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Tenant Improvements · Between Two Chairs - Demystifying Commercial Real Estate

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Welcome to Between Two Chairs,
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Demystifying Commercial Real Estate,
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the podcast that brings you the latest insights and
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trends on the South Florida commercial real estate market.
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With your hosts, Fernando Adonisibia Jr. and Jennifer Wallman.
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In each episode, we dive into the world of
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commercial real estate and break down
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complex concepts to make them accessible for everyone.
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Whether you're a real estate professional,
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a curious investor, or just interested in
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the South Florida market in general,
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Between Two Chairs is the podcast for you.
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So pull up a chair and join us.
0:35
Welcome everybody to another episode of Between Two Chairs.
0:54
My name is Fernando Adonisibia Jr.
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And with me is the always cold,
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just because she loves warm weather.
1:02
Jennifer Wallman. Hi Jennifer.
1:04
Hello, hello. Yes, I am always freezing.
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You see how I corrected that?
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Yes, yes. Thank you.
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I didn't say like cold of heart.
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I said cold just because you prefer warm weather.
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Correct. I wouldn't be freezing if people would just
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adapt to South Florida weather and lay off the AC.
1:24
I don't know man. AC is a very important.
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Yeah, we probably wouldn't have as many people here
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if we didn't have AC.
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So yes, I'll just wear my jackets and park us.
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It's really interesting.
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I didn't intend it to be a transition,
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but actually it's a very good transition because, you know,
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it's really interesting as a commercial broker
1:47
when you're negotiating a commercial lease
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that the topic of AC and who controls the AC
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and from what time to what time the AC is on
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and is the AC on in the weekends.
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Those are all legitimate important things
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to hammer out in a lease for a commercial lease.
2:07
And it's very appropriate because the theme today
2:11
is we wanted to do a dive into the tenant improvement credit
2:16
component of the negotiations of a commercial lease.
2:20
Right. So tenant improvements also referred to as TI or TIA
2:25
for tenant improvement allowance
2:27
or leasehold improvement allowance is a huge part
2:31
of negotiations in any lease.
2:34
And a lot of landlords that I know don't like
2:38
tenant improvements, but most tenants need them,
2:42
especially if they're, you know, really having to redo a space,
2:46
for example, for a restaurant space or medical office, etc.
2:50
And those usually have much larger TI's or if it's new,
2:54
if it's new construction and you're only taking possession
2:58
of something that's built out to vanilla shell,
3:00
which sorry, vanilla shell is just space with the dry wall up
3:04
and probably the AC ducks.
3:07
And that's about it.
3:08
And it speaks to the convertibility or the flexibility
3:11
of commercial space in general, right?
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And that every company, every business is going to have
3:18
a different set of requirements for how they want their space
3:22
to be laid out and what their needs are.
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And we thought that we would kind of break down
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some of the key considerations in the negotiations
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and look at it from both the tenant and the landlord side.
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Let's dive in a little bit here.
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One of the considerations is the scope of the improvements,
3:39
right? You know, some spaces, you might have a tenant
3:42
that has very low requirements.
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They might do a little in regards to the scope of the work
3:49
of the space.
3:50
And then there are tenants that have some very, very big
3:52
requirements.
3:53
One of them you mentioned is if you have a 30,000 square foot
3:56
space in a retail location and you have a tenant
4:01
that is looking to open up a clothing store, for example,
4:05
a boutique clothing store, their scope of the work
4:09
is going to be very different than the scope of the work
4:12
of a restaurant operator that is going to utilize
4:16
the 30,000 square feet, right?
4:17
Because the restaurant operator has to contend
4:19
with grease straps, hood, there is a lot of infrastructure
4:23
that has to be built.
4:24
Aside from the actual cosmetic building of the interior
4:28
of the space.
4:29
And so the scope of the improvements
4:32
is going to be one of the most important considerations.
4:35
Well, and I think there's two different types of TI's, right?
4:39
So there's the TI that adds value to the building itself.
4:44
And then there's the TI that's just
4:45
personalizing the space for your particular brand.
4:50
So for example, in your example of the clothing store,
4:54
if they need a rack system, if they need special lighting,
4:59
if they need a certain type of paint,
5:02
that doesn't really add a ton of value that's
5:05
going to stay with the building, right?
5:07
It doesn't really stay with the space.
