How is the TI allowance handled in your market

Question

Hello BP,

Was wondering if there were any commercial (retail/office) landlords that can chime in on how they were offering terms on TI.  Are you offering a TI  allowance as an upfront incentive (where the tenant does not need to pay you back)?  Or are you paying for TI's up front but amortizing those costs over the term of the lease and charging this in addition to their base rent?

I know the answer obviously depends on your local market or how hard you negotiate but just wanted to see what some folks were actually doing in practice.

Thanks in advance

Joel Owens · Answer

It's a calculated decision based on at what stage and condition the building is in.

For retail if there are no demising walls yet and it's in a cold dark exterior shell condition the all in costs for putting in walls could be 35 to 40 per sq ft with plumbing and ceilings etc.

If you have demising walls already could drop to 25 to 30 a sq ft. If this is existing space a previous tenant left that was already finished out you can sometimes do for 15 a sq ft for more minor changes.

If a Starbucks is calling me with a national corporate lease guarantee then I can feel good about recovering my TI costs eventually. If it's a local start up tenant there is a lot more risk if they go dark early because it takes time to recover the TI's. In those situations you want personal guarantees and high liquidity and net worth. You also want rents rising annually instead of every 3 years like national tenants so you can extract maximum rent if they go out early.

Weaker tenants free rent if the tenant spends the money for TI is better because if they go out you are not out that physical money. You can also take a retail center and do condo's. In this way the tenant will own their business space and can usually get a SBA loan for 10% down and get 90% of total costs funded including build out .

Lot's of options and everything is on a case by case basis. Not only do you have to decide if a tenant makes sense for the strip center with other tenants and businesses but also if they go out how much anticipated TI will be needed to release the space.

If the tenant business is failing 1 to 2 years in for example and they want a rent reduction you can demand audited financials from an independent company reviewing their records. You can also ask for an early termination buyout where if they still owe 2 years on the primary term they pay you for 1 to cancel. In that situation the goal is to try to get enough money to offset upcoming leasing commissions for that unit and expected TI's so you are at break even with the new tenant. Timing the termination of the existing unit for optimum releasing point in the year is important as well.

No legal advice given.

Robert T. · Answer

Instead of handing out cash to a new retail tenant, who might disappear with the cash; we offer the equivalent in terms of free rent.

Martin Z. · Answer

i wouldn't pay upfront, more likely do free rent over time, just remember all the huge financial institutions that collapsed several years ago

Dale Shin · Answer

Other than what's been commented on, I've also seen landlords pay out tenant TI in the form of an actual check back to the tenant or as a credit towards rent.  But this was issued only after improvements were completed, work verified and a lien release from the contractor.

Bill Gulley · Answer

Oh, my, what time is 12:42 AM my time when I posted, LOL!

I see you said office! Sorry, we put that on the tenant's back in the office-warehouse but consider what that infill may be as well. Trade fixtures are all on a tenant.

Interior walls dividing office space can aid in the marketability for future tenants, dividers for coffee/kitchen area, waiting area can improve the property if nicely done.

Such can be on a split cost basis, the tenant may expense that amount as capital improvements, owner's share is amortized over the economic life to depreciate. If the improvement is significant, you may have a windfall that was expensed by the tenant that reverts back to you as RE when they leave.

Need to look at the depreciation, the tenant has a faster schedule than an owner, look there as to who can write off expenses quicker and negotiate from there.

• As to condos on a strip, that might apply, depends on any minor subdivision requirement, most probably can't go there. Joel is off in left field again, LOL. :)

Jason Mak · Answer

@Bill Gulley

I was actually referring to Tenant Improvements but your post was very informative - thanks

@Howard Abell

Thanks for the response - yeah it's not a straight shot answer so I will have to ask the local brokers to what is competitive

@Joel Owens

Thanks again as always for your good advice.  Splendid stuff!

Howard Abell · Answer

I believe the TI in this instance was meant to be Tenant Improvement or as they say here in North Carolina "Upfit". As you say, most landlords will amortize the TI over the term of the lease. However, using it as a promotion or negotiating element is useful.  Either way you need to do the numbers and stay competitive at the same time. Sorry I have not easy answer but there usually isn't one.

Bill Gulley · Answer

What?

If a tenant wants title coverage for a lease-hold interest, they buy it, generally not done, except in a long term lease where a tenant may have such concerns.

Is this for a ground lease where the tenant will build? They get the title coverage required by the lender, it's part of their build costs.

Your costs are in the cost of acquisition, which are amortized, not over one lease, but the economic life of the property.

Usually, not always, in a sale transaction a seller proves they have good title to convey, they pay for the search, the owner of the policy pays for the policy, the more customary approach, but local custom prevails, it can always be negotiated.

Now, if you mean T&I, taxes and insurance, they are amortized over the lease period on a per-diem basis, just as your interest expense is, vacant periods are on you. :)

How is the TI allowance handled in your market

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