Commercial Real Estate Investment/capital improvements

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Expert: - 8/29/2007


Question
 I am negotiating leasing out a 6,000 sq ft commercial space I own. I am willing to make some capital improvements and the tenant is willing to pay additional rent for these. Is there a standard percentage range? I heard that 12% of the cost added to the annual rent is reasonable??

Answer
Frank-

No, there is no "standard percentage range".

Do you mean that you are willing to make some "improvements" or "capital improvements"?  The commercial space should not require that the prospective tenant perform any capital improvements.  Capital improvements include things like putting on a new roof if the current one is old and leaking everywhere, or replacing the 6 ton air conditioning unit because it is 20 years old and it has been repaired so many times it just won't hold together anymore without constant repair work.  These types of major capital costs should be provided at the sole cost of the owner.  If you are asking the tenant to pay say $10 per square foot to rent the premises, all of these basic structural elements associated with the building should be in sound condition and working well in return for the rental being paid.

However, it is common for the landlord to offer to provide certain improvements to the premises as an incentive to come to terms on a lease.

A tenant may ask that the premises be painted, more lighting fixtures be installed, a rusted out old electrical box be replaced, or the floor be re-tiled or re-carpeted.  Those are the kind of things you can negotiate to make the deal.  If you feel the tenant is asking for too much of those kinds of improvements be done, and you feel they are too costly in return for the rent you are going to receive to induce him to agree to to the lease terms, then tell him you cannot accept the terms.  

Keep in mind that some of the improvements this tenant is asking you to install at your cost may be improvements that  will still be attractive to another tenant after this current lease expires and you will get value for it again when signing the next lease.

Finally, be certain you have a prospective tenant that is credit worthy before agreeing to put in a lot of your money into improvements to get the lease signed.  There is nothing worse than spending $10,000 dollars of your money to get a tenant to sign a lease, and then two months later the tenant skips town and you are out $10,000 in improvements.

If you doubt the ability of the tenant to stay in business and recover all your improvement expenses, get a bigger security deposit up front.  Then if the tenant goes out of business, you can recover your improvements costs.  For example, if the tenant is opening a restaurant and he has never done it before, get a big security deposit!

- Jim

Commercial Real Estate Investment

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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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