Commercial Tenant Wants to Renew but TI Requested = $14k
I have my first amendment coming up as a Landlord. Tenant wants to renew/extend their lease for another 5y term from Aug-2022 to July-2027 with approx $10k in TI (carpet, paint, lights). Currently tenant pays $3500 for approx 2200sf. This doesn't include CAMS/Taxes/NNN.

This was an inherited lease when I purchased the building. I pushed back on the tenant broker for higher rates due to the market being a bit higher ($22-$29/sf yr). Current tenant has been in there since 2007 and already has spent money on the build out for this learning center.

The issue I have is that there is only a 3% bump per year for the next 5yrs, plus I'm shouldering the TI as an inducement for the tenant to resign (approx $10k). What strategies have you all applied to renegotiate and keep the tenant there? They are a good tenant with good credit. 

I'm estimating TI will cost $14k. I'm requesting that if TI cost more than $10k, then tenant should shoulder the costs. Tenant broker has forgone his commissions just to get the deal done. 

What should I do? Tenant holds their company training classes their, used maybe 60% of the week, but the operational expense does add up with their presence.

&amp;#x200B;

Thanks
[{"id": "hvd3pxf", "text": "try to hold the line on $10psf on TI, but will likely cost you a lot more than $14psf for a new TT.  worst case, try to amortize some/all of the $4psf in TI overage into the rent.", "replies": [{"id": "hvd8e1p", "text": "He offered $5 psf.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hvd4zdr", "text": "3% annual bumps is actually pretty generous, so I wouldn\u2019t be concerned with that. If they want $14k in TI give it to them and increase their rent by $1.27/sf/yr. ($14,000 TI / 2,200 sf / 5 years = $1.27/sf.\n\nThis covers your expense, gives you a return on money with the rent bumps and also increases the value of your building if you end up selling. $1.27/sf equates to about $200,000 in additional value at a 7 cap (cap rate chosen for discussion purposes only).", "replies": [{"id": "hvd79c3", "text": "2years at $3600/mo     $43.2k/yr\n\n2years at $3700/mo     $44.4k/yr\n\n1 year at $4100/mo      $49.2k/yr\n\n\\*Currently at $3500/mo or $42k/yr - TI's will easily amount to $14k, broker gave up his commission which I thought was generous, but the historical lease was priced below market imo. I can run the risk of them going elsewhere but they've been there for 15yrs now. For them to have a space built out like this again with ample parking will be hard to find.\n\nTenant broker is giving up his 4% commission just to make this happen. I'm not sure how you would add $1.27/sf back into the annual/monthly base rate. Great response though, thanks!", "replies": [{"id": "hvd89ir", "text": "Less than $10 psf for a lease renewal and no lease commissions? Seems like a great deal. New tenant will cost you $40psf and you will pay lease commissions.", "replies": [], "depth": 3}, {"id": "hvd9ysu", "text": "I can\u2019t imagine you\u2019ll get a \u201ccheaper\u201d deal in terms of your capital outlay. Foregoing the commission in this case is saving you $8,400 which is over half your TI. Additionally they\u2019re only asking for $6.36/sf in TI which is insanely low. On a new deal with a quality regional/national tenant you\u2019re going to have at LEAST $30/sf in TI, $14,000+ on commission, vacancy expense, etc. \n\nThis Tenant has been there for 15 years and is offering to renew at almost market rate for little Landlord money, if they pay on time and don\u2019t hassle you, it would honestly be plain silly for you to hold out for a better Tenant in this market given what you have in hand (long term proven tenant, virtually no capital outlay, no free rent period, above market bumps, etc.)\n\nAs for adding it back into the rent, you\u2019re currently getting $19.09/sf NNN if my math is correct. Go back to them at $20.36/sf NNN (double check the math here I\u2019m going off memory) and then just continue with the annual 3% bumps thereafter.", "replies": [{"id": "hvdtkgy", "text": "I'm definitely not going to get a better tenant, but I would like a better rate that speaks to the market were currently in.\n\nWould a tenant like this really step away for a cpl hundred bucks more a month in rent?\n\nHow would I know if there truly is a tenant broker commission? There's nothing in writing, no one has an original lease, it took me months before I could connect with the broker. As soon as I closed I reached out to the tenant. \n\nI agree with you! I don't want to lose the Tenant, but gaining the few extra dollars does help out. It just doesn't seem like they want to budge. \n\nSafer thing to do is to just sign the amendment but getting some help upfront is definitely desireable.", "replies": [{"id": "hve1fgz", "text": "It sounds like you made up your mind before posting and came here for someone to agree with you so you don't feel responsible when your tenant is pissed at you and you ruin your own day by getting pissed about your rightfully pissed tenant. \n\nThink about keeping this tenant like keeping an employee. Maybe you can underpay the next employee and \"save\" money, but did you factor in the costs of finding a qualified candidate? What about the headache of training? Why do you have to squeeze more money out them? Are you losing money because your current all-star is sabotaging you? Add the 1.27/sqft and do the improvements, and stop coming to Reddit to push back on all the advice you get.", "replies": [{"id": "hveogt1", "text": "Lthis. Unless the market is 10-15% higher it is not worth 6+ months foentime AND your TI will be higher.