Restauarant and Retail - LOIs, TIs, Variances, and Leases

[Will F.]

Hey can someone give me general advice on retail/ Restaurant Leasing. Building Located in Los Angeles County.

I purchased a value-ad mixed use with retail/ with goal: to maximize value to property.. Possibly refi in 2 years or sell in 2-5 years after property is stabilized. I want to maximize the rent/ appraised value.

I have been marketing a retail space to lease to restaurants and have a few interested parties.  There is no existing infrastructure for restaurant, and the space is in need of major repair.  A normal retail space in this building might only require $10-20k in improvements to bring it's standards up, where a restaurant would require $60-200k in upgrades to meet restaurant standards.

One restaurant is interested in doing a $250k buildout (I may have to contribute another $20-40k to fix up the space's shell -plumbing/wall repair)

They are requesting $40k TI and 4 months free rent during buildout period.

It's approximately 1700 sf and they want $2/ sf/mo NNN(I'm pushing for $2.75/sf NNN)

Do you think this is reasonable? In this area, turnkey rents are around $3-3.50/sf/m, and $3-4/sf/m in better areas.

Any tips or general advice for a landlord?

General advice for pushing the most value for property in this lease/ build out.  What is expected in general for a retail space requiring a full build out to bring it to restaurant?

[Joel Owens]

You could possibly give them a little lower rent the first year and have them do the build out and pay for all of it. You could have 3% rental increases each year instead of 2% so that your blended return is higher over time and when you sell years later. Rent doesn't usually start during build out as they have not taken occupancy yet to open for business with a certificate of occupancy. It is typical sometimes to give 1 or 2 months free rent after they open.

In the lease MAKE SURE tenant is required to disclose monthly and annual sales. This is important so you can monitor their annual rent to sales ratio.

Example 100,000 rent and 1,000,000 sales is a 10% rent to sales ratio. Usually do not want the percentage much higher than that because you throw in food and labor cost and the profit starts getting tight. When you go to sell it will be a plus to a buyer and the lender that you have ongoing sales. You need penalties if tenant does not disclose proper sales figures etc.

Really need an attorney to draft a good lease in the landlord's favor. If NNN lease have no cap on the property taxes each year.

No legal advice given.