5:09
And in a lot of cases, the landlord might say, look,
5:11
I know you're improving this for your particular brand.
5:15
But when you leave, we want you to take out the racks.
5:17
We want to have you take out that stuff.
5:19
And that happens a lot, like especially
5:21
an industrial warehouse, right?
5:23
With refrigeration, sometimes the landlord
5:25
will actually say, OK, you're going
5:27
to put in the refrigeration system.
5:29
But when you leave, we want it taken out,
5:31
because it narrows who can actually use their space.
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So I think it's the type of what goes in, whereas in a restaurant
5:40
space, that gets value, right?
5:43
Because second generation space of a restaurant is easier to lease.
5:48
So a tenant might be more willing in that case.
5:50
Those are definitely capital improvements
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that can be depreciated over time.
5:55
They're faramortized over time, so they might be more willing.
5:57
So it's super important whether you're representing the tenant
6:02
or you're representing the landlord,
6:04
that you are really clear on what the improvements are.
6:08
Are they really capital improvements to the space?
6:12
Right.
6:13
Somebody putting in a gym and putting in special flooring,
6:17
may or may not be.
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A lot of times, I've seen the landlord say,
6:19
no, you have to take that stuff out when you leave.
6:22
But again, to our point on medical space or something
6:25
like that, also with a capital improvement,
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and I'm thinking of the medical spaces that we've done,
6:34
a dentist is less likely to leave because of the expense
6:38
and the amount of work that goes into a TI.
6:41
It's a lot harder to move that equipment than it is to move
6:45
clothing racks and shelving when a tenant leaves.
6:48
So it's more likely that a landlord would be willing to help
6:52
with tenant improvements for one of those capital improvements,
6:56
and somebody staying kind of tying a tenant to a space
7:02
beyond the initial term of the lease.
7:05
Yeah, and when you're looking at the scope of the improvements,
7:07
of course, the tenant is looking to ensure
7:11
that all of those improvements are
7:13
going to align with their business needs.
7:16
But they also ideally would like for the tenant improvement
7:19
credit to be sufficient to cover all of those customizations.
7:23
On the landlord side, to your point,
7:26
they may want to limit the scope of those improvements
7:29
either because they want to maintain the building's
7:31
integrity, which is going to be important,
7:33
but also they want to make sure that all those improvements
7:37
are adding value, ultimately.
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And so the landlord is not only thinking
7:42
about the tenant and the use of that specific tenant
7:46
and those improvements, but what's
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going to happen once the tenant is no longer there?
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Is it going to be easy to release the space
7:55
if the tenant leaves?
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So you're always looking for that flexibility.
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And then it naturally leads to the next consideration,
8:03
which is the amount of the allowance.
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And so obviously, the tenant is going
8:09
to push for the maximum allowance,
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but the landlord is going to take into consideration
8:13
a set of factors to consider how much TI credits are
8:17
going to be given out for this lease.
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And they're going to look at the term of the lease,
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the length of the lease.
8:24
They're going to look at the tenant's credit worthiness,
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how the improvements might increase the property's
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marketability.
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And so those TI allowances, like in anything in real estate,
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but specifically in commercial leasing,
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everything is negotiable.
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But the negotiations are based on so many different factors.
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What we often have running to this scenario in which you
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may have a tenant that has more leverage based
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on the number of units that they have already opened up
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based on their credit worthiness,
8:56
based on their status on the marketplace.
8:59
And then you have some people that are
9:01
brand new starting a brand new endeavor.
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They don't have a lot of experience.
9:05
And so that is also going to be part
9:09
of the consideration of the landlord,
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because ultimately the landlord is going
9:12
to put up that money upfront.
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So the landlord is thinking, how likely,
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when I amortize this expense, am I
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to recoup it and actually have a tenant that
9:21
is going to see the lease through all the way to the end?
9:24
Right.
9:24
And it all depends on the terms of the lease.
9:28
I mean, don't come in asking for TI when your lease is
9:34
a year or two years.
9:35
Right.
9:36
So forget.
9:38
Don't even bother.
9:39
You might be able to get some free rent.
9:41
You might be able to get a month off of or two weeks off
9:44
of rent to paint and do whatever,
9:47
but you're not going to get TI.
9:49
Longer lease, to your point, credit-worthy tenant.
