The key to every commercial real estate lease is constructing an economic framework that works for both the tenant (my client) and the landlord. Most tenants envision this simply as negotiating the lowest rental rate that the landlord can tolerate. It is much more than that.
The other major capital expenditure after rent is the cost of remodeling and refurbishing the leased premises, commonly referred to as tenant improvements, or T.I.s. This is the financial weight that breaks down most lease deals. It is understandable that most tenants do not do not have much experience working out these issues. But it always surprises me to find so many landlords lacking the imagination to creatively solve these problems.
The problem, when it arises, is typically that the cost to construct what the tenant needs is more than the landlord is prepared to spend. This is where an experienced tenant rep broker’s understanding of the landlord’s investment perspective helps the most. After all, return on investment is how they look at real estate in the first place!
I recently had a situation where an office building landlord was quite stubborn about bridging the T.I. gap. First of all, he was unwilling to fund the T.I.s outright but gave the tenant a free rent concession and told them to do the construction themselves. But the concession offered was only half of the tenant’s cost. When I attempted to bridge the gap with a request of additional T.I.s the landlord offered one more month -- $1.50/square foot -- for an additional $.10/s.f. on the rent for the three year term. Apparently, he failed to do the math: 36 months x $.10 is $3.60. Pulling out my financial calculator that comes to…an annual interest rate of 60%. Non-starter. So I patiently spelled out a loan amortizing three additional months of free rent at 6% interest that came to $.12 per square foot per month. The landlord agreed to the deal and the lease got signed. (Yes, I know many of you are thinking, where the heck can you rent office space for $1.50 per square foot? Give me a call and I’ll tell you!)
The framework for a lease deal requires many beams and a good real estate broker to serve as an expert welder.