\n\nHonestly if you dont want to do it, just try 3Y with no reno/TI or even 2.", "replies": [], "depth": 6}, {"id": "hvf0dvp", "text": "I don't think I pushed back once. I'm listening to different angles other veterans have used in these cases.", "replies": [], "depth": 6}], "depth": 5}, {"id": "hvf0biw", "text": "I would say that the rate you have the space leased at is probably closer to market rate than you think. In order to get the highest and best market rate you\u2019re going to need a good amount of capital to reinvest, you\u2019re going to have time on the market, leasing commissions, etc. as I mentioned above. What is your current market vacancy? Are those market rates you quoted, actual comparable done leases or is that an average asking rate? What\u2019s the net absorption in your market for that asset class?\n\n&amp;#x200B;\n\nIf you want top of the market rent and a national credit Tenant, that's fine, you're allowed to have a vision for your property, but just know there are inherent risks in passing on a safe opportunity for a potentially \"better\" Tenant. I think your current deal makes sense, the market is still a little soft from COVID, idk where you live, but most of the US is still being somewhat affected and it's showing in new leases I'm seeing and how long it's taking to lease certain space. If you have other vacancies in the market of a comparable size, or have been seeing space stay vacant for several months, I wouldn't risk it for what is relatively a small amount of money all things considered.", "replies": [], "depth": 5}, {"id": "hvg1efc", "text": "You don't want to lose the tenant ? Sounds like you do actually. Lol.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hvdisen", "text": "Stepping over dollars to pick up pennies on this one. If the broker is willing to waive the commission, it pencils.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hvd8ouu", "text": "This is good advice.  If you haven\u2019t exchanged LOIs yet, you could propose this idea, but bake a small 1.5% commission into the deal for the tenant rep.  To be clear, this isn\u2019t an open market transaction, so you absolutely don\u2019t owe the tenant rep anything.  That said, it\u2019s good biz IMO.", "replies": [], "depth": 2}, {"id": "hvdmylm", "text": "If the tenant is a credit tenant, then I agree with you. However, we apply an APR to the T.I. allowance to account for TVM. We view the T.I. allowance almost like a loan that is being paid in installments with the grossed-up rent. It\u2019s certainly cash out the door (as are the commissions and other concessions). So, using this fact pattern, we might gross up the base rent by $1.55 PSF if using 8.0% APR.", "replies": [{"id": "hvezabq", "text": "You can certainly do that and have your own internal calculations to make sure you squeeze every dollar, I just went with a pretty basic calculation for discussion purposes. As for them being credit, since they've been there 15 years, I don't even really care if they're \"credit\" if they've always paid on time and you trust/understand the business model, then I'd just view it as a cost of doing business.", "replies": [], "depth": 3}, {"id": "hvf0uba", "text": "I like this response bc it gives perspective on how CRE guys view TI and commissions. Surely brokers/tenants can't just demand what they want in terms of rent costs.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hvd5hsq", "text": "It\u2019s not unreasonable. No one wants to lose a tenant right now.", "replies": [], "depth": 1}, {"id": "hvd8nog", "text": "Weird you won't consider such a small TI package for a 5 year renewal (with no LC, downtime, or TI for an alternate user), but I guess that's not my call.\n\nEasy solution: if you're hesitant to spend what they need to keep them happy, and tenant doesn't want to pay more to either do the TI overage themselves or pay more rent...pull the third lever when it comes to lease deals.  Add more term.  A seven-ten year renewal adds real value to your building, protects the tenant's investment in their space, and keeps you from potentially making bad real estate decisions like you seem to be willing to do so now.", "replies": [], "depth": 1}, {"id": "hvd95mm", "text": "If it\u2019s an existing tenant, we usually don\u2019t give any TI on renewals. Is this included within their extension option or are they just asking? TI usually pertains to a new tenant leasing a space as the landlord should provide upkeep to the space prior to the tenant occupying it", "replies": [], "depth": 1}, {"id": "hvd9bau", "text": "Will the bank finance the TIs and amortize them over the life of the lease? The additional payment should be nominal over 5 years.", "replies": [{"id": "hvd9wr3", "text": "I'm sure they could, but it is very nominal over 5yrs.\n\nThe amendment was already waiting to be exercised before I bought the building. I just didn't realize that it existed until recently.", "replies": [{"id": "ipayw49", "text": "Thanks for everyone's responses here. Tenant renewed and is here for another 5yrs. \n\nI've been insanely busy with normal day to day ops.\n\nHvac, insurance, taxes, etc...I'll post more on my first CRE endeavor.\n\n4 acres with a 50k sf class c commercial office building built in the 60's by an iconic company. Stand by for more posts.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hvddi0r", "text": "10k in TA in return for a 5yr deal with 3% annual increases sounds like a fair deal for you. They\u2019ve been in that space for over 21 years now. If you had to put a new tenant in there it would cost you way more than 10k to get someone else in there. \n\nIf you don\u2019t have the 10k up front to lend them, then 3 months of free rent covers it, then start the higher rent.   