Ground lease up for renewal

[John McKee]

I have a property ground lease that is 15 years old and 3 years left on the lease. A Hired broker of the large chain  restaurant wants me to contribute 100k toward improvements and in exchange they will extend the lease. Is this Normal or a shakedown?

[Joel Owens]

What some tenants do such as Walgreens and others is they will have someone newer to the business a leasing broker make contact or send letters making all these demands to extend the lease.

Then whatever concessions the broker gets they often get a BONUS per location. So the more they screw the landlord the more money they make from the tenant. This is often why the leasing broker making contact doesn't know what the heck they are doing. They are a newbie hungry for money. Legitimate leasing brokers do not usually work on such arrangements.

If the leasing broker is not experienced we often say we want to talk directly to the leasing person working at the tenants company not some outside person. Sometimes you can't get around it.

First thing you need to do is determine the STRENGTH of your site and WHAT the NNN rents are per ft compared to ground leases in the area. IF the ground lease is overinflated compared to absolute NNN with under 5 dollars a foot difference then you might want to negotiate with the tenant for TI's. The way I look at TI's is it opens the door for me to re-negotiate points of the lease to extract more value for myself if I want to sell later.

The large chain restaurant it's all about are they on an upward climb the brand, stagnating, or falling? How about if this is not parent corporate but a larger franchisee. If the ground rent is way below market and a booming area you almost want them to leave and go elsewhere if you can backfill for another stronger tenant that resale has lower cap values for with higher pricing.

You need to determine the age of the building and cost to retrofit it or adapt it to something else. If it's really old we just tear it down and figure in demo costs with purchase price when we acquire it.

It's common regardless what the lease says for options for tenants to ask for concessions. Walgreens does it all the time. If they want me to front new parking lot or roof then the 5 year renewal option goes out the window. It's a fresh 15 year lease with rental increases in primary term. I get my value and more profit back that way.