The
40 Professional
Advisory For Dental Professionals
IN THIS ISSUE STYLES: WHAT TYPE OF LEADER ARE YOU? (PART 2) Dr. Ron Weintraub
DENTISTS VERSUS TEACHERS: WHO ARE THE BETTER INVESTORS? Mark McNulty BA, CFP, CIM
DAVE’S COMMON TAX TRAPS AND HOW TO AVOID THEM David Chong Yen CFP, CA
THE BLACK SWAN AND INSURANCE Dr. Ian Wexler
TAKING CARE OF BUSINESS Graham Tuck H.B.A C.A
SMILE DENTAL: PRACTICE NAMES REVISITED David E. Rosenthal BA., LL.B.
THE CHANGING REALTY LEASING MARKET Ian Toms B.Sc. (Hons)
plus SMART ENOUGH? NOTES FROM THE EDITOR
VOL. 40 : JUNE, 2009
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The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different eld. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Smart Enough? RALPH CRAWFORD BA., DMD Not long ago I was sitting in the reception area of our local medical clinic and began browsing through the magazines looking for something to read while I waited for my appointment. The magazine that caught my eye was the April 2009 edition of Good Housekeeping. Not because being a good housekeeper was my immediate goal but the cover bore a photo of Michael J. Fox with the inscription “Happiness is a Decision”. Knowing a little about Michael J. Fox and his combat with Parkinson’s Disease (PD) I turned to the article and was immediately captivated with the interview he gave Good Housekeeping’s editor, Rosemary Ellis regarding his latest best seller book, Always Looking Up: The Adventures of an Incurable Optimist. Because I was called into the doctor’s office before I got very far into the story, I couldn’t resist dropping into the store on the way home to buy the magazine. I’m glad I did. Surely there couldn’t be very many of us who haven’t heard of Michael J. Fox, the Edmonton born, Burnaby, B.C. raised lad who rose to fame as a movie and TV star and who first showed signs of PD at the age of 30 and didn’t reveal the condition for seven long years. And what about the Research Foundation he founded in the year 2000 that to date had raised over $150 million to seek a cure for the affliction that stalks the life of over four million people worldwide and 100,000 in Canada. What I found particularly fascinating about the Good Housekeeping article were the profound insights into Michael J. Fox’s character and approach to life despite his Parkinson’s. Typical - and this will touch the heart of any dentist - is the good humour approach he takes
in explaining the simple task of putting toothpaste on a brush. But it is the phrases he uses to project his philosophy of Always Looking Up that really caught my attention. Take: • Appreciate what’s good about right now and be ready for what’s next • Chance favours the prepared mind (a quote from Louis Pasteur) • I only have to be smart enough to find people who are smarter than me; I only have to be smart enough to recognize who knows more than me. It is precisely this attitude and enlightenment that allows Michael J. Fox - despite his debilitating disease - to do so much towards helping those similarly burdened. Each of the above phrases is “wisdom personified” but the one about being “smart enough to find people who are smarter than me” seems to go a step further. Because that’s what education, direction and life is all about - seeking out the wisdom of those who know more than we do so we can be more successful in attaining our goals. Undoubtedly, that’s precisely why you, a member of the dental profession, read The Professional Advisory. Whether it’s about information on insurance, taxes, leasing, valuation, investments, the law, leadership and many other aspects of your dental life, you only have to be smart enough to recognize someone who knows more than you. In their own modest way - and we repeat modest - that’s the role and responsibility each of the author/contributors to The Professional Advisory strives to fulfill within each and every page. Thank you Michael J. Fox for your tremendous contribution in assisting those afflicted with Parkinson’s Disease and for alerting all of us to be smart enough to find people who are smarter than me. PA
crawford@dccnet.com
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Styles: What Type of Leader Are You? (Part 2) DR. RON WEINTRAUB www.innovativepracticesolutions.ca
