Steve1 leases a 300,000 square foot distribution facility in Northwest Edmonton. The building consists of predominantly warehouse space, but it also includes an office area. At one point, the office area was full with tech support, sales people and administration staff. Unfortunately, recent company layoffs had reduced the amount of office the company required. To save some money, Steve sought to sub-lease the portion of the office that wasn’t being used.
To Steve’s chagrin, he was about to encounter an insurmountable problem. It wasn’t a case of a landlord not agreeing to sub-lease, nor was it an issue of finding a tenant. Instead, it was an unexpected run-in with Edmonton’s draconian zoning bylaw2
Intuitively, it wouldn’t seem to make much difference between one company leasing the whole building, or one company leasing the warehouse portion and a second company leasing the office portion. But before we get to how this story ends, we first need to provide some context.
For assessment and taxation purposes, the City of Edmonton, or more specifically the Municipal Government Act (MGA), categorizes real estate into three separate areas:
With seemingly never-ending circular references, the MGA actually says that Residential is not non-residential. In a battle of one-upmanship, we hereby decree that non-residential will henceforth be known as not not non-residential3.
The intent with the classification system is to group the tax base into properties that are intended for people to live in (“other residential” is essentially multi-family properties) with everything else falling into the not not non-residential4 category.
In the Zoning Bylaw, The City of Edmonton expands on the categories to include commercial, industrial, residential, agricultural, urban services and direct control zones.
Urban services include parks, libraries, schools, churches, etc. Direct control (DC) zones are designed to provide a zoning classification for properties that don’t fit into the mould of the other ones. For example, a DC zoned property might allow for a mix of residential, retail and office space.
Residential and agricultural are fairly straightforward, although these do have certain nuances (such as density or height restrictions).
Commercial and industrial can both be broken down further into sub-categories.
Neighbourhood Convenience Commercial Zone (CNC)
Shopping Centre Zone (CSC)
Low Intensity Business Zone (CB1)
General Business Zone (CB2)
Commercial Mixed Business Zone (CB3)
Highway Corridor Zone (CHY)
Commercial Office Zone (CO)
Business Industrial (IB)
Light Industrial (IL)
Medium Industrial (IM)
Heavy Industrial (IH)
Ultimately, each and every property will be have a certain zoning classification, and accompanying that zoning will be a set of permitted and discretionary uses allowed under the zoning bylaw.
It just so happens that Steve leases a property zoned Medium Industrial. One provision of that particular zoning is that a company cannot occupy 100% office space. Although it was used as office space by the company leasing the whole building, a second company cannot lease the office space separately. Even after discussing with a senior planner at the City of Edmonton, there was no mechanism to deal with this issue5.
As a result, the company is paying rent (and property taxes) on a vacant space that the City will not allow them to lease.
Moral of the story #1: The property taxes collected by the City of Edmonton (which coincidentally are the highest in the region) seem to be fueling a system that is increasingly bureaucratic and decreasingly business-friendly.
Moral of the story #2: click here – it’s profound.
1 Not his actual name
2 His words, not ours
3 We currently lack the jurisdictional power to decree things. So regrettably this will not be an actual term going forward
4 Looks like the term is catching on, might actually be a thing going forward
5 The City planner did say that the property could be re-zoned. The statement about draconian bylaws is starting to make more sense.
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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