Developing empty shell to lease to physical therapists, advice ne

[Igor S.]

Need advice,

I bought an empty shell space ~ 1.5 yrs ago and it's about 4,450SF. I am meeting a couple of physical therapist guys next week who have 4 locations already and are expanding and are interested in renting this space from me. Does anyone know how much per SF are the build out costs for a PT office in East Tennessee? I was thinking about charging them $21/SF/YR rent (Modified Gross) with a $50/SF tenant improvement allowance. I'll have to take a 10 yr bank loan out for it. I will also need a 10 year lease contract with them for the numbers to work out. I do not want to allow them more than they truly need for their build out.

2) Anything I should be aware of? Any words of wisdom? What are acceptable % annual increases if any? I was thinking about holding the rent steady for the first 3 yrs, then maybe 2% annual increases until year 10? Is that fair? Any advice?

Much appreciated,

[John McKee]

Sounds like you are willing to give them TI so  I would keep the rent increases in the lease starting after the 1st year.  I think 3% is reasonable but you HAVE to keep up with inflation these days. A lot of landlords will give the tenant 3-6 months of free rent so that the tenant can do their build out.  The most important thing is to pay out TI in phases as they finish the work in my opinion.  For example: 10K upon plumbing and electrical completion, 10K upon dry wall etc., and 10K upon receiving a certificate of occupancy.  The biggest needs of most tenants is upfront capital.  This is just an example of how I have done in it in the past.  Everything is of course negotiable, but if you're generous with your TI I would make sure you are getting a little higher rent.  It just depends on what the tenant needs.  Also I would make the lease 5 years with a 5 year renewal option.  This will cut down your costs to the leasing broker as typically they only get paid on the net rent of the initial term.  Feel free to reach out as I can go on and on.  Congrats!