Leasing out part of the building you own

What it involves

Demising means dividing a building into separate premises that can each be leased on their own. For an owner-occupier, that usually means carving off a bay or one end of the building, building a wall between you and it, and giving it everything a tenant needs to operate independently. Then you lease it, generally on a proper commercial lease with a term rather than a month-to-month arrangement.

Alberta's Residential Tenancies Act does not govern commercial space. The relationship with your tenant is governed mainly by the lease itself and the general law, so the lease needs to be complete.

When it makes sense

It works best when the space is surplus for the long run. A tenant commonly wants several years, and you won't get the space back before the term ends unless the lease says so. Good candidates: your operation has settled into a smaller footprint; you bought more building than you need and plan to grow into it much later; or the surplus sits at one end, with its own wall line, room for a door and nearby parking.

If you might need the space back within a year or two, a short-term licence keeps you flexible. If the whole building is surplus, see leasing out the whole building.

What the unit needs before you can lease it

A tenant should be able to run its business without depending on yours. Plan for:

• A demising wall. Between tenancies it often needs to be a rated fire separation; your designer or contractor confirms against the building code.
• Its own entrances. A man door to the street or parking, and an overhead or dock door so the tenant can load without crossing your floor.
• A washroom. Inside the unit or with clear shared access; the building code sets what's required.
• Utilities. Separate meters for power and gas where practical, sub-meters, or a written allocation formula. Water is often shared and allocated.
• Life safety. Exits, emergency lighting, fire alarm and sprinkler coverage that still work for both units once the wall is in.
• Heat and an address. A heater or HVAC zone the tenant controls, and a unit number the municipality and utility providers recognize.

What the land-use district lets a tenant do

Your building sits in a land-use district that lists permitted and discretionary uses. A tenant can only run a business the district allows, and some uses need their own development permit even in an existing building. Before you market the unit, ask the municipality which uses are permitted without a new development permit. That list is your realistic tenant pool.

Uses involving public assembly, retail, fitness or food can be a change of use that brings permits and code upgrades. Industrial districts generally don't permit dwelling units, so nobody can live in the unit; see can you live in a warehouse. Many tenants will also need a municipal business licence, and the municipality decides that, not you.

Lease or licence, and the other consents

A tenant with a walled unit, its own doors and its own keys has exclusive possession of defined premises for a term. That's a lease, whatever the document is called. Use a full commercial lease covering the premises and measured area, term and renewal, base rent and additional rent, repairs, insurance, use, alterations, signage, default and restoration at the end. See licence vs lease for where the line falls.

Check whether your mortgage requires lender consent to new leases, and, if the building is an industrial condominium, whether the bylaws restrict leasing. Tell your insurer before a tenant moves in. Commercial rent is generally subject to GST; ask your accountant whether you need to register and collect it.

Risks and how to manage them

• Fit-out you can't recover. Get pricing before you commit, and weigh it against the term a tenant is likely to sign.
• A neighbour inside your building. Noise, fumes, traffic and security all affect your operation. Choose uses that sit comfortably beside yours, and write rules on yard use, parking and hours into the lease.
• Tenant default. Screen the covenant, take a deposit and consider a guarantee; see screening a warehouse tenant.
• Insurance gaps. Require the tenant's commercial general liability and contents coverage, naming you as additional insured.
• Lost flexibility. The space is committed for the term. If you may need it back, negotiate an early-termination right, knowing tenants will want something for it.

What drives what you can charge

Size and function come first: clear height, loading type, power, yard and parking. Independence is next; a self-contained unit with its own doors, washroom and meters leases more easily than one that shares facilities with you. Then structure. Small-bay units are commonly leased net, with the tenant paying base rent plus its share of operating costs, property tax and insurance as additional rent, reconciled annually. A gross lease folds those into one figure and leaves cost increases with you. A longer term can justify landlord's work or a reduced-rent period; a shorter one generally can't.

Local supply sets the ceiling. A brokerage can show you what comparable units nearby are offering, and the market page tracks the broader industrial rent index. Size the unit against your own needs first with the rent-out planner, work through preparing a warehouse to rent, then start at Rent out.

Before you demise and lease a unit

• Is the space surplus for longer than a typical lease term?
• Can it have its own man door and loading door?
• Will the demising wall need to be a rated fire separation?
• Do exits, sprinklers and alarms still work for both units?
• How will power, gas and water be metered or allocated?
• Which tenant uses does the land-use district permit?
• Does my mortgage or condominium bylaw restrict leasing?
• Have I told my insurer and priced the fit-out?
• Will I lease net or gross, and how will costs be reconciled?