Di Donato: So the discussion is about educating and saying, "Here is the market rents in the area. Yes, your building sits in an area where it's worth $85 a square foot, however your building, because you're a crappy landlord and haven't put a dollar into your investment, is basically almost at its end of life, so it's not worth $85 a square foot. It's worth 60 bucks a square foot if you want me to take this space and put in all the capital. If you don't want me to put in the capital and you still insist on 85 bucks a square foot, then you need to come up with some money.
Riccardo Di Donato: The number of deals in my career that I have walked away from where landlords are insistent that it is $85, $90, $100 a square foot and the building is pretty much ready to fall down and even the rats are leaving, I have walked away from those deals every time. Those deals are money pits that will kill you as a tenant and it's a good example of if this is the way a landlord manages their asset, then this probably is going to be reflective of the type of relationship you're going to have with that landlord, and you probably don't want to get into business with someone like that. It seems like it will probably most likely be a lot of headaches, and I would say through my career
Jason Pereira: I'm sure there's a lot of people right now with COVID where maybe they were not pleased with their landlord, but looking for rent relief, who discovered very much they got in bed with the wrong person.
Riccardo Di Donato: Yep, yeah, and they're learning that lesson now, because when times are good and you're making money and the landlord's making money, everyone's usually happy. Most situations with landlords are solved financially and everyone moves on with their life, but these times are when you really see people's true colors come out, and just back to that point, most of those times where we've walked away from those leases where people are just demanding outrageous numbers, those spaces tend to still be sitting vacant. It doesn't matter how hot the market is.
Jason Pereira: Well, no one wants to go into the ramshackle [crosstalk 00:14:21] location.
Riccardo Di Donato: Yeah.
Jason Pereira: I want to come back to the leasehold improvements, because this a very important point because the reality is, is that, especially ... I'll use the old Seinfeld example of the spot of death restaurant. The reality is, when you've outfitted a location for a certain type of business, it becomes immediately more appealing to anyone else looking to get into that kind of business, and I'm sure we've all seen, again, like on Seinfeld, the spot of death, with the restaurant that keeps on turning over but someone else comes along and says, "Well, those 10 guys may have failed but I can make this work," and I'm specifically, because I want to get up and running fast and spend the least amount of money, I want to find a place that was already a preexisting restaurant.
Jason Pereira: I always laugh at that because I always think to myself, "Are you not wondering why it didn't work out in the first place?" But, again, those locations can command a premium rent from people looking for that kind of business.
Riccardo Di Donato: So you're basically paying for the courtesy of using someone else's equipment that's basically worth nothing. When a restaurant outfits itself or any professional business outfits itself with new equipment, it's like driving a car off the lot. It instantly devalues. So yeah, you're basically just stepping in to pay a turnkey rent, and that's the term that's used, because the space is ready. You can basically order your food, turn on the stove and start operating.
Riccardo Di Donato: You're paying a premium for that. That equipment belongs to the landlord, so if you abandon that space, the landlord, under the law, has every right to lock the doors on you and claim everything that's inside that space as theirs.
Jason Pereira: So the landlord owns that equipment, but what happens if it fails?
Riccardo Di Donato: If what fails?
Jason Pereira: The equipment fails.
Riccardo Di Donato: That's the landlord's responsibility. Sorry, let me correct myself. If you're operating the business and the equipment fails, it is your responsibility.
Jason Pereira: Thank you, yeah.
Riccardo Di Donato: You are operating the business. If the restaurant fails and you leave, the landlord then can, through a sheriff or bailiff, lock the doors on you and claim everything inside.
Jason Pereira: It's not just your space you're losing. You're actually losing potentially the asset investment in your business [crosstalk 00:16:18].
Riccardo Di Donato: 100%, so that's why it's important, again, to go back to the beginning point, which is make sure you have proper guidance when you're doing these types of things and make sure that you have an understanding of what you're getting yourself into, because if you think, "Oh, this isn't going to work out but I can sell the equipment," not if you abandon the space, you can't. So that's why it's important. There's certain clauses, just kind of ...
Riccardo Di Donato: There's a few certain concepts that are really important in commercial leases. One is a clause called a continuous operating covenant, and a lot of people don't know they have this in their lease. A continuous operating covenant is an obligation by the tenant to continually run their business in the premises. So, the logic behind it from landlords is, "You don't devalue my property by having a vacant storefront, and if you sign a lease with me, you must run the business that is in the premises."
