leasing to TIN (no SSN), and what is average giving in TI?

[Courtney Duong]

Hi BP,

We have a retail spot available and there is this couple who have been showing serious interest in leasing it for a restaurant.  Here is the dilemma:

2 persons will be on lease.  The husband, and a partner.  It is this partner who has no SSN but she has TIN and willing to provide her tax returns and bank statements.   My question is:  will we have any problems in leasing to them in this situation?

How much in TI to give is the norm?  We are in Houston.  Thinking of giving 40% towards cost of building of kitchen and grease trap but that will be spread over the 5 years term in the form of credit back to each month rent but not sure if this is reasonable or not?  

We are newbies here so and tips/advices are greatly appreciated.

Thanks.

[Jack Butler]

Courtney, Based on your description I am making the following assumptions: 1) The TIN is the tax identification number of some business entity.

2) The TI you referenced is a Tenant Incentive or also known as a Tenant Allowance. 

 It’s not uncommon to lease commercial property to a business entity. As far as the TIN I would suggest you contact a real estate attorney to be sure you have a good commercial lease that covers you and minimizes your risk. I would do back ground checks to find out about the proposed tenants. 

I would recommend a triple net lease (NNN) where the tenant is responsible for paying additional fees - the property tax, all maintenance (including or excluding the roof - (your choice) and insurance on the property. The insurance I am talking about is insurance to protect your property such as from fire, damage, etc. You should purchase this insurance and collect from your tenant.

The above ( taxes and insurance) should be paid in estimated monthly installments with a provision to allow you to bill them at the end of the year for adjustments such as an increase in insurance or taxes. If they have over paid that can be applied as a credit against future Additional Fees. 

They must have business and liability insurance.  Any insurance they purchase,  you should be notified by the insurance company if the insurance lapses.  

 The tenants should be responsible for keeping all mechanical systems in working order throughout the term of the lease and return the property with all systems working. I found the following information on a google search - Around 60% of restaurants fail with in the first year.  If it goes sideways you want to have a solid commercial lease that spells out everything very clearly and has all of the tenant parties responsible for the lease.

  What is the size of your retail space? Is it free standing or in a strip center?

You have several questions to ask yourself / find out. Do you want your property to be converted to a restaurant? Is this the best use for this space? Do the proposed tenants have any restaurant experience? Are they opening a franchise restaurant? Are there other restaurants in the area that are successful? While it will be an additional expense to you getting a commercial real estate agent to help you could be beneficial. He/She May also know a good real estate attorney  

Have the prospective tenants asked for a TI? Do they have a cost for construction and itemized list of equipment?  If so how much? Has the health department approved of the plan and equipment? Can they afford the initial build-out to transform your space to a restaurant that will pass health inspections and have enough funds left for the start up, food cost,  and marketing? The start up cost for a restaurant can be significant plus there will possibly be increased HVAC requirements.

Once converted to a restaurant it will be harder to rent as a shop or office. However it will be somewhat easier to rent it as a restaurant.

As for the TI / TA 

I would not give it as a rent reduction. The rent is the rent. If they do not fulfill the terms of the lease or the business fails you have a lease with X number of months at a specific rental rate that they are responsible to pay.

If you want to participate in helping them convert your property first you must determine home much you are willing to spend. There are many ways to do it. Are you going to be a partner in their adventure? 

1) You can, as you suggested, do a monthly credit and divide the TI over the length of the lease. I would make this contingent upon all terms of the lease being met. Examples-  Payment wasn’t late for the month, insurance is current, Etc. If they aren’t current then they don’t get that months reimbursement check from you.

2) Similar to the above - make the payment at the end of each lease year. If they haven’t been current for the entire year they do not get a reimbursement check from you. 

In the above methods who owns the equipment? 

3) They most likely will push you to give them most of the money up front. I would not recommend this as it is like an unsecured loan. If you decide to go this route I would not give them any money till the work has been completed, they have passed inspection, gotten a certificate of occupancy, and have opened for business. Maybe pay with in 30 days of opening. In this method  all improvements and equipment should remain with the building. 

4) If I give a tenant allowance I increase the base rent to cover the cost of the allowance. It can be structured in many ways. 

5) I have a tenant that took a rough historical building that I owned and converted it to a brewery/ tap room. The building had been vacant for 2 years and my commercial real estate agent was getting nowhere until this person wanted the building. Since he had to go through months of applications, approvals, ATF permits to brew beer, and building upgrades that would remain with the building.  I gave him 7 months of free rent. All he had to do was pay for the property taxes and insurance. He also paid for all improvements to get the building to be Compliant and fit for his use. 

There are lots of other things to think about but I am sure the above is a start.