9:52
That's right.
9:53
Better chance of getting more in.
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And TI is done on a price per square foot.
9:58
So that's negotiated in the lease on a price per square foot.
10:03
And to your point again, the landlord
10:06
isn't going to give you 100% of what you want as a tenant.
10:10
They're going to only really be willing, to the extent
10:13
that they're willing to do any.
10:14
I know a couple that are like vets or says she's allergic to TI.
10:19
So it's all going to depend on the value
10:23
that the landlord thinks they're going
10:25
to get not only out of the term of the lease
10:28
and you as a tenant, but that equipment
10:31
after you leave those improvements,
10:33
after you vacate the space.
10:36
Yeah, for sure.
10:37
And timing is very important.
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The length of the lease and the likelihood
10:41
or the confidence that the landlord has
10:45
that the tenant is going to see it through to the end
10:47
of that lease term.
10:48
And for example, it's very different when
10:50
you do a 10-year lease than if you do a five-year lease
10:53
with a five-year option to renew.
10:55
The five-year option means that the tenant, usually
10:57
within six months before the end of the lease,
10:59
would have to let the landlord know
11:01
that they want to renew for another five years.
11:04
From the landlord's side, when they're
11:06
looking at the scope of the work and the amount of money
11:09
that it has to be invested, they're
11:11
going to evaluate it based on those five years.
11:13
They can't count on the other five
11:15
because the only one that has the option to renew
11:17
is the tenant at that point, whereby
11:20
when you have a 10-year lease, then the landlord
11:22
can look at amortizing that cost over a longer period of time.
11:26
And usually, the landlord will say, well,
11:28
I'm going to recoup my loss after X amount of months
11:31
of the lease.
11:32
And then after that, then I'm going
11:34
to start to see the money coming in.
11:36
That becomes a part of the consideration.
11:39
Another thing is, which a lot of people
11:41
don't think about, is the responsibility of construction
11:43
management, which is something that also is negotiated
11:46
as part of the TI.
11:48
And there are some landlords that are especially
11:50
institutional landlords, buildings that are owned by REIT,
11:53
for example.
11:54
They have a very clear structure as to how they are going
11:58
to execute their TI.
11:59
And they would prefer to have their construction group
12:02
execute on the build-up, because they have a lot more control
12:06
over that expense.
12:08
The tenant, you have some tenants
12:11
that want to have total control, and they rather handle it
12:15
themselves.
12:15
They feel that they could do it better.
12:17
They could do it faster.
12:18
In my experience, when you have a landlord that, for example,
12:21
has a 100,000 square foot office building,
12:24
they have the building in great shape.
12:26
They have a solid team.
12:29
Usually, it works better when the landlord
12:31
handles the construction management.
12:33
That, obviously, is going to come at a cost that
12:36
is deducted from the tenant improvement credit.
12:38
But if you have the right team, they can save you on time.
12:42
So that ultimately saves money for everyone involved.
12:46
Right.
12:46
And usually, even if the tenant's doing improvements
12:49
on their own, depending on how the lease is written,
12:52
and we'll get into some of the clauses in a little bit,
12:55
but the landlord isn't going to say, well,
12:57
here's a check for 100 grand.
13:00
They're going to say, OK, you're
13:01
going to have certain timelines in which you
13:04
need to complete certain tasks.
13:06
You're going to show me the receipts.
13:07
I'm going to pay the receipts as they come due.
13:11
It's not like you're going to get a check up front from the landlord
13:15
to handle the improvements.
13:17
And you're going to be on the timeline,
13:19
and those improvements are going to have
13:21
to be clearly specified for when you use them.
13:25
It's not like you're going to get the TI,
13:27
and you get to spread it over the life of the lease.
13:30
Correct.
13:31
I mean, there's usually an addendum to the lease that
13:33
has to do with scope of work.
13:35
And it's usually titled scope of work.
13:37
And in there, it lays out who's going to do what,
13:39
and it also lays out how that payment is going to be made.
13:42
Sometimes the tenant is actually carrying the cost,
13:46
and then they're getting reimbursed
13:48
as they hit certain construction milestones.
13:52
And sometimes the landlord says, we
13:54
don't have to worry about that if you let me manage it.
13:57
And I'm going to have my construction crew do it.
14:00
And then, of course, I'm going to pay it out
14:02
as they finish the work.