Riccardo Di Donato: It's never good to agree to this as a tenant, and I'll give you an example why. Let's say that you run a hair salon and you have a continuous operation covenant in your lease. You get sick. Your salon has to stop operating because you're sick, you have cancer, you're in the hospital. You could be in violation of your continuous operating covenant. Your landlord could seize your premises because [crosstalk 00:17:32]-
Jason Pereira: That's a real question. My first question was, "Define continuing." Like, how many days do I have to be closed before they trigger that clause?
Riccardo Di Donato: So again, that goes back to the beginning about having a proper legal guidance, because that's all, like we mentioned at the beginning, a negotiation. If you have one ideal situation, you never want to agree to a continuous operating covenant. I personally never agree to them in any commercial lease that we do. It's an absolute deal breaker, but if you have to for whatever reason, you could say, "We'll agree to a continuous operating covenant for the first 30 days after we open the premises to the public for the first time, and after that, that's it." Or you can say to the landlord, "I'll agree to a continuous operating covenant. If I close and don't reopen within 30 days, you can reclaim the premises and kick me out but if you kick me out, my lease obligation is terminated and you have no recourse against me."
Riccardo Di Donato: So there's ways to temper it, but a lot of people don't realize they have those in their leases and if you ever have that family emergency or health emergency or whatever it may be, you can be in a bad situation very quickly. You can be in default of your lease, and then if you don't hear that default within the X number of days as prescribed in your lease, which, again, it's up for negotiation, you can then be terminated from your lease. The landlord can seize your premises.
Riccardo Di Donato: The worst situation I've seen of this blow up in people's faces is areas ... Let's use Ossington Street in Toronto. It's a perfect example. So Ossington Street, when me and you were growing up, was a Portuguese area, right? Mom and pop business, and that was it.
Jason Pereira: Hey, my grandfather had a pool hall on Ossington Street.
Riccardo Di Donato: That's right, that's right, that's right.
Jason Pereira: There you go.
Riccardo Di Donato: So, what you've seen over the last 10, 15 ... 10 years, let's say, realistically, is Ossington's become this cool place for urban hipsters to go hang out and act like they're different from everybody else. So, what you see in this example is people, landlords, started to get the itch that this area is changing. I can charge a ton more rent or I can get tenants out of my building because condo developers want to buy some buildings and put them together to build small mid-rise developments. Well, a tenant closes for a renovation of his premises
Jason Pereira: That's a violation [crosstalk 00:19:32]-
Riccardo Di Donato: ... He shut down for 30 days and the landlord serves him notice that says, "You are in violation of your continuous operating covenant." He says, "What?" 31 days goes by, he seizes the premises and kicks him out. So that's why, again, this goes ... I'm trying to not be a broken record but I'm going to be. This all goes back to the beginning of, you need to make sure you have proper guidance when you're doing these things and you understand what you're getting into.
Jason Pereira: No kidding. That's just a couple of examples there. One thing that I think is not paid enough attention to in some cases is depending on the type of business, you might have the need for different utilities to be upgraded or to support the actions of what's going on there. Talk to me about that, whose responsibility it is, and kind of best practices there.
Riccardo Di Donato: So it depends on the type of business you're in, and part of that discussion is at the beginning where you're going to build out your premises and you need to understand, and this is where having a qualified contractor and having a drawing design done by an architect or an engineer that certifies, "Hey, this is what I need to have." A couple reasons. One, you don't want to ever be in a situation where you burned the building down because you've done your own makeshift electrical upgrades and you've overloaded the system and caused a fire, because that can be then traced back to what you did and you're responsible.
Jason Pereira: I know the location you're talking about, by the way, but continue.
Riccardo Di Donato: Two, you don't ever want to ... You want to make sure that you're able to operate your business. So a good example of this is a bakery, right? You want to make sure within your lease that if you're leasing their space as a bakery, the beginning, number one, you want to make sure it's zoned for that use so that the city can't show up and shut you down, or you just never get a building permit but then you're stuck in a lease you're committed to. But two, you then go include language in your lease that says to your landlord, "You are leasing this premises to me as a bakery. This is the required electrical output that we require. You are, as a landlord, covenant and agreed to provide this amount of electrical service to my property."
Riccardo Di Donato: So it's about doing the homework upfront, knowing what you need, and making sure that it's inserted into the lease so your landlord agrees to it, so that you never get in a situation where you can't get power, you can't get water or electrical service gets terminated or something gets shut down and then people are pointing the finger at you.
Jason Pereira: Yep. And let's talk about other ... So that's an individual you know. Let's talk about in a plaza, because there's other clauses, I think, that need to be contemplated when that's the case.