It\u2019ll cost you nothing and you\u2019ll have a happy tenant.\n\nEdit: To make sure the 10k is spent on improving your space require that an itemized work order is sent to you outlining their costs.", "replies": [], "depth": 1}, {"id": "hvdfqdk", "text": "I'm assuming this is the same building you posted about a few weeks ago. To me this is a no brainer to accept as-is, unless you have filled your other vacancies. Improving your building with minimal TI, and not paying lease commission is a win. Extending the lease five years is a big win, and bringing them up slowly is fine. If you try to force them to market, they may look elsewhere. Honestly, in my opinion, you want your tenants below market so that they're captive. But you're not paying commission so that's ok. Also you will develop your relationship with the tenant and ideally next time they won't even have the broker involved.\n\nDon't try to do it all at once. Vacancy and re-let costs are expensive. Incrementally stabilize your building and above all manage your risk to not lose tenants, until you are at a point where the building is just humming along and its okay or desirable for your worst tenant to leave. Then you put in a big rent bump for the new tenant.", "replies": [{"id": "hvdhzak", "text": "Yes, same building. This has been by far the hardest week. One tenant passed away, his business is in the process of shutting down. I didn't have the heart to badger his wife about what she planned on doing. Another tenant of 5 years left due to effects of Covid19. \n\nEssentially the cash flow that I built up over the last two months dropped off in 2 weeks. This renewal is a good deal, but I asked the tenants broker to look at the market, and to be cognizant of this climate and to do what's right for all three parties involved. I'm looking for another $3.6k annually (which isn't much to ask for). Although I didnt give him a rate specifically, I did ask him to look at similar properties in our sub-market. He didnt budge on the base rate, but did agree to forgo his commissions which I dont think would have been collected. He gave up the commissions rather quickly, when he heard my disconcerting tone.\n\n&amp;#x200B;\n\nGreat advice by all - I think the best thing to do is to take the deal vs fighting for the extra funds. The extra $3.3k annually definitely wont hurt this client and I find it difficult for them to find another space and call that home in this sub mkt. The client EVP has already signed the amendment, and waiting on my signoff.", "replies": [{"id": "hveyzj8", "text": "If it's training use, conceivably there's a chance they could move into a different submarket in the metro. Potentially, consolidating into underutilized space they're already leasing elsewhere.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hvr9xrm", "text": "One thing is for certain, no cash flow is permanent unless it's a commercial account with solid financials.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hvdgfkg", "text": "Consider your downtime, if it\u2019s more than 6 months, plus refurb costs, plus a new Ti then I don\u2019t think the existing tenant is being unreasonable.", "replies": [], "depth": 1}, {"id": "hvdjtqd", "text": "Keep the tenant. Turnover is going to have all kinds of unexpected costs and headaches. If your in NYC as your user name indicates there is so much vacancies right now so this tenant can easily leave.", "replies": [{"id": "hvdk3rl", "text": "Not in NYC, down south.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hveypju", "text": "Ultimately, your alternative is to let the tenant go... you'll save the TI, but then have the downside of X months vacancy and Y dollars of TI for whatever future tenant. Although your future rent may be a couple of dollars more, all but certain the TI cost to help future T build out the space (and vacancy carry) would almost certainly make it the wrong move.\n\nFrom what I'm reading in your summary, it seems that they are making bona fide efforts to make this work. 3% escalations are high end historically (of course, that may change) Broker foregoing their commission is definitely not norm.\n\nNot thinking it gets much better than what you have in hand. Picture them notifying you next week that they've changed course and will consolidate this site into another one of their locations (for context)", "replies": [], "depth": 1}, {"id": "hvf6zgj", "text": "You need to hire a broker to advise you, not come to Reddit. \n\nWe don\u2019t know your market or sub market, type of product, etc. A broker can also help you find more tenants for your building. \n\nYou\u2019re out of your depth.", "replies": [], "depth": 1}, {"id": "hvfdnq4", "text": "First you half to ask how hard to replace tenant and what that would cost given the times.\nNever leave a bad taste in the tenants mouth ))", "replies": [], "depth": 1}, {"id": "hvfn3zb", "text": "Don't waste time, get the deal done.", "replies": [{"id": "hvr9fiz", "text": "Agreed!!!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hvg0afq", "text": "Give them 6 months at half base rent so you're not out of pocket. Let them be responsible for controlling their costs for whatever renovation they need to do. They'll still cover the OpEx and for 6 months your net rent for this one space is half. If you can't shoulder that you must be operating very thinly", "replies": [], "depth": 1}]