Our ability to influence the behaviour of those who work for us is essential for our practice to flourish. However, there is a big difference between merely affecting people’s behaviour and actually influencing it. Our effectiveness depends increasingly on our ability to handle people. Although anything we do will somehow affect the way people react and perform, leaving decisions to others without defined parameters could easily have negative effects. Refining our leadership style helps motivate and control our team toward accomplishment of planned objectives and implies the use of people skills. In Volume 39, we discussed the need to hone our leadership style for our practices to thrive in the current recession. In the downturn of the early 90s, a friend operating a group practice called a team meeting and announced the following, “We are now in a recession that is affecting dental practices - we choose not to participate.” He then proceeded to have in-depth meetings with the team to find ways to alter the operation to improve effectiveness and to be even more focused on patient needs. Now that’s leadership! Leadership styles yet to be discussed are the Abdicator and the Enabler. What is an Abdictator? An Abdicator is one who indiscriminately relinquishes responsibilities to others. This leadership style is the opposite of a micromanager. For example, a dentist who has engaged us for a practice enhancement proudly declared, “I do the dentistry and I leave everything else to Gail and Ruth, and at the end of the year, my accountant tells me how I did.” A comment such as this is followed up by his explanation, “Gail and Ruth have been here for many years, and they know everything there is to know about running this practice.” He continued,“They are very well paid and I cannot afford
to have them leave or the practice would fall apart.” When asked about issues outside the realm of clinical areas, his standard answer is “I don’t know, ask Gail and Ruth.” The red flags that arise are obvious. Delegating tasks and accountability to others is fraught with extreme danger. Gail and Ruth are aware of their enhanced power and the leverage with which knowledge of their indispensability is fraught could result in unintended abuses such as taking freedoms to organizing protocols or fixing practice hours to suit solely their needs and preferences as opposed to the well-being of the office. Another drawback of being an Abdicator is that staff has little or no incentive to improve their performance because change might interfere with Dr. X’s perception of their previous competence.
An additional negative effect of assigning away office responsibilities is that Dr. X is not getting the opportunity to use his expanded clinical skills acquired by continuing professional development without the necessary in-house promotion. By default, staff is unaware that additional systems need to be in place to ensure that patients accept these types of treatments. Positive changes that need to be discussed and implemented will not occur readily in an Abdicator’s office, thus posing potentially catastrophic results as the current recession continues. A serious evaluation of D. X’s participation in his own practice is needed.
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What is an Enabler? Although in psychological language, the designation of Enabler has a distinctly negative connotation, a significantly more positive perception of Enablers is that of leaders who enable their team to grow in effectiveness, to be flexible, and to feel a sense of belonging and ownership of the process to improve the performance of the practice. This type of leadership allows and supports creative and proactive behaviour. Among the characteristics of the Enabler are the ability to enjoy dialogue and effective interpersonal communication with staff and patients. Even though they have formal structure for meetings, Enablers encourage active participation by the team. Enablers are aware of the role and challenges faced by team members. They create an accepting atmosphere for staff to offer creative solutions allowing patients to receive treatment as they survive the economic downturn. In fact, Enablers encourage suggestions to alter the usual payment protocols by staging treatment plans, offering payment plans, focusing on clients’ biologic needs, and staggering discretionary treatment. Most importantly, they focus on increasing
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customer service. In addition to creating accepting environments, Enablers consider patients’ needs by assuring work hours offered are in synch with the times available resulting from the altered workplace. In general, heightened awareness of customer service is a great strategy to survive and thrive in this economic climate. Paramount to succeeding in the current recession is understanding our past behaviour, predicting our future behaviour, and modifying our leadership style to one that leads to productivity and success. The choice of leadership style, Micromanager, Abdicator, or Enabler, is not as difficult as we might think but takes awareness and perseverance. PA
Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.
