Commercial Real Estate Investment/Office lease: t.i.'s

Advertisement

Expert: - 12/22/2011


Question
FACTS:  I'm at final stages of negotiating a 5 1/2 year lease for office space in Los Angeles.  The construction bid (from landlord's contractor) for t.i.'s has come in around $25,000 above the t.i. Allowance.  ($42 rsf for 3400 rsf.).  Landlord had initially said cost would come in near allowance amount but I was skeptical so I told them i wanted a preliminary bid before signing lease. In an effort to make the deal work, landlord has offered to amortize the extra cost at 9% interest over lease term, or increase t.i. Allowance by $10,000 if I extend the lease for another year.  QUESTION:  Is there a standard formula that is used for this?  If they are giving me approx. $150,000 in t.i. Allowance for a 5 1/2 year lease, why are they only willing to give another $10,000 if I extend lease to 6 1/2 years?  Also, is there a standard for determining interest rate on amortizing the additional t.i. Cost? I can borrow the money at 4%, so 9% seems awfully steep in today's market.  Would appreciate any advice, as I have no expertise.  Thank you.

Answer
Stefanie:

My experience is that a landlord will factor in an additional charge of about 2% above the current cost of money to amortize the additional funds for tenant work.  So 9% seems a bit above current market rate.

Additionally, although I do not know how much market demand there is for the space you are leasing, I would expect the landlord would make the additional tenant improvements in exchange for you extending the lease term by one year.  Because of the escalation provisions in your lease (I am assuming what they are because you did not indicate those terms), adding another year following the first 5.5 years will likely bump your overall lease rental per square foot even further above what market rate for your space will be at that time and your landlord assuredly knows this will likely be the case and will be fattening his return on your space for that year.

Did you ask your landlord if you can also get another price for providing your tenant improvements?   Although your landlord will likely not agree to that request, it will add to your influence over him to agree to providing your additional improvements at the terms you request.    Landlords always get bids from "friendly" contractors that give him either very safe figures on the pricing or in some cases render prices that are fat enough to allow the landlord to know that the contract price is above anticipated actual cost.    If the landlord's costs are - in fact -  slightly inflated, it has more room to negotiate on the terms you have offered.    

Be certain that you have some quality market information on the value per square foot for the space your are planning to acquire.   You have probably already asked other tenants that are leasing comparable space what they are paying in rent for their rent.   

Good luck.

-Jim

Commercial Real Estate Investment

All Answers

Answers by Expert:

Ask Experts

Volunteer

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.

©2012 About.com, a part of The New York Times Company. All rights reserved.