Riccardo Di Donato: Yeah. Can I just speak in general in plazas? Is that
Jason Pereira: Yeah, multi-unit [crosstalk 00:21:57]-
Riccardo Di Donato: Sure. So, in plazas there's a couple things as a business owner you want to understand. It's easy for me to use a restaurant as an example if that's okay, but these concepts are applicable to any type of business. So let's say you're going to lease a space in a restaurant. So, first comes first. Whatever space you're looking at, you need to make sure that your landlord warrants and represents that the space is zoned for that type of use. The reason you want to do that is you don't want to end up signing a lease and you applied for your building permit with the city and the city comes back and sends you a zoning notice saying, "This unit is not allowed or zoned to be used for restaurant space," and guess what? You're stuck in a lease for 10 years and you have to go to Committee of Adjustment now and you end up in an obligation where you have to pay rent and you're not even open.
Riccardo Di Donato: So that's step one. Step two is you want to protect your business in a plaza, so if you sign a lease that says you're going to open Jay's Portuguese Chicken Place, sorry for the racial stereotype, Jay, and you have an exclusive covenant in your lease that says, "Landlord, you are not permitted to lease any other spaces in this premise's current or future tenants to anyone selling Portuguese chicken other than me." And then you would develop what's called a use clause.
Riccardo Di Donato: A use clause dictates what you do in your premises, and then you provide that to the landlord and make it a schedule so that he's aware that this type of use is protected, and then you are protected in that plaza. That makes your business more valuable in that property so that nobody else can come into that plaza and sell that use that you are doing. It increases the value of your lease upon sale and also you may end up potentially paying a little bit more to the landlord in rent for that guaranteed protection.
Riccardo Di Donato: Because what you don't want to do is end up, and we see this in lots of plazas across Toronto where there's six barbershops or five hairdressers or four cleaners or three variety stores, and you're like, "How the hell did this happen?" So that's an important clause. The other piece is you want to make sure that your operating costs, so those are made up of your common area charges which are charges landlords apply to premises that you pay for maintenance of the property, snowplowing, landscaping, roof repairs, et cetera, and your realty taxes are properly weighted.
Riccardo Di Donato: So if you are in a plaza of 100,000 square feet, you want to make sure that your property tax and your ... are weighted on a proportionate share. So not that your little 200 square foot Jay Portuguese Chicken place ends up paying the tax bill for the grocery store that's 50,000 square feet. So those are just some general concepts that you want to make sure that you're protected.
Riccardo Di Donato: And the other thing is you always have to think about your use. So if you are a business that requires ... The best example is a cleaners, let's say. You have six parking spots in front of your ... Pizza, let's use a pizza delivery place, even better. You sell Jay's Pizza Shop, and you have six drivers who work for you starting every day at 3:00 til midnight. You need parking. Your drivers need a place to park. You can't get the pizza from the store to the car and to the customer if your driver has nowhere to park and he has to walk across the street with the pizza.
Riccardo Di Donato: So, it's important then to call that out to your landlord and say, "I need five reserved parking stalls at or near my premises," and you would agree to that with your landlord, that are marked and signed "for use exclusively by Jay's Pizzeria drivers." So these are all things that you need to think about. What supports your business and how can the property support your business? But those are some basic concepts that are really important in multi-unit plaza deals because these are things that can really come back to hurt you if you don't think it through properly.
Riccardo Di Donato: You never want to be, especially with the proportionate sharing ... I have seen this, and Jay, you know the plaza. There's a plaza at
Jason Pereira: There was one I used to live across from that had three convenience stores and [crosstalk 00:25:26] have eight stores.
Riccardo Di Donato:The best example is the one where we went to high school which was at Renforth and Rathburn where they had no frills, is ... the tenant's no longer there, but there was a tenant in that plaza that paid almost 35% of the realty taxes for the plaza.
Jason Pereira: What? Was it the [crosstalk 00:25:43]?
Riccardo Di Donato: No, they were a small restaurant.
Jason Pereira: Oh, good God.
Riccardo Di Donato: And because they just didn't sign their lease properly, and I found this out through someone who did some leasing work in a plaza for the landlord, that was the situation. They were paying literally 35% of the realty tax bill. So the grocery store was actually getting subsidized by the restaurant.
Jason Pereira: The major national brand grocery store was getting subsidized by a restaurant. Lovely.
Riccardo Di Donato: Yeah.
