Landlord wants to offer zero TI for an office lease due to unestablished business credit. Fair or scam?
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[{"id": "eearme9", "text": "It's not really surprising. The landlord is scared to put any money into the space before seeing that your business is able to pay rent on time, etc. If you're not already using a broker, it would be a good idea to reach out to one. They should be able to have conversations with the landlord to help mitigate. There are a ton of great shops out there but PM me if you need any recs. ", "replies": [], "depth": 1}, {"id": "eeash03", "text": "Are you only considering a 1-year lease? 1 year is typically not enough time for a landlord to recoup the costs of a build-out if you decide to leave when your lease is up.", "replies": [{"id": "eeaxq0l", "text": "+12 upvotes\n\nSo many thoughts, so little time...\n\nHere's the LL's risk: Say he gives you a $30/sf allowance on a 3-year lease. This adds $10/yr/sf to tenant's base rent. Then, tenant goes belly up in year 2 and defaults on the lease. Typically, tenant would owe LL the unamortized costs, or $20 of the allowance. (Forget interest for simple math.) Since tenant went broke, what is LL's recourse to recoup? He can either demand payment from a business with no money or stand in line behind other creditors at bankruptcy court to get pennies on the dollar he is owed.\n\nAk the LL why he changed his position after seeing your financials. He may be doing you a favor in trying not to sink you.", "replies": [], "depth": 2}, {"id": "eeb2tcz", "text": "We initially had a 5-year lease and $15/sq ft of improvements on the table. I was fine with that. They changed their tune after months of quoting out improvements from contractors, when they finally decided to look at our financials... which are not bad at all. ", "replies": [{"id": "eeb3vl6", "text": "I see. A 5-year term sounds much more realistic to receive a $75k TI allowance. Additionally, if I were you, I wouldn't feel comfortable forking up that kind of money to do the improvements yourself if you're only going to be able to lock-in a 1-year deal. If they won't consider more than 1-year, you're probably stuck taking the space with paint/carpet. If you would be open to taking the TI allowance in the form of free rent, maybe they will consider that? Sometimes that is more appealing to the LL than coming out of pocket with $75k upfront. ", "replies": [{"id": "eeb46b1", "text": "Thanks I\u2019ll try that. ", "replies": [{"id": "eeemada", "text": "Thinking about this more and something is fishy... If your financials don't look right, it makes sense to cut the allowance but it makes less sense to shorten the offered term length. This is more pure conjecture from me, but the LL might have another prospect for the space that has a lease expiry out one year (i.e., he's teeing it up for that tenant to move in while trying to preserve cash flow on the cheap for the year until that other tenant can commit). If discussions have been fairly civil and not combative, I try to empathize with LLs to get to the real issue. In this instance, you could say something along the lines of \"I can't understand why you would shorten the term length you offered. My business is at the point where my bank wants to see longer term planning, especially for my fixed costs. A one-year lease puts me in a position where I almost have to start looking for new space as soon as this lease would start. Did something change since we first talked?\" Just urge him to shoot it straight with you. ", "replies": [{"id": "eehbh3u", "text": "Interesting. At one point after changing the term to 1 year, they did tell me they would probably agree to a longer lease if I paid for the improvements out of pocket. Obviously isn\u2019t much of a deal for me, but it may indeed provide more security in the space.  \n\nThere is a lot of other space in the building, and I don\u2019t see it filling up quickly, so I\u2019m not sure how much of a priority it is to lock in this space...\n\nKeep in mind there are options to renew in the lease, which I will have to review legally but I believe they are exclusive options.", "replies": [{"id": "eehg27h", "text": "Im so glad to hear you have counsel. You or your counsel should ask the LL, point blank, if the space is encumberd by another tenant. Option language can be slippery. It can be drafted to put another tenant preference even if you have a right of first refusal or right of first offer.\n\nIn any event, given your last few comments, you have a good handle on the situation. Your BS detector is honed correctly.