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Commercial Real Estate Investment/Amortization of TI's
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Question
Hi Jim:
I'm a commercial property developer and broker. I continue to get a debate when pricing a lease to include TI amortization. My experience is to provide a certain allowance for TI in the base rental rate... say $25 for medical office. Medical TI (from a cold dark shell) for 5,000 SF basic medical practice or an urgent care facility can run $70-$90. The additional $45 to $65 is amortized over the initial term of the lease and at a negotiated interest rate. It has been my practice to define the TI payment as "additional rent" but compute my rental increases, say CPI, on the Base Rental rate.
So, what happens at the end of the amortization term (same as the end of initial lease term) to the TI payment?
Does it go away? Does
Of course the main reason for this question is to better understand how lenders interpret the GSI and the resulting NOI that dictates amount able to be financed.
Have I managed to confuse you?
Fred-
It sounds to me like you are correct about everything in your statement. Whatever the actual cost of the money is for you to finance the additional TI's is the interest rate; it is not negotiated. If the tenant won't pay your actual cost to finance the additional work, the tenant can finance it themselves.
The TI payment goes away at the end of the initial lease term because the cost of the above standard TI work ("additional rent") has been recovered via the tenant's monthly additional rent payments. Note that your property retains the residual value of the above standard medical TI's that the medical tenant has now paid in full.
You should be able to collect a higher rental rate on that space because of the specialized medical improvements, which will increase the NOI of your building, hence the amount you can finance.
Please let me know if I have provided you the information you wanted. This is a good credit tenant for the challenging economy ahead.
Good Luck.
-Jim
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Answers by Expert:
Jim Avancena, CPM
Expertise
Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.
Experience
Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.
Organizations
Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.
Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".
Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.
Awards and Honors
The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.
Past/Present Clients
Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.
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