14:03
There is a, again, everything is negotiable.
14:06
So that's all part of the negotiations.
14:08
I work with a group that it's funny,
14:11
because we just had a meeting about two, three months ago.
14:14
They have a great reputation in the marketplace.
14:18
They have about nine locations.
14:20
And I think they have come to the realization
14:22
that they're great at doing what they do,
14:25
but they're not great in building and construction.
14:31
They realize that they don't have the team.
14:34
They've jumped from architect to architect,
14:37
from general contractor to general contractor,
14:38
because for one reason or another,
14:41
in one space, the build-out didn't work out.
14:44
And in the other one, they took forever.
14:45
They just realized that it's far easier for me
14:49
to have a landlord that wants me in their space that
14:51
is willing to do the work and to my specs,
14:53
but I don't have to manage that work,
14:55
because they will do it faster, better,
14:57
because this is what they do all day.
14:59
And so that's part of the consideration here
15:01
when you're making that decision as to who's
15:04
going to manage the construction.
15:05
Another item that I have here is cost overruns.
15:09
And then this is, again, one of those things
15:12
where I find that in every aspect of the negotiation,
15:17
this is where experience matters,
15:19
because you kind of want to lay out the expectations
15:22
to the tenant if you're representing the tenant.
15:24
And to the landlord as to who's responsible for what
15:28
and what happens if you overrun the cost of construction.
15:32
And this comes up, especially after the pandemic.
15:37
There was such a precipitous increase
15:39
due to inflation of construction costs
15:42
that the landlords had to kind of stop and recalibrate
15:47
their numbers, because the amount of TI and the price
15:51
per square foot on TI just skyrocketed, right?
15:55
Something where they may have spent $50 a square foot
15:58
to build out a really nice class A office space.
16:02
All of a sudden, it was close to $100.
16:04
It doubled.
16:05
And so those things become points of contention later on
16:09
as you're finishing construction.
16:10
So you kind of want to make sure that that is laid out
16:15
and ironed out in the lease.
16:17
Usually landlords want to cap their TI,
16:19
and they want to make it clear that anything that goes above
16:22
that allowance is the responsibility of the tenant.
16:25
And of course, the tenant is always
16:27
concerned about that price cost overrun.
16:32
And another thing that I think is important,
16:34
if you're a tenant that is looking for commercial space
16:36
and you are entering into this, is
16:38
to consider that there's usually language about what
16:41
they consider tenant delays.
16:43
And I think that that's another important component,
16:46
because that might run into your tenant improvement credit.
16:50
Your rent commencement date.
16:52
All of that becomes very, because then there
16:55
is usually a back and forth about,
16:56
well, I didn't consider that a tenant delay
17:00
because I gave the architect my information,
17:03
and then the architect took another week to come back.
17:06
And then when they came back, they
17:07
realized that they couldn't do what we were asking them to do,
17:10
because the zoning had changed.
17:12
And so that provided a delay.
17:14
Because now, especially when you're working with big companies,
17:17
that it's not one individual making the decision.
17:19
It's a group of people at a corporate level
17:22
that is making those decisions.
17:24
So that becomes an important component.
17:26
Agreed.
17:27
Agreed.
17:28
And again, it comes down to the clauses in the lease.
17:30
And that's why you need to pay really, really close attention
17:34
to all of the different items that go into TI,
17:39
because it's more than the price per square foot.
17:43
It's way more than just the credit and the price per square
17:46
foot, because it can be a domino effect.
17:49
And to your point, we saw that a lot with that lease,
17:51
again, with leases that we did during COVID,
17:54
and that got stuck in that.
17:56
So we've already gone over, you're
17:58
going to look at how much the landlord is
18:00
willing to give.
18:01
It's either a price per square foot or a lump sum figure.
18:04
It's going to specify within the lease
18:08
what eligible improvements are allowed.
18:11
And they might allow a lot of eligible improvements,
18:14
but only certain ones are going to fall under the landlord's TI.
18:21
So the scope of the work might be a lot larger
18:24
than what the TI covers, because again, to our original point,
18:28
anything that doesn't materially improve
18:31
the value of the real estate, and that's more branding
18:36
and more personalizing the space is going to fall on the tenant.