\n\n(Edit: wordiness)", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eeastc3", "text": "Pretty standard. They have deemed you too risky to spend a bunch of money on the unit for you. \n\nEverything is open to negotiation. Its similar to getting any financing, the stronger your financials the better deal you will get. \n\nIf you are a fortune 500 company with great financials wanting a 10 year lease, you will get very good offers. If you're a barely 3 year old company showing low cash flow and low profits it's much riskier for the landlord to spend any money on the unit. ", "replies": [{"id": "eeb3d31", "text": "That\u2019s exactly what they said, but the funny thing is that it\u2019s a relatively outdated office building in a slow, cheap market, which doesn\u2019t exactly have big name tenants lining up. Half or more of the building is vacant. The space needs renovation to be suitable by anyone\u2019s standards. ", "replies": [{"id": "eeb8jpl", "text": "So you described the problems with the building. That is their problem. Your problem is that you look weak on paper. If you can do anything to strengthen your position, then you could negotiate the TIs back in. Looks like they are playing hardball with a relatively empty building, you could play hardball too and say you need TI or you're going to another space. Th best thing you could do is have another space you're ready to move into and let them know you have alternatives.\n\nI would try to negotiate the TIs back in though. Get what you can.", "replies": [{"id": "eebhvju", "text": "Alternatively, see if the landlord will give you a rent abatement for X months if you pay $X amount of TIs out of pocket. I've done this with tenants and it's great. Shifts the risk off of me if they blow out and ties them to the space because they feel some ownership.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eeasynm", "text": "Sounds like its not a scam. They are just being cautious or negotiating aggressively.  Are they having you sign any personal guarantees to the lease? Is it an institutional landlord?", "replies": [{"id": "eeb2x96", "text": "No and no, fortunately. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "eeatqgp", "text": "I wouldn't jump to the scam conclusion. Overly careful? Maybe, but if you look at it from their point of few they're just looking for additional security. I think it might help if you had proof of your business reinvesting the profit into your business as well. If they're eager to lease you the 5k SF space as you say, I'd think that gives additional leverage that you can negotiate off of. They'd probably be a lot more willing to give the TI if you're willing to sign for a longer term. Think at-least 3 years. \n\nAlso, with my experience in CRE, I don't think I've ever seen any TI offered in a one year lease other than very small cosmetic alterations (wall demise, paint, etc..) $15 TI is a quite common number but not for a one year deal.", "replies": [{"id": "eeb2zux", "text": "Right, they offered the 1 year, i was looking for 3 or 5. ", "replies": [{"id": "eeb36zv", "text": "So they want you to sign a 1 year lease to see if you can make it? If I may ask, is the landlord a business or an individual? ", "replies": [{"id": "eeb3t77", "text": "Exactly. They offered a 1 year lease with an option  to renew for another 1 year, then an option to renew for 5 years after that. \n\nThey say that if we grow as planned and need improvements, they will consider paying for them when we renew, but I\u2019m unsure if it will really work out that way. \n\nThey are a small CRE investment group, with basically 1 individual making the decisions for the ownership. ", "replies": [{"id": "eeb4523", "text": "Interesting but always negotiable. If you think the TI will substantially improve your business I would definitely push it as much as you can as well as a longer term. Are you represented by a broker? I think that if the landlord knew you weren\u2019t, he might think that you\u2019re somewhat inexperienced with something like this and try and gain from it as much as they could. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eeaujcd", "text": "How much cash do you have? How much is the rent PSF? How much cash flow does the business generate?", "replies": [], "depth": 1}, {"id": "eeawccv", "text": "If you have the cash to do the renovations yourself then negotiate a free rent period to offset those cost. Then when you\u2019re up and running, replenish the bank account with you \u201crent\u201d you\u2019re not paying for that period. ", "replies": [{"id": "eeb34fo", "text": "Is this something that is commonly done? (Free rent period?) That would definitely help. ", "replies": [{"id": "eebbg8w", "text": "Free rent in lieu of TI is pretty common. Is your Lease NNN or Gross? You will usually have to pay opex charges during the free rent period. I would advise you not to expect to budget $0 for monthly charges from the Landlord.\n\n", "replies": [{"id": "eebbre1", "text": "Full Service / Gross Lease. That sounds doable. ", "replies": [{"id": "eebl2xg", "text": " I've signed commercial leases with 7 different landlords over the years and always did my own TI and got free rent in exchange. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eeb2tvt", "text": "Not surprising at all.  As a developer, I\u2019d give you $0 as well.  If you go belly up, I lose all my money.  Sorry just being honest \u2639\ufe0f", "replies": [{"id": "eeb3wu5", "text": "Thanks for the input. