There is a giant wild card in the economics of a commercial property lease that can easily derail a deal: tenant improvements. In most instances, the tenant asks the landlord to make changes to the leased space prior to the lease commencement that can amount to a significant capital improvement on the landlord’s part. Even for a small lease, these costs can easily climb into six figures. What a lot of tenants fail to see is that this investment on the part of the landlord changes the character of the arrangement from a mere lease of space to more of a partnership. It is enough for a landlord to agree to tenant significant tenant improvements but when the tenant’s financial statements don’t indicate impressive financial strength, the decision by the landlord will often be to pass on the deal.
A good commercial tenant rep broker can adjust the landlord’s perspective in a way that helps get over this hurdle. In many deals, I emphasize the fact that many of the requested improvements add value to the building and make the property more valuable and the subject space more marketable for many years to come (and future tenants). I call this “playing the long game”.
I recently negotiated a deal for a tenant that wanted to move several walls in a small suite. The space was very inefficient with valuable space wasted on hallways and a couple of the windowless, interior offices that were too small to really be functional. But it is crazy how the costs balloon when changes like this are planned. There is a domino effect – walls impact the ceiling, the flooring, the HVAC (air conditioning system), and the lighting. But by moving some walls, useless hallway space was converted into more area in those interior offices. Windows were installed at the top of the walls in the interior offices to let in light. Cabinets were relocated in the kitchen/break room area yielding enough space to put a small table and chairs for employees to take their breaks in the suite. Now the landlord had a much more appealing suite for the market at large. We just offered to lease it for the next five years.
I was able to get the landlord to see the tenant improvements as an investment in his building, not just in the tenant. Everybody was happy with the outcome…and the landlord was quite happy for the income!