18:40
The disbursement process, we talked about how and when
18:43
that TI is going to be paid out, the time restrictions,
18:46
as to when the payouts are going to happen.
18:48
And usually that comes with something, right?
18:51
It's not just the bill.
18:52
It's the invoice.
18:53
It's they've met a certain metric, et cetera.
18:56
And then you have to make sure that all of the timing
19:00
within your TI coincides with the various times
19:05
within the lease between lease commencement, rent
19:08
commencement, et cetera.
19:10
The reversionary term, so it's going to state
19:14
what part of those TI's stay with the property
19:18
once the lease ends, and which ones the tenant needs
19:22
to remove and put back.
19:25
So that's going to be very specific.
19:27
And then obviously all of the compliance wording,
19:31
that any TI's, especially if the tenant is responsible,
19:35
are going to have insurance requirements.
19:38
The contractors are going to have special requirements
19:41
if they're hiring code compliance, zoning, obviously,
19:45
all that kind of stuff.
19:46
Within the TI section, there's usually
19:49
several very specific clauses within that portion that
19:54
relate only to the TI.
19:55
Yeah, absolutely.
19:57
Because it's probably the one thing
19:59
that is going to require the most focus and energy
20:03
once the lease is executed.
20:05
And so it becomes a really important thing
20:08
to make sure everything is ironed out prior to signing
20:11
that lease.
20:12
One thing that also happens is that the way that the TI is
20:16
dispersed, which we discussed, also works in the way
20:20
that you may negotiate with a landlord x amount per square
20:24
foot of TI credit.
20:27
But obviously, if it costs 20% less to do the buildout,
20:32
the tenant doesn't keep the other 20%.
20:35
It's not a set amount of money that the tenant can count on.
20:38
Sometimes I've spoken to tenants that didn't really
20:41
understand that part.
20:42
I wasn't part of representing them in the lease.
20:45
But after the fact, I had a group that came to me and asked
20:48
me, we had this issue with the lease.
20:50
Now we're looking to renew, but this issue was never resolved.
20:53
This is five years after they had already moved in.
20:56
Everything was ready.
20:57
And they were still, in their mind,
20:58
they felt that the landlord still owe us a credit for that 20%.
21:02
And I said, well, first of all, that's something you would have
21:05
had to negotiate.
21:06
In the lease.
21:07
And interestingly, I had a situation in which we did
21:10
negotiate that the full amount of the credit
21:13
will go to the landlord.
21:14
And the way that it was negotiated
21:16
was that the tenant felt that we could probably
21:19
do all the work that we want to do based
21:21
on the amount of tenant improvement credit.
21:23
There might be some money left over.
21:25
We don't want to give up on that money.
21:27
And so the way we negotiated is that the landlord agreed
21:30
that if there was money left over,
21:32
that the tenant can use it for FF&E.
21:35
So that was really interesting.
21:37
Also because the landlord is aware that whatever things that
21:41
are affixed to the space, they were going to keep.
21:45
But it had to be negotiated.
21:47
One thing that you mentioned that I think it's also important
21:49
to understand, because sometimes you don't realize it
21:52
until you go through it, is the importance of permitted uses
21:57
and code compliance.
21:58
Companies that haven't leased out a lot of space for office,
22:01
for example, they are surprised to know,
22:04
as they're going through it, that the layout of the office
22:07
furniture is a big component of how many people can be there.
22:11
And whether they're going to be able to achieve having
22:15
the density that they're looking for for their employees.
22:18
Sometimes there are code changes that happen
22:21
that it's impossible for the landlord to really be up
22:24
to date, because it all depends on how you lay out the space.
22:28
And so I had a situation where the way that the space was laid
22:32
out required them to build another firewall.
22:36
Just because of the fact that it was a very elongated,
22:39
rectangular space, and the way that it was laid out,
22:42
there are fire codes that were not going to be met.
22:45
The other thing that happened is that they
22:47
had three conference rooms.
22:50
Well, one of the conference rooms was huge.
22:53
And the dynamics of having the three
22:57
was triggering that firewall, which
23:00
was going to be prohibitively expensive to do.
23:02
But if they would have removed, which is, I think,
23:05
what they eventually did, one of those spaces,
23:07
then they wouldn't have had to build a firewall.
23:10
Now, obviously, all of that created a lot of delays,
23:13
because people had to make decisions.