Dave’s Common Tax Traps and How to Avoid Them DAVID CHONG YEN CFP, CA www. dcy.ca
Having reviewed tens of thousands of tax returns during my career, I wish to share some common tax traps and ways to avoid them. Dentists and their family members often borrow money from their Professional Corporation (PC), Hygiene or Technical Service Corporation (H/TSC). This creates a tax problem to the dentist and/or his/ her family members as this money must be repaid to the PC, HSC/TSC within one fiscal year after the year in which it was borrowed. For example, if a dentist has a PC with a July 31 year end, and the dentist
borrows money on August 1st immediately after the year end, then the borrower must repay the PC by the end of the 2nd taxation year (i.e., two years minus one day). In addition, interest must be charged by the PC and paid for by the borrower at the prescribed interest rate (2nd quarter prescribed rate is one per cent). Also, there should be a loan agreement evidencing this loan and interest must be paid by the borrower no later than January 30 of the subsequent calendar year. Some creative dentists and/or their family members try to get around this trap by borrowing money and then repaying it back before the deadline and then borrowing money again right after. The tax department has another set of rules to address these series of loans and repayments and therefore this creative maneuver will likely not work. Alternatively, one might consider paying dividends
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to poorer family members who are 18 years of age and older, provided they are shareholders of the company. These dividends will be taxed in the poorer person’s hands at a lower tax rate. The recipient of a dividend can then gift money to whomever he or she pleases. The recipient of the gift will not be taxed. The recipient can then repay the PC. Another method of repaying the PC/HSC/TSC is to transfer property into the PC/HSC/TSC to offset the amount borrowed. This could trigger a tax bill and land transfer taxes on the transfer of property. Another maneuver to consider is to repay the loan by transferring one’s insurance policy into the PC/HSC/TSC. The transfer could offset the amount borrowed depending on the value of the insurance policy. This maneuver should not result in any taxes on the insurance policy transfer. Many dentists buy investments including stocks and bonds and put them in the name of the minor children and/or spouse. The dentist’s rational for doing this is that if the investment is in the name of the spouse or minor children, then any investment income, gains or losses will be taxed in the hands of the spouse and/or minor children. Beware; the tax department traps this scenario. Although the investment is in the name of your spouse/children, if the money came from the dentist’s pocket, then the dentist will be taxed on the investment income (except capital gains for minor children). The way to avoid this trap is to lend your spouse money at the prescribed interest rate which is currently one per cent for the quarter started April 1, 2009 and ensure the interest is paid by January 30 each year.
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Although the investment is in the name of your spouse/ children, if the money came from the dentist’s pocket, then the dentist will be taxed on the investment income (except capital gains for minor children). Your spouse would pay you interest at the rate of one per cent, and if your spouse is able to invest the money at more than one per cent this will produce overall tax savings. The resulting investment income will be taxed in your spouse’s hands; while the one per cent interest income from your spouse will be taxed in the dentist’s hands. These loans should be evidenced by a loan agreement. By knowing the various tax traps, one can better navigate around them with some peace of mind. PA David Chong Yen, CFP, CA, of DCY Professional Corporation Chartered Accountants, has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
Taking Care of Business GRAHAM TUCK H.B.A., C.A. www. ppsales.com
I am fortunate to have David Lind here to service our clients while Val and I went for a cruise in the Orient. Beijing for three days then the cruise; Tianjin to Shanghai, Okinawa, Taiwan, Hong Kong, two ports in Vietnam, Singapore then Bangkok for three days. We stopped in Vancouver both directions and visited some friends. A great vacation! But when we arrived
home we had five inches of water in the basement. Both sump pumps failed. I thought back a few years when our agent suggested that we should put sump pump insurance on the house insurance. I am very glad that we did as two thirds of the basement is finished space and the replacement of the furnace, the freezer and the reconstruction of the walls is all covered by insurance. This in turn reminds me that we tell our clients they should have a valuation and update it on a regular basis because you never know what is around the corner in life. If the flood comes in whatever form, it is nice to know that the valuation is complete and current. You have taken care of business and have the
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assurance that you have done everything reasonable to protect your asset, the practice. Too often spouses are left to pick up the pieces and it is a lot harder if they have not been involved in the business.
