Would you take this deal? Domino's lease on the table
We have been working on the leasing for an end-cap Retail Strip in a mid-size southeast market. We have had minimal legitimate interest from anyone with actual business experience and no LOI's.

Suddenly, along comes Domino's looking to expand into the area. In their proposal, they asked for $45 PSF of T.I, and are proposing 10 yrs at our asking rate ($10.5 PSF + NNN) with 3% increases per year starting in Year 5. Yes, I know that rate is low, but that is my market. The Suite is 1,490 SF. They are handling the rest of the buildout. Our landlord is giving us pushback, talking about his payback period being 49 months, and they aren't sure about forking the $$$ upfront. They have plenty of money, that's not the issue.

From my POV, we should take the damn deal, commission aside, as we are going to keep sitting on the suite, and even if we do get something, it'll be a smaller local retailer on a two year deal, and in two years they'll have another 1.5 years of vacancy. Plus is increases the value of his asset significantly. Remember, it's not up against another lease, we have no prospects on the suite and given the location it will not lend itself to another national look for a while.

&amp;#x200B;

What am I missing here? I'm still fairly new to Real Estate but I'd take this deal

Edit- got domino's to go up on psf and down on buildout. I love working with qsrs
[{"id": "hrf7icd", "text": "I\u2019d take it. QSRs are good in the pandemic and the lease is probably corporate guaranteed.", "replies": [], "depth": 1}, {"id": "hrfejzj", "text": "LL needs to realize a bird in hand is worth two in the bush.  They should see how far they can go with the negotiation before they start incurring legal fees.\n\nWhat Domino's locations I've seen, do not necessarily have/need the best visibility since they do primarily deliveries.  If proposed space has been vacant due to bad/poor visibility, a reasonable LL should realize the opportunity that's fallen into their lap.\n\nMost likely TT will seek an early termination option (i.e. after 5yr)...try to include reimbursement of unamortized TI/LC along with some penalty.  And/or, see if all/most of the LL's TI contribution can be toward something that can be used by a future tenant.  Domino's will probably spend more than $45/sf, so have LL's TI contribution go in pari passu to TT's contribution.  Try to have the LL keep any unused LL' TI or apply it toward 'rent holidays' spread out over time in future years (i.e. second half of their 10yr lease).", "replies": [], "depth": 1}, {"id": "hrfhah9", "text": "Assuming the lease commission is 6% of the rent (what I typically pay), the total cost to the landlord would be around $77,500 or over 5 years of rent. I assume the asking rate of $10.50 does not include much in terms of buildout. I think I would offer enough to \u201cwhite box\u201d the space and increase the base rent by the amortized value of the additional buildout.\n\nIn other words, the rent is not sufficient to cover the \u201cexcess\u201d buildout and I would either pass on the deal or raise the rent to where it needs to be to pay for it. \n\nThe only exception would be if the owners wanted to sell it and then the deal would have a different appeal.", "replies": [], "depth": 1}, {"id": "hrfi168", "text": "Can you get them to trade some of those TI dollars for rent abatement (I.e. a couple years at 50% rent for $10 in TI) or just a lower rent through the term? $45 is expensive imho for a $10 rate, even for a great tenant like dominos.", "replies": [], "depth": 1}, {"id": "hrfnemb", "text": "Absolutely he'd be stupid not to take the deal under those conditions. They will be there for 50 years.", "replies": [], "depth": 1}, {"id": "hrfrr5z", "text": "Not sure what market you are in, but we recently worked on a similar deal in my market where we are charging $3.25/SF/mo + NNN (.65/SF) (annual $39/SF) and they requested about $50/SF for T/I. The space was 2,400 SF.\n\nIt is a big chunk of money upfront for the Landlord. See if you can negotiate the payment of the T/I over a period of times rather than upfront or offset it with rent abatement versus T/I allowance. Spread it out yearly versus monthly. Also put in a clause that if they leave early, they would reimburse the landlord for the T/I dollars. You can even put language that would require them to leave the equipment in place when they vacate if they were to leave early.\n\nJust some \"outside the box\" ideas to try and sooth the blow to the Landlord so they would agree to do the deal.", "replies": [{"id": "hrgdkr4", "text": "your rent is 4x theirs for the same TI. Not comparable IMO.", "replies": [{"id": "hrjk80a", "text": "Yes, the are not comparable....my point was that the T/I for the amount of rent this landlord is receiving is a LARGE burden and risk to the landlord. For those saying they would do this deal in a \"heartbeat\", it makes me ponder and scratch my head. If it were my building, I wouldn't be in a rush to do this type of deal.