23:14
But ultimately, those places that one of the conference rooms
23:20
was no longer a conference room, it
23:22
became a meeting room of max four people, for example.
23:26
So then what does that mean?
23:27
Well, now they had to change the furniture that
23:29
was going to go into the place, because you don't get
23:32
your certificate of occupancy until you have certificate
23:36
of use, until you actually have all the furniture in the place
23:40
and you have your final inspection.
23:42
So again, those are little things that happen that sometimes
23:45
you're like, well, I got the TI to do this
23:47
and I wanted to build this.
23:48
But those are considerations that, and usually,
23:51
in the least, there's language to say, look,
23:55
we're going to abide by the building codes and the zoning
23:58
laws, right?
23:59
And there are certain things that we just
24:02
don't have total control over.
24:05
So I will say that one of the things
24:09
that you mentioned that is about who owns the improvements.
24:13
You want to dive into a little bit more of that.
24:16
Is that always negotiable, or is everything that is built out
24:19
owned by the landlord?
24:21
I think it depends.
24:22
It depends on a lot of things we've talked about it before.
24:26
What good does it do for a landlord
24:28
to pay and own a brand, right?
24:31
Something that's related to a company's brand,
24:33
whereas an AC or a grease trap or a hood makes sense.
24:39
At the end, I'm thinking of medical space, right?
24:43
I'm thinking of a deal that we're doing.
24:45
So if you have an x-ray room or you have an MRI room,
24:50
a lot of times those rooms are built around the equipment
24:54
because of the width of the doors and everything else.
24:57
So when that medical tenant.
24:59
And the thickness required.
25:01
Right, exactly.
25:02
And whether it's leaded, et cetera.
25:04
So you're building a room.
25:06
And I'm thinking a bank is another thing, right,
25:08
when you have a safe built in, right?
25:10
So there are certain things that are done that are actually,
25:15
they seem like they're going to be great for the landlord.
25:18
But at the end of the day, they're
25:20
a headache because how do you remove a bank safe?
25:24
You know how expensive it is to remove a bank safe from a bank?
25:27
That's why most landlords and owners who buy a bank
25:33
try to think of creative ways to incorporate that safe.
25:38
So even though to a bank, it's like, no, but look,
25:41
I mean, it's got so much value.
25:43
This is expensive.
25:44
It's this or something with doctor's equipment.
25:47
At the end of, let's say you've got a 10-year lease
25:50
with three five-year renewals.
25:53
So now you're in the space 25 years.
25:55
Is that space, is that equipment still relevant?
26:00
I'm sure there's something newer.
26:01
So now if that tenant leaves, now it's
26:04
that landlord's responsibility to remove it and the cost.
26:09
So now you're almost paying for it twice, right?
26:11
You're paying for the improvement
26:12
to the building during the lease.
26:14
And when the lease is over, if it's not the tenant's
26:18
responsibility or the tenant goes bankrupt or leaves
26:21
or whatever, now you're paying to take apart that room
26:27
to remove that equipment.
26:29
So either new equipment can go in or a different use
26:32
can go into that space.
26:34
So I think that's why it really depends on whose side
26:39
you're representing.
26:40
And you need to understand both sides, right?
26:43
Yeah, I think that is an incredibly valid point.
26:47
I remember working on a space in Wilton Manors that had,
26:52
it was an end cap.
26:54
But the operator was basically mining crypto very early on.
27:01
This is many, many years ago.
27:02
This is at the onset of it.
27:05
And they had left towers of all the data towers
27:09
where they would put all the servers, right?
27:11
Obviously minus the servers.
27:13
Well, the problem was that, first of all,
27:16
to find another operator that is going to utilize that.
27:19
And the landlord then looked into, well,
27:21
because they had not negotiated in the lease
27:24
that they would have to remove the towers or remove
27:27
anything inside.
27:28
It was a very poorly done lease at that time.
27:30
And the landlord said, well, let me see if I could sell the towers.
27:34
Well, the problem is that the towers were obsolete
27:36
because they were not conducive to distributing
27:39
the heat that is created within those things.
27:43
So nobody wanted the towers.
27:45
So they ended up in a landfill.
27:46
But he had to pay to have somebody come in here
27:49
and basically take out 25 of those towers.
27:54
And so, yeah, I think that that's definitely the case.