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "eeb4tcz", "text": "Yep, I\u2019m a commercial agent in Texas and see if frequently. It\u2019s a win scenario for the landlord too, no up front costs other than commissions and a nicer space to release once you vacate.", "replies": [], "depth": 1}, {"id": "eeb5cyr", "text": "When your lease is up, prepare to get screwed. Hold out for a five year otherwise you will be looking for space in 6 months after you just moved in. \n\nLook at their financials and see if they can afford to not have you there. ", "replies": [{"id": "eeb7hyc", "text": "Well they\u2019ve given us options to renew in the lease, so hopefully that won\u2019t happen. Or do you think it would? ", "replies": [{"id": "eebavwj", "text": "What is the renewal rate? Fair market value or a set 2 percent bump? Does it go to a 5 year after that or are they 1 year renewals. \n\nThe ti is baked into the lease rate, so if you are not getting getting paid to improve the landlords space, then your rent should go down. \n\nFor shady no credit clients there usually is a recourse provision in the lease, where you would be personally liable not the company. \n\nSounded to me like the LL may not have the funds for the ti or was unwilling to dump money into specializing the space, or that the rent makes up a significant portion of your expenses that you would be real shakey, in that case a large security deposit is normal. \n\nIt may be on the level, just a one year lease seems like shenanigans, but maybe he has seen tenants like you before and he is trying to make it easy for your company to walk away if it does not work out. ", "replies": [{"id": "eebbtpk", "text": "I would agree here. Options are meaningless if they are at \"Market Rate\". Make sure your options have the option rent outlined so you don't get screwed. 2% per year or 10% in year 1 of a 5 year term then flat is pretty standard in my market.", "replies": [], "depth": 4}, {"id": "eebc8t8", "text": "I can understand that. \n\nThe options to renew are set at a max $/sq ft per year increase, which is a reasonable percentage (around 3%). Im not too worried there because it is an underused building and they should want to keep tenants however possible. \n\nI was actually thinking myself that at some point the TI requests scared them because they are really broke. Lol. Hopefully I outlive the landlords and the building gets sold ", "replies": [{"id": "eebgly0", "text": "That is a great way to raise your rent. \n\nIf your lease is NNN, then you pay your share of the taxes. If the building is sold, well, then your NNN went up. \n\nSo, hopefully you are a FSG with utilities included. \n\nDo me a favor and make sure the building is to ADA code, cause if you need to get permits, you will need to bring it up to code, and the landlord should pay for that really, or give you a couple months free in exchange for dealing with all that BS. \n\nAnd hopefully one day, instead of a dinky 5K lease, you are working with a 30K lease and can bring a broker in to beat up the landlord. ", "replies": [{"id": "eebi1dk", "text": "It\u2019s a gross lease, so you would say the fixed ~3% per sq ft per year increase is a good thing to have in the lease? I\u2019ve been told multiple times that there are no additional taxes or other OpEx that i will be responsible for paying in addition to base rent. ", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eebct7l", "text": "Would definitely get renewal options though... Otherwise when you succeed you will have plowed $XXX into the space and have the LL asking you for crazy rents. It's a fair ask on your part- Mr LL, understand that you can't offer TI. We'll take the space but we're going to invest X. We need your assurance that rents will be stable down the road. Second bit of advice, HAVE AN ALTERNATIVE.", "replies": [], "depth": 1}, {"id": "eebixte", "text": "For a one year lease it's very common to not have any sort of tenant improvement allowance no matter how great the credit of the tenant is. Most landlords consider that amount of time too short to amortize the expense of any sort of improvements into the rent.  I mean you're talking about moving walls around as well as paint carpet and other reconfiguration all for a single year of rent. Any tenant improvement allowance you get would increase your rent drastically the kind of work you're looking at. you have to remember that he has to spread the cost of all of those improvements you have across the term of your lease to get the money back so basically all the improvement costs need to be paid back in only 12 payments.", "replies": [], "depth": 1}, {"id": "eebpsvd", "text": "We've done plenty of deals where the LL is ready to do a 3-5 yr term with T.I.'s but then the company financials are weaker than expected so the terms quickly change to reflect that. It's the LL limiting their risk. Although, if you have been in negotiations for months, I'd say it's the LL fault for not requesting financials sooner. \n\nWe typically request them asap. ", "replies": [], "depth": 1}]