How We Help Our Clients Maximize Their Concessions
Tenants with ten or more locations should be negotiating concessions on every deal they do. Although every deal and market is different, what remains consistent is generally Landlords would rather spend more money on tenant improvements, tenant improvement allowances, abatements, etc. on a multi unit operator rather than an as is deal with a new business.
The following outlines how we help our clients maximize concessions without having to amortize it over the Lease term:
Understanding The Landlord’s Preferred Deal Structure
Whenever our team is executing site selection for a client, we always talk to the Landlord or their broker about their preferences early on in the deal cycle. What we mean by this is we ask questions such as:
Can you provide some insight as to what is important to this group?
You can find out a lot by asking this question. Last week my team asked this question to a mid size landlord and were told they have a refinance coming up in the next 18 months and they’d like to fill the space so they can maximize their refinance proceeds.
This tells us that they are hungry for a deal, that the length of the Lease term is likely important to them (lenders prefer stability), and that they are likely open to delivering improvements or allowances to get a deal done in the next six to twelve months so they get credit for the deal. When you are able to obtain insight like this it can put you at an advantage during negotiations, and all you have to do is ask.
Another example we recently obtained from a Broker was that the Landlord “rarely sells, doesn’t have any debt, likes to keep his portfolio full, and we’ve never seen them write a Tenant Improvement Allowance check”. Between that and the under market asking rate, we realized it was best to structure a deal with a longer free rent period rather than asking for a TIA.
Does this group prefer to deliver a Tenant Improvement Allowance or to deliver tenant improvements?
We ask this because every landlord is different. Sometimes the asset is owned by a larger company that has in house construction and prefers to control the work themselves sometimes it is a mid size owner that prefers to write a check and not deal with construction, and other times it is an unsophisticated owner that prefers neither (we’ll get to how to handle these later).
Structuring Concessions
Once we understand the Landlord’s preferences, we then work with our clients to craft a compelling offer using one of or a hybrid of the below:
Tenant Improvement Allowance/Permit and Build Out Period
I.e. a $30 TIA on a $15 base rent with rent commencement language similar to the below:
Tenant shall have forty-five (45) days from the day the lease is fully executed to submit plans to the city for approval, and upon Tenant's receipt of the building permits, Tenant shall have one hundred and fifty (150) days to complete construction prior to rent commencement
For operators with complex build outs, this structure generally helps with the deal because the Landlord has a fixed cost rather than a construction project that can have surprises; we don’t have to wait on the Landlord to price out the work and if the operator has done this before they generally has an idea of what it costs; and it helps the Tenant reduce exposure on rent payments prior to their opening as the build out period starts once they receive permits, not when they sign the Lease.
Abated (free) Rent Period
If the Landlord or Landlord’s broker advised they prefer against writing checks, we propose a deal that delivers the operator a similar concession.
For example, if the tenant was seeking a $30 Tenant Improvement allowance on 2,000 square feet ($60,000) at a base rent of $15 per square foot ($30,000 in annual rent) on a ten year term, we would structure the offer to have a twenty four month abated rent period and offer a twelve year term so the abated period is “paid back” on the back end of the term.
This allows the Tenant to obtain a similar concession to a Tenant Improvement allowance without the landlord having to write a check.
White Box/Turn Key Deliveries
For sophisticated landlords and or landlords that have an in-house construction team it oftentimes makes sense to propose a turn key or white box delivery, especially when the prior use was medical or “office” in a retail setting that has an extensive demolition.
The upside to these deals is it puts the burden of the build out on the landlord and generally alleviates pre opening rent exposure, however the downside is sometimes problems arise and it may delay your commencement.
Generally when negotiating these deals you will need either a prototype or a set of recent plans so the landlord can price construction out prior to signing the Lease. It also helps if you can refer the Landlord to a general contractor that has already done a build out for you as it will save all parties time.
Help Your Broker Help You
The following outline a few ways you can set up your Broker for success:
Provide Your Broker With General Abatement Targets
Most multi unit operators have abatement targets, such as seeking to obtain twice the first year’s base rent in tenant improvement allowance i.e. if the base rent is $18 psf for the first year they will seek a $36 TIA.
Another example of a less intensive build out is five months of free rent for every three years of lease term.
Regardless of whether you have a fifty thousand dollar or five hundred thousand dollar build out, it always helps to provide your broker with guidance so they know where to start negotiations and a target of where the client needs to finish.
Provide your Broker With A Prototype or Set of Plans
This helps your broker understand the ins and outs of the build out so they can negotiate on your behalf and set your deal up for success.
No Landlord likes speaking with a broker and being told it is an easy straightforward deals just for them to receive a complicated LOI with a ton of build out abatement, etc.
For these types of deals it is important to set expectations from the beginning so by the time you get the LOI the other side has an idea of what is coming and it doesn’t piss them off.
Advise Your Broker of Changes ASAP
Prototypes change and that is part of the game, however in the event it does change, your Broker should be one of the first to know.
If you as a Tenant are rolling out 10 stores and several are in the LOI stage, and the RTU/HVAC requirement goes from 10-15 tons, please let your Broker know as soon as possible so they can explain the change to the Landlord and it doesn’t get in the way of the deal.
No Landlord likes retrades, but if a change is communicated promptly and properly it is taken much better than waiting until the Lease is about to be executed and the Tenant going “We are good to sign however we now need 15 tons”. Many landlords have egos and the means to walk from a deal and this could be avoided by simply communicating promptly and properly.
As a reminder, we help Tenants with 10-100 with site selection services. If you have any questions or would like us to expand on any points please click the below link to schedule a time to discuss or give me a call at the below number.
Hope this is helpful, if you have any questions or would like us to expand on any points feel free to contact us at ap@trueequityg.com or (512) 216-5495.
