Tenant wants over 250k in TI's, how much is a reasonable rent increase?
I have a commercial building I'm in the final stages of buying, 2 story, multi tenant space.  There is a restaurant on the ground floor that is doing well, but the owner wants to sell the business to someone else.  The current restaurant occupys about 1500 Sqf at 2.50/Sqf

 The new tenants, want about $250-300k in TI's done to the space.  But it also involves taking over the next door suite, and hallway behind the two spaces, to make the total rentable space to 6000sqf.  It also helps me since the hallway is currently not rentable space, so I am now increasing rentable space in the building about 800-1000 Sqf.

So my question is...how much should I increase the rent to justify the large capital investment for TI's?  I was thinking 50 cents for every 100k that I spend, starting at $2.50/Sqf?  Does that sound reasonable?  I've read somewhere that 20% is a guideline, but not sure how set in stone that is.

So if no ti's then 2.50, or if I spend 200k then 3.50/Sqf.
[{"id": "ccod4ie", "text": "Just average it into the rent at a borrowing rate (maybe 7% or so) over the life of the lease.", "replies": [{"id": "ccodgxc", "text": "So if they have a 5 year lease at 7% and the total ti cost is 300k, at the end of the lease term they would've have owed 420k, or about 1.15/Sqf per month (3.60 total).  In my calculation it would've been 4.00.  So not too far off.\n\nSeems likes reasonable spot to start a negotiation, no?", "replies": [{"id": "ccodkg1", "text": "Exactly.  All you're doing is financing the construction, but rolling the payments into the lease rate.  Find out what your local borrowing rate would be based upon the tenant's credit, then just apply it to the lease term and TI total and roll it into the rate.  It's fairly standard methodology.", "replies": [{"id": "ccodrps", "text": "Cool.  Thanks!  Most of the TI's I've done in the past are normal, carpet moving a wall, etc.   This is expanding the kitchen, taking over space, converting others.  \n\nThe tenant is fairly large (30-40 restaurants) in the area.  They have the money to do it themselves, which is something else I've considered, but I'd rather increase the rents and noi/cap on the building.  ", "replies": [], "depth": 4}], "depth": 3}, {"id": "ccodn9c", "text": "Also, remember that the base rate probably should include some sort of base TI (paint, flooring, etc. so probably $5-$10 PSF).  Start the negotiation at rolling the whole TI into the lease, but expect them to come back asking to roll in only 80% of it and have you pick the rest up.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ccodxos", "text": "Is this a credit worthy tenant?  Is the new lease guaranteed?  If so, are you comfortable the guarantor's net worth?  Have you tried splitting the TIs or tried offering a TI allowance as opposed to covering all costs?  I would be asking myself those questions before shelling out $250k.  \n\nIn direct answer, calculate the IRR of the cash flow that provides you a suitable return.  I would look for something in the 20% range.", "replies": [{"id": "ccoe2m8", "text": "Yes, the tenant is credit worthy. They own multiple restraints in multiple states, all medium to high end.  I've thought about having them pay for part or all, and that is def. part of the negotiations.  Should I push harder for them to pay a % of the costs?", "replies": [{"id": "ccp3jnl", "text": "I would offer them an allowance based on what the market is giving.  Maybe something like $20 PSF, and make them pick up the rest.  Don't foot the whole build unless it's seriously credit worthy, ie big name chain restaurant, with 10+ year term.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ccofn7v", "text": "I would insist on a personal guaranty for the full initial term and make sure that the TI money is paid back after T is open for business &amp; receipt of lien waivers. I've seen restaurants run with TI money that has been fronted.\n\nHave the prospect's GC provide you with a scope of buildout and itemized budget to ascertain costs then have a GC of your own quote you your own bid to verify costs they need to buildout. \n\nThe rent seems pretty low so maybe offer TI to cover the reconfiguration of the space for the tenant and then offer to allow the prospect to build in the additional TI $ into the base rent and amortize it over the initial term at a rate of 7-8%. Just a thought, obviously a lot of variables at play here.", "replies": [], "depth": 1}, {"id": "ccoherg", "text": "Since its a credit worthy tenant I would amort the TIs over 75-80% of the term at no less than 20%.", "replies": [], "depth": 1}, {"id": "ccoswn7", "text": "Whatever the net present value of the rent increase would be. What do you use for your discount rate?", "replies": [], "depth": 1}, {"id": "ccov44j", "text": "Not to hijack your thread but are rental rates in San Diego really $2.50/sq. ft??? What am I missing?? How could they possibly be so low. I do development in New Jersey and our restaurant tenants are in the $30's. You're in an urban area, how could values be so different. ", "replies": [{"id": "ccozhcw", "text": "This is not in San Diego.  This is in a much more depressed area of the country. :-)  But to you're point, it is still lower than the surrounding area.", "replies": [], "depth": 2}, {"id": "ccozo0g", "text": "I'm assuming they are quoting $2.50/SF/Month.  Out west they often quote monthly rates per square foot. We always use $/SF/Yr in my neck of the woods. That's $30/SF/Yr which still seems about right for a credit restaurant tenant.  ", "replies": [{"id": "ccozqtt", "text": "That makes so much more sense. I have never seen that though on the east coast. Interesting. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cd34fws", "text": "Amortize the TI dollars back into the lease...and make damn sure they're worthy of the space/lease/TI. Also, have you seen the restaurant's books or schedule c?", "replies": [], "depth": 1}, {"id": "cd3vfx6", "text": "More importantly, dive into the tenant's credit and business history.  Is he worth the risk?  Also consider keeping the selling tenant on the hook as backup....", "replies": [], "depth": 1}, {"id": "cey7j5l", "text": "I am a little late on this one but you need to start with a work letter.  Once you define what landlord work will be and tenant work, you can determine the tenant allowance.\n\nI work for a national retailer doing exactly what you described - what we pay for rent and how much TI we end up getting depends on how the landlord delivers the space.", "replies": [], "depth": 1}]