Jason Pereira: Terrible. All right, so [crosstalk 00:26:10]-
Riccardo Di Donato: Again, goes back to having guidance.
Jason Pereira: Absolutely. So, we covered a lot on leasing. Let's talk a little bit about buying. Before a property gets acquired ... I mean, here's the thing. There's an entire conversation I can have about acquisition and why it should be done within a corporation or a separate holding company. I'll save that for another conversation, but specifically from the buyer's standpoint in the transaction itself, talk to me about what people should be aware of or concerned about.
Riccardo Di Donato: Again, sound like an old horse here, but ... flogging a dead horse, but, again, make sure you have proper legal representation, proper real estate representation. The things you want to look out for, irrevocable dates, any type of nonrefundable deposit that you're responsible for, any types of conditions that are attached to the purpose. So whether it's a condition of something governmental or approval that's required, those are the types of things that you'd really need to be aware of in a purchase situation of a property, and again, if you have the right professional guidance, you will get that service and that kind of clarity as you enter into a purchase and sale agreement.
Riccardo Di Donato: Those are really the things that are most damning. I think the other thing that's coming up more and more is environmental. If you're purchasing land, you want to make sure that you're aware of, "Is there an environmental condition in this land? Are you purchasing a building or plaza that has old gas tanks buried beneath it?" So doing your due diligence on environmental and zoning as well to make sure you understand what the property is currently zoned for, what is restricted and what can be used on the property so that you understand the full scope of it.
Riccardo Di Donato: So it helps to set up your table for, "These are the things I can do at this property to generate income. I can lease it to an autobody shop. I can lease it to general retail. I can't lease it to a health care clinic for whatever reason." Those are really the things that you need to do due diligence on, on purchasing.
Jason Pereira: Good. Well, thank you very much for this rundown. I'm sure this will be of use, but again, as the message is always on this podcast, get the right help.
Riccardo Di Donato: 100%.
Jason Pereira: That's valuable.
Riccardo Di Donato: 100%. Look, if there's one thing I can leave to the people who are listening to this podcast, I have been doing these types of transactions for over 15 years for major corporations. I managed all the real estate development for Tim Hortons in the Toronto and GT area. I managed all the real estate development for Starbucks Coffee Canada in all of Ontario. I still rely ... the two most important people when I'm doing these types of deals are lawyers and also our real estate broker partners. Ultimately, like any decision in business, it's inherent risk and you make a decision, but you shouldn't be making a decision based on, "Oh, I think I know everything and I can do this. It's just like selling my house." Or, "It doesn't matter what the lawyer says, this is going to work out. This guy's my buddy and we're best friends and, oh, he's a good guy and this is all going to work out." [crosstalk 00:28:54] You've got to always make sure you have them put ... What's that?
Jason Pereira: Money changes people, man.
Riccardo Di Donato: 100%.
Jason Pereira:[crosstalk 00:29:01]
Riccardo Di Donato: 100%, and I think too, I've seen too many cases where, especially with landlords, we've seen a couple cases in Toronto too where someone sets up an independent business, it's very successful, the landlord takes note of that and then decides, "Maybe I want to get that business now." So they do certain mechanics within your lease that you're not aware of in order to get their hands on the property and push someone out.
Riccardo Di Donato: So, again, it goes back to, Jay, like you said, make sure you get professional advice and guidance when you're doing something so that you don't end up in an "oh crap" moment five years down the road.
Jason Pereira: Yeah. There's an old saying in Brazilian Jiu-Jitsu training which is, when you ask the instructor how to get out of a certain position that they don't know, the answer is always, "Don't put yourself in that position in the first place." That's so great. Anyway, Rick
Riccardo Di Donato: [crosstalk 00:29:48]
Jason Pereira: ... thank you so much
Riccardo Di Donato: No worries.
Jason Pereira: ... And I'm sure [crosstalk 00:29:51]-
Riccardo Di Donato: Thank you.
Jason Pereira: ... find this informative. Take care.
Riccardo Di Donato: Have a great day. Bye-bye.
Jason Pereira: So that was my interview with Rick Di Donato of Redberry Restaurants. Hope you found that informative and if you are looking to sign a lease, again, this is not a standard thing. Get the right advice, as always, is the message on this podcast. As always, if you enjoyed this podcast, please leave a review on iTunes, Stitcher, or wherever you get your podcast, as it does help people find us. Thank you and take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high net worth individuals, business owners, and their families. To learn more, go to woodgate.com. You could subscribe to this podcast on Apple Podcasts, Stitcher, Google Play and Spotify, or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.