27:59
I would say that the other thing to consider when you're looking
28:04
at, well, how much TI and how much tenant improvement can
28:08
be negotiated, that we have to look at market conditions.
28:11
Those things are extremely important, right?
28:14
Everybody knows how office is doing nationwide.
28:17
Well, in South Florida, we have the healthiest office market
28:20
in the country, right?
28:21
It's still double digits vacancy factor.
28:23
But it's very different in Class A than it is Class C.
28:27
Class A buildings usually will offer,
28:29
will be more generous with TI on a 10-year lease
28:32
because they usually have already earmarked a marketing
28:36
budget and an expense budget for getting a quality credit,
28:41
tenant-worthy tenant in there.
28:43
Also, rents are better, right, than in a Class C building.
28:48
And so retail is going to have a different consideration.
28:52
And even within a retail center, having an end cap
28:56
or having a freestanding corner building
28:59
within the shopping center is going
29:00
to have different considerations than if you
29:03
are in an inline space that is 1,000 square feet.
29:07
So there are a lot of factors that go into whether you're
29:11
going to get six months worth of TI or 12 months or 18 months.
29:15
It all depends on the way they negotiated or no months.
29:19
You know, we did a lease with a landlord that basically
29:25
did not believe in TI.
29:27
But they were willing to give a lot of free months,
29:31
you know, months of free rent.
29:32
Well, and I think that's why, right?
29:35
So rent abatement, which is the free rent,
29:38
is so much easier to negotiate because it's basically
29:41
time-specific, right?
29:43
Whereas all of these issues that we've brought up,
29:46
who's going to pay for what, who's going to deduct what,
29:49
how are things going to be repaid,
29:51
it's easier to just say, we understand
29:53
you don't have the money up front,
29:55
but you'd be paying for the lease to start anyway.
29:58
So we're just going to give you free rent.
30:01
And I was negotiating a deal that required almost them
30:05
rebuilding the space.
30:08
And it was going to be for a five-year lease with a five-year
30:13
option for a restaurant space.
30:16
And we got them to agree to 18 months free rent.
30:21
So, and people were like, how'd you get 18 months?
30:23
I mean, the restaurant market was booming.
30:26
And it was basically because they were
30:29
going to have to rebuild the entire space.
30:31
At the end of the day, my tenant didn't go through with it
30:34
because there were just too many other issues with the space.
30:37
Right.
30:38
But depending on what you're going to do,
30:41
the landlord recognized the value, and not only in this tenant,
30:46
but in this tenant basically building out the space for them.
30:50
That then, whether the tenant succeeded or not,
30:53
wasn't going to matter because the landlord was going to be,
30:55
it was going to be very easy for the landlord
30:57
to release the space based on the improvements
31:01
that they were going to do because of the lack of improvements
31:05
that had been done to that space.
31:06
The tenant has to consider that, OK,
31:09
so I'm going to get 18 months of free rent.
31:12
I'm going to do the build out.
31:13
But part of the consideration of the tenant
31:15
is obviously, how quickly can I get this build out
31:18
so that I can actually take advantage of those months
31:21
of free rent to recuperate my initial investment
31:24
in this tenant improvement.
31:26
Right.
31:27
And this is where I think it's important for tenants
31:30
to realize whether do you really have the right team
31:33
and are you going to be efficient in the way
31:36
that you do this build out?
31:37
And are you taking into consideration
31:39
time to get permitting, code compliance, zoning laws,
31:42
all those things into account to be able to do that?
31:46
And even the best operators in their business
31:49
are not necessarily great at doing the constructions.
31:52
You've got to have a good team around you
31:56
to be able to execute.
31:57
Not only that, but when you get into all of that,
32:00
my first, when we use the TI calculator,
32:03
so there are tenant improvement calculators.
32:06
You input the lease information, the tenant improvement
32:10
details, any additional factors in terms
32:14
of what you think construction costs are going to be, et cetera.
32:16
And it helps you come up with a final price and decision
32:20
and to make sure that the numbers align with the wording
32:24
and the lease.
32:25
But before you do that, and a lot of tenants don't do that,
32:28
they're just looking again to our point, the price per square
32:31
foot that they're getting.
32:33
Is there a comparable property nearby that maybe
32:37
is more price per square foot but doesn't require
32:42
the tenant improvements?
