NNN Lease Renewal Rates after TI Amortization
Let's assume you have a base rate on a shell at $15/yr. Then finish out amounts to $22/yr ($190/ft TI amortized over 15 years at an acceptable rate). So an initial rate of $37/yr going up to say $43/yr in year 15. How would you handle the 2 5-year renewal rates after the TI is fully amortized? [10,000sf Building]
[{"id": "ddcfefd", "text": "I'm not sure which perspective you're looking at this from, but here's my thoughts based upon experience:\n\nThe additional TI is essentially a loan and paid back over a given period of time (typically the initial term of the lease).\n\nWithin the lease, the renewal option will specify what the renewal lease rate will be. Typically it will be based upon market lease rates at that time, but in no event less than the expiring rent. It could also be x% above the expiring rent.\n\nShort of it, the additional rent associated with the above standard TI will burn off.", "replies": [{"id": "ddcfvmi", "text": "So once the TI is fully amortized, the total rent still won't reduce? I'm looking at this from a develper's perspcective. I want the tenant to like it because I want to sell this lease upon occupancy. It's a build-to-suit situation.", "replies": [{"id": "ddcgfhp", "text": "After the TI is fully amortized, the rent will reduce. During the initial term, the rent will be Base Rent + Additional TI Rent = Total Rent. Once the TI \"loan\" has matured, it goes away and there is only base rent.\n\nIf you're looking to sell this, a potential buyer will look at these cash flows and know they have higher rent during the initial term (let's say 10 years) and some other rent once the tenant renews.\n\nThe benefit to a potential buyer is there should also be some residual value in the above standard improvements.", "replies": [{"id": "ddciq75", "text": "This is what I hoped this sub would be. ", "replies": [], "depth": 4}, {"id": "ddcv1wa", "text": "Correct. \n\nHonestly since you're build to suit as a LL, I personally wouldn't touch the space until a credit worthy tenant has submitted a proposal. Then you'd have an exact allowance to their needs, and when you lock them in there at say a 10 or 15 year net lease it'll be much easier to sell. Also if you wait like this you can negotiate an abatement period with the tenant to do its own buildout. The abatement period is a specified time during the lease that base rent is minimized so that the tenant can have a period close to recuperating the initial cost of occupancy.", "replies": [{"id": "dddoowj", "text": "Also can ask for a letter of credit from tenant's lender ", "replies": [], "depth": 5}], "depth": 4}, {"id": "ddcy7v1", "text": "To add on, a lot of leases break out the TIs so you can easily see base rent + the amortized TI rent.", "replies": [], "depth": 4}, {"id": "ddcyjat", "text": "Excellent thoughts on the matter. I'm looking to sell it quickly. My main concerns:\n1. Getting the tenant to accept\n2. Having a lease that won't be looked at negatively by buyers", "replies": [], "depth": 4}, {"id": "ddgdfcq", "text": "unless with inflation the rent at the end of the term is somewhat close to what the rent with the built in TIs is, right?", "replies": [{"id": "ddgfqgg", "text": "Smart guy. Yes, there is the possibility the market rent would be higher at the end of the term.", "replies": [{"id": "ddh3j1i", "text": "Smart lady*", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ddcmc9y", "text": "That's my pet peeve. FMV is nowhere near \"fair\" when it can't go less than prior year rent. Defeats the purpose of FAIR MARKET VALUE. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "ddcor23", "text": "Get a tenant rep broker to negotiate your renewal.", "replies": [], "depth": 1}]