ten years out. When dentists are about 45 to 50 years old they come to the realization that they will not live forever. We do very few valuations for retirement planning for dentists under 40. We do valuations for partnership break ups, matrimonial purposes, and for sale when the dentist is going back to school or moving to the U.S.A. (in fact we just completed one of these this month). Most valuations that we do are not for immediate sale purposes. We think it is wise to have a valuation done eight to ten years before you wish to sell your practice. This provides planning time with regards to equipment replacement, lease renewal, staff requirements, and relocation options. Think of us as another set of eyes. With regard to estate planning, you will need a current valuation to sell your practice. The purchaser’s bank The valuation can be used for retirement planning. will require a current valuation. Think of an update of Often the practice and your home are your two an existing valuation costing about $500 per owner per main assets. But more than this, the presentation of year. As with my flood, this is a small price relative to the valuation should draw your attention to areas of the benefits of keeping a current valuation in hand. potential improvement that can be carried out over future years to improve the value of the practice. Graham Tuck, H.B.A., C.A. is the broker/owner of Professional Practice There is time to consider even such basic concepts as Sales (Ontario) Ltd., which specializes in the valuation and sales of dental moving to a new location. See my article in Volume # practices. He can be reached at (905) 472-6000 or 1-888-777-8825 32 How Do I Prepare My Practice For Sale? eight to or e-mail at: grtuck@rogers.com
Smile Dental: Practice Names Revisited DAVID ROSENTHAL BA., LL.B. Originally dentists were required to practice dentistry using only their personal names as registered with the Royal College of Dental Surgeons of Ontario (College). However, changes to the regulations under the Dentistry Act, 1991 permitted dentists to carry on dentistry using a practice name other than their personal names. The College issued a Practice Name
Advisory in May of 2000 to provide certain guidelines as to what is and what is not acceptable for practice names. Before using a practice name, that name must be registered at the Ontario Ministry of Consumer and Business Services. The name must also be registered at the College, and depending on the practice name, possibly be approved by the College’s Executive Committee before its use is permitted. If the practice name is “reasonably referable to and describes the location of the practice”, the regulations state that the approval of the Executive Committee is not required since such a practice name makes it easier
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for the public to identify a particular office. Names such as King Street Dental Centre or Main Street Dental would be acceptable under this category. Often a dental practice is located in a shopping mall or plaza, so if the practice was located on King Street at the King Plaza, a name such as King Plaza Dental Centre would also be acceptable. However, any other name that does not refer to the location of the practice does require the Executive Committee’s approval. The College will not approve a name that refers to any area of dental treatment other than the recognized specialties and also will not approve a name containing an adjective if that adjective (1) may be potentially misleading, (2) is not verifiable by the facts, (3) makes comparisons to other practices suggesting uniqueness or superiority, and/or (4) is likely to create expectations of favourable results or appeals to the public’s fears. The Practice Name Advisory Names Advisory lists some of the adjectives which have not been approved, such as “best”, “convenient” and “painless”. Other adjectives not listed but which I understand will not be approved include “pure” or “white”. Historically the word “Smile” was not approved or permitted in a practice name. However I understand the College changed its policy and will permit Smile Dental as part of a practice name. The word Dental must be included, likely so there is no confusion with a hygiene clinic. Adjectives are not permitted. Therefore
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practice names such as Big Bright Smile Dental or Best Smile Dental are not acceptable. Imagine if dozens of separate dentists received approval for the practice name Smile Dental for their dental practices. Clearly this would create confusion and be misleading to the public who might believe all of these independent practices are one chain of dental practices. Therefore the College will not simply approve Smile Dental. Further words are necessary in a practice name. The purpose of a practice name is to identify your own dental practice. If you wish to use Smile Dental as part of your practice name (and have that name approved by the College) I suggest adding the location also to the name. Names such as King Street Smile Dental, Smile Dental on King, or King Plaza Smile Dental would be practice names likely to be approved by the College. The above names are examples for illustration purposes only. I choose King Street in these examples as my law firm is located on King Street. Perhaps it’s time to change the name of my law firm to Smile Legal on King…well, maybe not…it does not seem to have the same ring to it as Smile Dental. PA David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0736; or fax to (416) 203-8592; or e-mail to david@drlaw.ca.