32:44
Because when you add in everything all together
32:48
into the pie and the time and the potential overruns
32:51
and everything, oftentimes the cheapest option
32:55
isn't really one the cheapest.
32:57
It's often not always the best option.
33:00
So all of those need to be taken into account more so
33:05
than just how much is the landlord charging me for rent,
33:08
how much are they giving me in rent abatement,
33:10
and how much are they giving me in TI?
33:12
Yeah, and sometimes people lose sight of that.
33:15
And I think it's so great that you mentioned it in that way
33:19
because a good operator knows, especially if they have
33:24
experience and they have multiple locations,
33:26
they know I can generate X amount of money per square foot
33:30
in my location, the moment that it opens.
33:34
And so they have to say, if I can save,
33:37
if I have to spend more money on a price per square foot
33:41
of lease, but I can be open eight to 10 months sooner,
33:47
the revenue and the profit margin that I'm going to gain
33:50
on those eight or 10 months is well going to surpass
33:53
the few bucks per square foot that I'm trying to save.
33:56
Correct.
33:56
And sometimes that, when you're negotiating,
34:01
especially if you're a tenant, you fail to look at that part
34:03
of it because you're just looking at,
34:05
you're thinking you're comparing apples to apples.
34:08
There's a space, they're asking for this,
34:10
this space, they're asking for this,
34:11
this is the amount of TI, this is the amount of TI.
34:13
And so now it becomes a negotiation,
34:15
well, I could get the space for less
34:16
because I need to do the work, I'll do the work,
34:19
but they don't take into account,
34:21
well, how about once I move into the space,
34:25
how much can I generate and what gets me there sooner
34:28
so that I can actually start to make money?
34:30
And so, yeah, I think that's very good.
34:33
So I hope this helped out in our goal
34:36
to demystify commercial real estate.
34:39
We've done a few of these where we go deep
34:41
into certain aspects of it.
34:43
One, because I think it's infinitely interesting,
34:46
definitely to us, but also because,
34:49
when you sometimes dive into the details,
34:52
that's where you sometimes get like an aha moment
34:55
to have a full understanding
34:57
of what commercial real estate is about
34:59
and what negotiating a commercial release is really about.
35:03
Correct.
35:04
And it's just this issue alone
35:09
is why there are no standard leases, right?
35:12
So that's why your attorney,
35:14
your team of people to support your landlord
35:18
or your tenant are so important
35:21
because you need a really good lease writing attorney.
35:24
You need somebody who understands
35:27
who gets to write off the TI,
35:30
who gets to depreciate it,
35:33
who, you know, it all depends on how that lease is written
35:37
and the wording in it.
35:38
So that is another reason why we like doing these deep dives.
35:43
And that's one of the reasons why commercial real estate,
35:46
you're always learning because no two deal,
35:49
no two leases, no two wordings,
35:51
no two clauses are ever the same,
35:54
even though they might be dealing with the same issue
35:58
in the lease.
35:59
So you have a fun fact.
36:01
Yes, I do.
36:02
All right, my fun fact is that Jennifer
36:05
is gonna share a fun fact with us.
36:08
So my fun fact is that Miami gets its name from a tribe
36:14
who used to lived here called the Miami.
36:17
They lived here in the 16th and 17th century.
36:20
They were actually closer to Lake Okeechobee.
36:24
And according to study.com,
36:27
they were coastal mound builders versus Northern tribes
36:32
who tend to be more in the mountains.
36:33
So the Miami were coastal mound builders
36:36
who built large-mounted villages
36:38
near modern-day Lake Okeechobee.
36:40
They were one of the longest lasting Native American tribes.
36:44
And Christian missionaries reported
36:47
that the last surviving Miami fled to Cuba
36:50
after Spain lost Florida in 1763.
36:54
Look at that.
36:56
And then it became...
36:57
Miami.
36:58
Then it became in reverse.
37:00
Well, at that time it was Miami.
37:02
Miami.
37:03
If you look in old school,
37:04
Miami resident, they'll say Miami.
37:06
And that's probably how you pronounce that tribe's name.
37:09
There you go.
37:10
Ha ha ha ha.
37:11
Well, thank you everybody for joining us.
37:13
We appreciate it.
37:15
And I hope you have a great, great rest of your day.
37:18
Bye.
37:19
Bye.
37:20
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