Help deciding on type commercial tenants!

[David Hite]

Good afternoon all!

So, I build a commercial building from the ground up that finished May of 19'.   I occupy 50% of the building (~3,000 sq ft) with my Medical/Optometry Practice.  I built the building to have ~3,000 sq ft of tenant space available.

With Covid and other things, nibbles on potential tenants has been far and in between, but recently have two very interested parties....and I am not sure which set up may be better long run!

I left the 3,000 tenant space as warm-dark shell, so tenants could customize if desired.

#1) Tenant one is a national franchise of UPS.  Owner has two other successful locations with little personal/business debt.   They only want half the space (it is build for up to two tenants), and they need it brought up to vanilla shell, then some TI dollars on top of that.  10 year lease, and they will be paying a higher base rent, enough that I will recoup my vanilla build out and TI allowance over the 10 year lease.  I figure a UPS store would be a great co-tenant, as most people tend to go to a UPS store at least every 1-2 years....so basically everyone in my area will see our business as they come to the UPS store.   Having them would leave me with the other half un-tenanted for now.  I would plan to just go ahead an vanilla shell the remaining half while I'm at it (surprisingly few people want the ability to customize their space, they want it to start as vanilla).  I feel like a UPS tenant would attract other tenants quicker as well.

#2) Tenant is a local business owner, who is opening a 2nd location of their business which has been successful since creation3 years ago.  He wants the entire 3,000 sq ft space AND is willing to front ALL the build out cost to bring it to his specifications, and in return he will have a lower base rent (since no build out/TI to recoup).  His business is a Pet supply/Dog Grooming/Self-Dog-Wash business.  I visited his other location, and it is neat/tidy, not smelly (there were not alot of people there).  While he was looking at our shell he was already talking about putting the animal portion of the business on the opposite side of the property, so furthest from my space, and double insulating the walls, extra ventilation etc....he seems like the noise/smell is something he wants to try and eliminate as his first space didnt do that as well.  There is the concern with animal's doing their business....and we would likely have to convert an area in front and back to be designated for that use.  There is no animal overnight boarding, just drop off's for grooming and pick ups later.

Going with #2 would literally save me ~$250k in vanilla shell, TI allowance, broker fees etc.... all up front.  I have the money, but I could use it elsewhere to invest from the get go....where with #1 the money will be recouped over the lease.   The lower rent would also end up with a lower commercial value however, because the lower base rent with 3% increases ends up being alot less then the UPS would be over the 10 years with increases.

So, financially, #2 is a slam dunk.

I am concerned with the type/prestige/quality of the co-tenants.  I feel like a UPS store would bring a wider range of people near my practice more often, and would likely be able to attract a better 3rd tenant.  I am concerned with the animal nature of #2 and potential problems there.

What are your thoughts?  Potential problems with a pet supply/grooming tenant who takes the whole space and pays for everything!  Or UPS that costs more, but may be more beneficial for traffic and building future value?

I appreciate it!

David Hite