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Dentists Versus Teachers: Who Are the Better Investors? MARK McNULTY BA, CFP, CIM www. mcnultycentre.com
I meet many dentists who envy the Ontario Teacher’s Pension Plan (OTPP) over their own retirement plan. And what’s not to envy!?! A teacher receives a basic annual pension of two per cent multiplied by their years of service times the bestfive years’ average salary. So if you spent as long in teaching as you did in dentistry, you might be eligible for a pension of over $120,000 per year (pre-tax). One advantage of the OTPP is that it is a defined benefit plan, so a teacher’s pension is guaranteed despite investment performance. As a dentist, you do not have an institutionally managed retirement plan. Therefore, you are responsible for all your retirement and investment decisions. While it is not true in every case, the decisions we have seen dentists and their advisors make have not generally resulted in the same (or even similar) success that teachers have enjoyed. If measurement is based on investment performance and funding retirement needs, in general it is my experience that teachers are far better investors than dentists. So what is holding dentists back? Well, a few salient points include: 1. Their management fees are too high. 2. Retirement plans are one dimensional. They do not include tax planning and cash flow planning. 3. No attention is paid to Sequence of Return Risk, which is basically the risk that even short-term negative portfolio returns, especially in the early years of retirement, can leave a portfolio unable to fund retirement income needs. 4. Too much of the portfolio is allocated to equities. I have seen many a dentist relying on very unrealistic equity returns to fund their retirement. Your concentration should be placed on minimizing risk
and making money in the practice! 5. Investment advice is provided in a vacuum. In other words, the dentists’ advisors are targeting an arbitrary investment return. We believe the place to start is by determining how you will get your retirement income at age 90 and working back from there. Investment decisions then fall into place. Investment advisors often have a circle of competence and their clients are best served if the advisor stays within it. For example, if you had a patient with a malocclusion you might decide that an orthodontist is best suited to treat the patient and refer the patient along. Unfortunately, this doesn’t often happen in the investment advisor community. I have never had a dentist walk through my doors and say that since they are now thinking about retirement and their financial needs are changing and growing much more complex, their advisor has referred them to another financial consultant who specializes in retirement planning.
Once you have already retired it is too late to implement many of the tax and cash flow management strategies, which need to be set up well in advance to be employed to help ensure you have a financially sound retirement. The emotional attachments that hold many dentists back from ensuring they are receiving the best possible retirement planning advice are some of the very reasons why the teachers’ pension plan is so successful.
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For teachers, these emotional attachments do not factor into the equation. OTPP has a team of top pension fund managers who all specialize in funding the retirement of teachers. The teachers who currently have their retirements placed squarely in the hands of the OTPP have no emotional connection to these professionals whatsoever. The teachers’ personal feelings are factored out. As a result - even though the OTPP is not without their troubles - as of December 31, 2007 the Ontario Teacher’s Pension Plan has recorded an average annual return of 11.4 per cent since 1990 and funded all their retirees’ pension obligations along the way. Now with the above in mind, the fact remains that if planned properly and well in advance, most dentists have an opportunity to develop their own retirement “pension” that is far in excess of what any teacher receives. For example, our average client receives $10,000 a month from their portfolio to fund their retirement, and that amount is after-tax, indexed for inflation, and has not been affected by the recent
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downturn in equities. In contrast, the current average annual pension for an OTPP member is about $41,000 a year, before tax. Most institutionally managed pension funds follow a Liability Driven Investment Model. Liability-driven investing (LDI) focuses on setting enough assets aside in advance to fund liabilities as they come due in the future. It also recognizes that when it comes to retirement planning, the true measure of investment success is the ability of your assets to meet your planned future cash payments, with as little risk as possible. It has been my experience that dentists who follow this model are the better investors. PA
Mr. Mark McNulty BA, CFP, CIM, is a financial advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222 ext 209 or mark.mcnulty@raymondjames.ca.
