I have a national chain tenant with two year lease still remaining. Tenant wants to leave early as they aren't able to make profits as expected, and giving me an option to find a different tenant and cut them loose. I feel this is a blessing in disguise - I can try finding a tenant while the current tenant is still in place and have a relatively long timeline to do it right. So my questions.
1. What should I expect in terms of buyout payment from the tenant for terminating a lease two years early - one year lease or more or less?
2. What kind of a broker should I hire to find restaurant tenants? I have purchased the current property with the lease so I am relatively new to the leasing process. Any guidance is appreciated.
3. What kind of brokerage commission am I expected to pay for the broker finding the tenant?
4. What kind of tenant improvements allowance and buildout time - realistic - in this market?
Any other guidance is appreciated as well. Thanks in advance.
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
3y
Lots of questions in that post so I'll try to cover all of them.
The first question you need to ask yourself is WHY they are not making as much money? The reality of things is if a national tenant is pulling out, the chances of you finding another national tenant to move in are not very high (think about it this way, if Burger King can't make that location profitable, why would anyone from Wendy's/McDonalds/White Castle/etc. think that they can do better?)
To your questions:
1) I wouldn't let them have a buyout at less then 75% of the full lease because you will be dark for a while. If anything, I'd rather reduce my rents with them and keep them in place until I found the next tenant.
2) You need a commercial broker, preferably one that specializes in landlord representation. even more preferable one that specializing in restaurants (or at least retail). Easiest way to figure it out would be to go to loopnet and see who has the most similar listings in the area.
3) Commercial leases commissions are calculated as following: [monthly rent] * 12 * [how many years the lease is for(3/5/7..)] * [commission percentage] (negotiable with the broker, depends on size of deal).
4) That one is hard to say. Really depends on what's in there today and what the future tenant will need. If you have a fast food restaurant in there now (BK, Taco Bell, KFC, etc.) and the next tenant will be a sit-down restaurant there will be a considerable cost to convert it (also, highly dependent on the overall SQFT of the place)
Overall, my advice would be to check your numbers and see if you can live with lower rent, if you do, then go back to the current tenant and ask, "at what rent will you stay and even consider extending the lease?"
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
I've been in your shoes. I let the tenant buy me out for a year even though there was 4 years left. You should make it 2 years because it can take a while to find the right tenant, and you might have to give that tenant some free rent for 6 months or TI. 6% commission is reasonable with 2 brokers involved in the transaction, however I would only pay the broker on the initial 5 year term and they should NOT get compensated on the renewal term. Make the renewal term 10 years or longer with 2 5 year options. That way at the end of 5 years you will know if the tenant is going to be successful and it will be easier to sell the property with a new 10 year horizon.
I went through 2 brokers before I gave up on them, and then decided to rent it myself. The reason being is that they moved to slow. They have dozens of clients and much larger landlords/properties so their focus wasn't there for me. The reason my tenant wasn't doing well is because their concept and management was lousy and it was a national chain run by corporate. If you have the right location you should be able to find a replacement tenant. Wishing you good luck!!