Need advice on build out of single tenant building

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

I have a standalone former drive thru bank that is now a vet clinic. The vet clinic wants to expand the building at their cost into the drive thru area as they don't need the drive thru. Should I charge them more rent to take up more space? My thought is that the the drive thru is the most valuable part of this property in case I need to release it.

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Dustin TuckerBusiness Member

Lender · Savoy, TX · Member since 2020 · 195 posts · 80 votes

I don't know the exact location of the property, but from my perspective a lot of former drive throughs are being replaced or no longer used, especially at former bank properties.

To answer your other questions, you would be able to charge more for the additional space, but I would think that would be negotiated when you make the modification allowing them to convert the drive through space. I would think that if the tenant is paying for the addition, they would want to have a minimum of a 5 year lease, if not a 10 year lease in place in order to pay for the improvements.

As in any real estate investment it is risk reward, I think with the current market and a stable vet tenant, that if you can get a 5+ year lease, it would be worth it to let them expand.

If you are worried about value, you could always talk to a commercial real estate appraiser.

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Dustin TuckerBusiness Member
Lender · Savoy, TX · Member since 2020 · 195 posts · 80 votes
2y
I don't know the exact location of the property, but from my perspective a lot of former drive throughs are being replaced or no longer used, especially at former bank properties.
To answer your other questions, you would be able to charge more for the additional space, but I would think that would be negotiated when you make the modification allowing them to convert the drive through space. I would think that if the tenant is paying for the addition, they would want to have a minimum of a 5 year lease, if not a 10 year lease in place in order to pay for the improvements.
As in any real estate investment it is risk reward, I think with the current market and a stable vet tenant, that if you can get a 5+ year lease, it would be worth it to let them expand.
If you are worried about value, you could always talk to a commercial real estate appraiser.
[email protected]903-647-6036
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John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
2y
I'm more worried about converting this unit back to a drive thru some day as I think the value is in the drive thru. They might be thrown off guard by saying I'm going to charge them more rent for their own built out. After all they are leasing the entire property as is so they are assuming that doing a build out isn't going to cost them anything more in rent.
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Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y
@John M., I have no direct experience with this scenario, but here are some thoughts:
First, drive thru's are limited to banks (and even these seem to be disappearing) and restaurants. Is this realistically a restaurant location? Is building over the drive through limiting your ability to punch a hole in a wall, re-stripe the traffic pattern and, and put in a restaurant drive thru, when/if the time comes?
Personally, I don't see a bank drive thru as valuable. Most banks are retracting their physical footprints, and when they are opening new locations, there is a drive through ATM, but not 2-3 lanes of drive thru teller access.
Broadly, I think the finished, leasable sq ft is more valuable. The challenge is going to be striking a deal with the tenant. Yes, they are paying for the new finished sq ft. But you are also foregoing the ability to finish that yourself and find a paying tenant for the space. One option is to "charge them" rent for the new sq ft at market rates. Then, provide a rent abatement for X yrs to offset their costs.
I.e. they expand the building by 2,000 sq ft. Market rent is $15/sf/yr. It costs them $200,000 to build the addition. You could straight line it and give them 6.5 yr rent abatement on a 10 yr extension.
Or, you could create a ground lease on the addition parcel and say the rent for that ground lease is $2,000/mo. But this could be overly complex when it comes to prorations for NNNs, since part of property is on GLA and other is on ground lease without being separately parceled.
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
2y
@John M.
Hey John
thats a tough call. A bird in the hand or two in the bush scenario. Giving up a guaranteed increase in value with them using their own capital to increase the square footage would seem like a no brainer, but how much are you losing if you remove the drive thru and can't put it back.
I would talk to commercial brokers and other owners in your area to see the value of a drive thru. I would also consider how long in the vet lease going to be, and what is your exit strategy. If it's to hold long term, you need to find out the value of the drive thru.
If it was me, I would give them a break on rent for square foot added, but increase based on what market charges for additional rent.
Good luck
Gino
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John M.
OP
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
2y
the drive thru may not be that big of deal as it may be easy to convert back depending on the build out. They have 5 years left and then 2 5 year options after that. Perhaps an amendment that talks about new market rents in the first 5 year option would be reasonable. Gives them time to recoup costs and grow their business making them a sticky tenant.
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Michael K GallagherBusiness Member
Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
2y
Quote from @Evan Polaski:

@John M., I have no direct experience with this scenario, but here are some thoughts:
First, drive thru's are limited to banks (and even these seem to be disappearing) and restaurants. Is this realistically a restaurant location? Is building over the drive through limiting your ability to punch a hole in a wall, re-stripe the traffic pattern and, and put in a restaurant drive thru, when/if the time comes?
Personally, I don't see a bank drive thru as valuable. Most banks are retracting their physical footprints, and when they are opening new locations, there is a drive through ATM, but not 2-3 lanes of drive thru teller access.
Broadly, I think the finished, leasable sq ft is more valuable. The challenge is going to be striking a deal with the tenant. Yes, they are paying for the new finished sq ft. But you are also foregoing the ability to finish that yourself and find a paying tenant for the space. One option is to "charge them" rent for the new sq ft at market rates. Then, provide a rent abatement for X yrs to offset their costs.
I.e. they expand the building by 2,000 sq ft. Market rent is $15/sf/yr. It costs them $200,000 to build the addition. You could straight line it and give them 6.5 yr rent abatement on a 10 yr extension.
Or, you could create a ground lease on the addition parcel and say the rent for that ground lease is $2,000/mo. But this could be overly complex when it comes to prorations for NNNs, since part of property is on GLA and other is on ground lease without being separately parceled.

These are some great thoughts on the situation. I like the idea of the 10 year deal extension and 6.5 years of abetment. Really cool way to do it so all parties have some skin in the game.
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