The Black Swan and Insurance DR. IAN WEXLER www.protect-ins.com
Recently, I finished what I consider to be, one of, if not the most influential book I have ever read. It is called The Black Swan and it is written by a brilliant individual by the name of Nassim Taleb, who holds a Wharton Business School MBA, a PhD. in Management Sciences, was a Wall Street trader, is a philosopher, university professor, bestselling author, speaks four languages, and is completely unafraid to say “I don’t know” about something. To summarize The Black Swan is extremely difficult, other than to say it is about the unpredictability of life and how major unexpected, unpredictable, and random
events help explain and shape our lives and the world around us. The reason for the title has to do with fact that for a great number of years, people only thought that white swans existed…until someone sighted the first black swan, and that changed forever how people view swans. A Black Swan according to Taleb is an “outlying event that lies outside of the realm of regular expectations, carries an extreme impact, and retrospective predictability.” Taleb explains that these shocks to our lives can be positive or negative. Everyone reading this article or The Black Swan will certainly be able to go back into their own lives to see what major events or Black Swans have shaped them. Taleb asks “How often did these things occur according to plan?” Consider just some of the Black Swans in your life including some recent and not so recent world events. You can start with our current financial crisis, the 9/11 terrorist attack, the invention of computers and the internet, how you met your spouse, or
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even how you became a dentist. Because of my own life, starting off as a “single, dentist in New Jersey, to where I am today…a married insurance advisor with three kids living in Toronto” I found the premise of The Black Swan to be of great significance. Particularly though, I realized after reading the book that I deal with Black Swans everyday: 1. Convincing individuals that “negative“ Black Swans exist in the form of incurring a severe disability or dying; 2. Helping individuals understand the financial impact of these types of Black Swans on their practices and families; 3. Providing financial protection to individuals who would benefit from it in the event of negative Black Swan; 4. Helping those at “claim time” who have just experienced a negative Black Swan. What I have found out in my years as an insurance advisor is that many individuals, dentist clients included, like to think they know what the future holds. I routinely hear: • I have great genes! My parents are completely healthy, and my great grandparents are 100 years old. I’m quite confident nothing will ever happen to me; • I don’t play any hazardous or dangerous sports, and lead a simple lifestyle; • I’m young and in great shape, plus I exercise regularly; • It just won’t happen to me!
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This was not supposed to happen to me!“ or, “I need to put in claim…what do I do…where do I start…do I have enough coverage?” People enjoy a level of comfort and satisfaction in thinking they know or can control to some degree what the future holds. We are raised and educated this way. This includes everyone from professional sports team owners to “all” of the economists who think they can predict how and when the financial crisis is going to end. Not one economist or politician by the way, predicted the current crisis!
A Black Swan according to Taleb is an “outlying event that lies outside of the realm of regular expectations, carries an extreme impact, and retrospective predictability.” Taleb explains that these shocks to our lives can be positive or negative.