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrfsykx", "text": "That\u2019s a lot of TI for that rent.  Their net effective rate is like $5.  Pretty low.", "replies": [], "depth": 1}, {"id": "hrg1ifg", "text": "Would push for free rent in lieu of TI. Seems to be easier to Landlords than actually handing over the \u201ccash\u201d.", "replies": [{"id": "hrgkz9z", "text": "It takes one bad experience with a tenant who wasn't adequately prepared for the end of rent abatement for a landlord to prefer to front the cash, assuming the liquidity is there.", "replies": [{"id": "hrqfnh1", "text": "Agree, No one size fits all", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hrg2mk4", "text": "What\u2019s your clients goal?  Lease up and sell, refi, keep it?  \nYou want rents market for valuation.  See about discounting rents for 1-2 years.  The improvements are only beneficial to the tenant. If they leave in 3 years what will your client do?  What would you advise at that point?  Would it contradict your current council?\nJust questions that come to mind. \n\nGreat work getting a national, credit tenant to the table for your client.", "replies": [], "depth": 1}, {"id": "hrh84l2", "text": "You'd take this deal because you get a commission and don't have to carry debt while the tenant is paying (far) less than value.\n\nCombining T.I.'s with current value of construction (he had to pay *something* for this place), taxes, commission for the broker, regular maint. etc.....at minimum, in 5 years, he's somewhere between $135,000.00 and $170,000.00 in actual **hard** costs. Actual money spent.\n\nTake out taxes and maint. and you're still *well* above $110,000.00\n\nIn return, in those same 5 years, he's going to receive plus or minus $82,000.00.\n\n*\"Please suh, may I have some more???\"*\n\nUhhhh....this one doesn't even require a solar powered calculator to decide the best move.  This one can be done with 10 fingers in about *3* seconds:  **Hard** pass.", "replies": [], "depth": 1}, {"id": "hrhbpv5", "text": "Unfamiliar with your market, and fully understand that each market has its own macros to work through but a 45% net TI is big.... especially with no increases for 5 years when we are tipped (globally) to be seeing a reversion in interest rates in the next 6-18 months.\n\nSome other posters have been saying bird in the hand... but honestly if you were to flag pole the deal to other users you\u2019d probably get interest!?\n\nHaving dealt with large users similar to dominos before it may be worth accepting the TI, increasing the rent and getting at least CPI increases agreed.", "replies": [], "depth": 1}, {"id": "hrhk6rs", "text": "Push back on owner to take the deal. I would point out (with your prospect data) how much more downtime they could have if they don\u2019t take this deal. Add on top of that how much more in costs they could face if they eventually do find someone else, but with much worse credit.", "replies": [], "depth": 1}, {"id": "hri0wc6", "text": "I mean surely in the next five years you can find a better tenant. I have to agree with the landlord on this one. I like to make my money back in the first year, year and a half for National.", "replies": [], "depth": 1}, {"id": "hri2att", "text": "Is $10.5/sqft current market only (Eg pandemic market) or has it historically been in that range? Eg if the pandemic is mostly gone in a year (fingers crossed) how will this deal look? You mentioned that if he leases to a smaller retailer he\u2019ll be vacant for another 1.5 years \u2014 has this unit historically been vacant half the time, or when you say 1.5 years do you just mean the pandemic-induced vacancies? Is that TI typical (non-pandemic)?\n\n\nThe TI seems high to me for the rent, and for valuation it would be better to get a higher rent and less TI. 10 years is a long time, and there\u2019s a reason why some building owners are letting their buildings sit empty vs locking in lower offers. \n\nJust because the owner has cash doesn\u2019t mean this is the best way for them to spend it. I think if you can show (financially, spreadsheets, etc) how this deal gives them a good return vs non-pandemic expectations, then they\u2019ll go for it. I feel like if the TI increases the value of the unit (Eg it\u2019s good for future tenants) then that might help the deal work. \n\nAnother way to think of it \u2014 $45/sqft TI and $10/sqft rent, that\u2019s like no money for 4-5 years. And he\u2019s tied up his capital in TI instead of investing it so there\u2019s additional opportunity cost \u2014 financially a net negative for at least 5 years. \n\nA unit that\u2019s empty for 12 months is no money for only 1 year, and in the meantime in that year the owner makes $5-7k of interest off of the cash they\u2019d otherwise spend on TI.", "replies": [], "depth": 1}]