Restaurant tenant wants to expand but asking for money

[Adrian Stamer]

Hello

So I have a small mixed used property and two of the units are occupied by a restaurant.  One is a small building with the actual restaurant and the other is just for additional storage.  There is a shed like room attached to the back of the actual restaurant and the tenant wants to turn it into an actual addition of the restaurant...  but has asked for money to help pay for it.  His justification is its improving my property

The tenant has a 5yr lease with options to renew, so its unlikely I would see any benefit as is to the improved property anytime soon.  Also, his rent is only $700 a month for the two buildings (I did say small heh) and he quoted me as the addition costing $25-30k.  I can't really see anyway I would get any benefit for helping other then a rather large rent increase.

But really my question is, how do situations like this usually work and are structured? This is my only mixed use property, as I'm just in residential other then this so I have no experience with this.

Thanks

[Howard Abell]

Tenant Improvement funds is not unusual in commercial real estate. However if the  landlord funds it in whole or in part, He/she would amortize the expense in the rent payments over the life of the base term of the lease. In this case, 5 years. I would try to negotiate some money being put in by the tenant and then raise the rent on both the old and new space which would include the expenditure made by the landlord repaid after 5 years. If the payments are higher than the tenant can manage, try to negotiate an extension to the base term of the lease. There is no set formula so you can be creative in fashioning a deal that suits you both. Yes, this looks like an interest free loan and it is. But you are getting an improved property. Also the new rental rates help build value. Just a thought.