I have always known, even before reading The Black Swan that insurance protection can be viewed from a few directions with regards to mathematical probability. The first is that I could recommend It is not uncommon for these same individuals to tell insurance coverage based upon statistical probability me when and how they are going to die or incur a dis- (which is how all insurance plans are essentially ability. The logic behind Black Swan events hold the priced). In other words, I could throw my clients onto a “bell curve.” The second is that I can protect them from opposite and include: being blindsided from an unforeseen, random event • You cannot predict the future; • You cannot choose which disability you might get, that could have devastating financial consequences. when it will happen, how severe it will be, or how It is up to you to decide how best to protect yourself in the event of a Black Swan! PA long it will last; • You cannot predict when or how you will die (unless you commit suicide of course). Just the other day, I received a phone call from a client commencing the twentieth disability claim that my insurance firm is currently overseeing and managing - a new record. The phone calls I get are always from either the office manager or spouse (usually the worst case scenario) or the client. In this case, it was the client who called. He began by stating what seems to be the opening line for all claimants, “I can’t believe it!,
Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, annuities, and other insurance products and services to professionals, executives, and business owners across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@ protect-ins.com
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The Changing Realty Leasing Market IAN D. TOMS B.Sc. (Hons) www. iantoms.com
Consider the following: • In many areas new housing and retail developments have been put on indefinite hold and some of these properties have been listed for sale. Major residential and retail developers are in financial distress. • Shares in publicly traded landlords (for example, Riocan, Morguard and First Capital) have decreased significantly in value, in some cases the decrease is more than 60 per cent. • Retail leasing managers with many years of experience are being let go and not replaced. • Landlords are actively promoting properties for lease, whereas up until last summer they would not take or return calls. • With specific respect to space for lease, the Toronto Real Estate Board reports that whereas the number of square feet leased increased by 21 per cent in July of 2008 compared to July of 2007, that increase fell to a mere 2.9 per cent in August of 2008, and has continued to slide since so that the number of square feet leased in January of 2009 dropped by 60.1 per cent compared to the same month in the previous year. The net change in space leased during July 2008 and January 2009 is a staggering 81.1 per cent. The trend continues; space leased in February 2009 was down by 44 per cent from February 2008, and in March of 2009 it was down by 54.8 per cent. Tenant’s sales and confidence is down significantly and as a result they are not renewing their lease terms or building new locations. Tenants are failing and leaving their units vacant. And new space continues to be added to the market. What does this all mean? There is a very significant change occurring in the realty leasing market. The
significant decrease in demand for leased space results in an increase in space remaining available for lease. As the supply of leasable space increases, the demand decreases, significantly improving tenants negotiating ability. Right now, and for the foreseeable future, base rental rates will hold at or close to current levels without the dramatic increases seen during each of the past several years. Additional rents will continue to increase as pressure to increase profitability motivates landlords. If the lack of demand continues for more time than their cash reserves allow, landlords will need to sell or refinance and rental rates will drop. At this point the real opportunity is to understand that as a tenant, you have both an increased leverage opportunity and a greater range of opportunities to use that leverage. My advice is to prepare to advance your position as a tenant over the next few years. 1. For existing tenancies between renewals - inventory your lease position by having your lease reviewed and key opportunities identified. Now is the time to be ready to accomplish those subtle lease changes which will have big payoffs in future years such as capped additional rent, additional tenant favourable options to renew, and relaxed assignment provisions. Consider approaching your landlord with an unsolicited proposal to amend the lease. 2. Lease term renewals - it’s more important than ever to take control and approach your landlord well in advance of the term expiry date to make sure they realize that you still have time to move, because in this market not only will the alternate space be available, but the competing landlord will provide incentives to make that move economically attractive. Use this leverage opportunity to make sure you receive the best possible rental rate and adjust other tenancy terms and conditions with your current landlord. 3. For new tenancies - think outside of the box, literally and figuratively. Instead of the “what you see is what you get” conditions that we have seen for a number of years, now is the time to adjust your thinking to reflect “what you can see is what you get”.
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PA
Developers will now build premises “to suit” because current leverage climate to make sure that all of the there is little demand for their standard “four walls terms and conditions affecting your tenancy are as and a ceiling” space. Custom built space includes favourable as possible. many extremely important features such as choice of position within the plaza, choice of size of unit, significant landlords work, long terms at comfortable lease rates and financial packages suited to tenants’ Based on more than 20 years business experience Mr.Toms, B.Sc. (Hons) tax planning needs. Know what you want, and be acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is prepared to ask for it. licensed as a Real Estate Broker and can be reached at (705) 743In summary, now more than ever it’s important to 1220, by e-mail at iantoms@pipcom.com, or through his web site at: understand the details of your lease, and use this www.iantoms.com
The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.