Restaurant tenant wants to expand but asking for money

Commercial Real Estate Investing
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Restaurant tenant wants to expand but asking for money

Adrian StamerPro Member
Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes

Hello

So I have a small mixed used property and two of the units are occupied by a restaurant.  One is a small building with the actual restaurant and the other is just for additional storage.  There is a shed like room attached to the back of the actual restaurant and the tenant wants to turn it into an actual addition of the restaurant...  but has asked for money to help pay for it.  His justification is its improving my property

The tenant has a 5yr lease with options to renew, so its unlikely I would see any benefit as is to the improved property anytime soon.  Also, his rent is only $700 a month for the two buildings (I did say small heh) and he quoted me as the addition costing $25-30k.  I can't really see anyway I would get any benefit for helping other then a rather large rent increase.

But really my question is, how do situations like this usually work and are structured? This is my only mixed use property, as I'm just in residential other then this so I have no experience with this.

Thanks

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Howard Abell
Commercial Real Estate Broker · Chicago, IL · Member since 2015 · 123 posts · 59 votes
11y

Tenant Improvement funds is not unusual in commercial real estate. However if the  landlord funds it in whole or in part, He/she would amortize the expense in the rent payments over the life of the base term of the lease. In this case, 5 years. I would try to negotiate some money being put in by the tenant and then raise the rent on both the old and new space which would include the expenditure made by the landlord repaid after 5 years. If the payments are higher than the tenant can manage, try to negotiate an extension to the base term of the lease. There is no set formula so you can be creative in fashioning a deal that suits you both. Yes, this looks like an interest free loan and it is. But you are getting an improved property. Also the new rental rates help build value. Just a thought.

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  • Howard Abell
    Commercial Real Estate Broker · Chicago, IL · Member since 2015 · 123 posts · 59 votes
    11y

    Tenant Improvement funds is not unusual in commercial real estate. However if the  landlord funds it in whole or in part, He/she would amortize the expense in the rent payments over the life of the base term of the lease. In this case, 5 years. I would try to negotiate some money being put in by the tenant and then raise the rent on both the old and new space which would include the expenditure made by the landlord repaid after 5 years. If the payments are higher than the tenant can manage, try to negotiate an extension to the base term of the lease. There is no set formula so you can be creative in fashioning a deal that suits you both. Yes, this looks like an interest free loan and it is. But you are getting an improved property. Also the new rental rates help build value. Just a thought.

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  • Adrian StamerPro Member
    OP
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    11y
    Originally posted by @Howard Abell:

    Tenant Improvement funds is not unusual in commercial real estate. However if the  landlord funds it in whole or in part, He/she would amortize the expense in the rent payments over the life of the base term of the lease. In this case, 5 years. I would try to negotiate some money being put in by the tenant and then raise the rent on both the old and new space which would include the expenditure made by the landlord repaid after 5 years. If the payments are higher than the tenant can manage, try to negotiate an extension to the base term of the lease. There is no set formula so you can be creative in fashioning a deal that suits you both. Yes, this looks like an interest free loan and it is. But you are getting an improved property. Also the new rental rates help build value. Just a thought.

    Thanks for the input I'll run the numbers and see where it ends up

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  • Jim Shepard
    Investor · Edwardsville, IL · Member since 2015 · 432 posts · 481 votes
    11y

    Restaurants come and go.  If you end up adding on I would suggest that you get personal guarantees (if you don't already have them) and also put a 2nd on their house.  They will think twice then before just closing up one day and your are left paying for the addition.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    Is this just one restaurant? Is it a franchised concept or a new concept?

    For NNN I evaluate what the sales are. Generally the most I am looking is for rent to be no more than 10% of gross annual sales and preferably the sweet spot is about 6% to 7%.

    No way would I front that large of a bill for a small concept restaurant like that. For a single tenant building 5 years is a short term lease. Usually those leases are 15 to 20 years with options.

    Let them spend the money doing it. I would question their estimate of 25-30k. If they have awesome cash flow they can afford to rehab it. If they are so confident in their concept give them a first right of refusal option to purchase at a set price.

    This way they can see the improvements they are putting in as a future payoff they will own.

    I am seeing to finish out TI for a cold dark shell interior about 30 to 35 sq ft. That does not include the exterior. You did not mention how much sq ft this addition is with the storage room.

    No legal advice given. 

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  • Jim Groves
    Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
    11y
    Originally posted by @Adrian Stamer:

    Hello

    So I have a small mixed used property and two of the units are occupied by a restaurant.  One is a small building with the actual restaurant and the other is just for additional storage.  There is a shed like room attached to the back of the actual restaurant and the tenant wants to turn it into an actual addition of the restaurant...  but has asked for money to help pay for it.  His justification is its improving my property

    The tenant has a 5yr lease with options to renew, so its unlikely I would see any benefit as is to the improved property anytime soon.  Also, his rent is only $700 a month for the two buildings (I did say small heh) and he quoted me as the addition costing $25-30k.  I can't really see anyway I would get any benefit for helping other then a rather large rent increase.

    But really my question is, how do situations like this usually work and are structured? This is my only mixed use property, as I'm just in residential other then this so I have no experience with this.

    Thanks

     I agree with all of these comments.  To get a 10% return on that investment you would need to charge another $200-$250/month in rent.  Are they willing to do that?  Also, you need to have the tenant put some skin in the game, especially if they are only in the space for 5 years.  If anything their investment would make them less willing to move.

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  • Adrian StamerPro Member
    OP
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    11y

    Thanks again for the input, going to have a discussion with them to get a better idea of what choice to make. They were just requesting partial funding of it also, so they would have some skin in the game too

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  • Hugh Ayles
    Cedar Park, TX · Member since 2015 · 377 posts · 200 votes
    11y

    My response is from my time as a commercial GC.  Landlords often gave build out allowances.  It could be as small as $5/sf up to $30/sf.  Anything above the allowances came out of the tenant's pocket.

    I defer to the other posts above regarding how to figure cost impact and cost recovery as a landlord as I was never privy to that information.

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  • Ash Patel
    Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes
    11y

    I too agree with all the posts.  One angle is give them some TI allowance and have them fund the rest.  This way they have skin in the game.  Keep in mind that a lease without renewals works in the landlords favor.  You hold all of the cards when it comes time to renew.  Would this restaurateur have a lot of options to move?  Have they already invested a considerable amount into this space?

    All of my commercial leases are presented with no renewals.  Its the tenants job to negotiate renewals. - keep us posted.

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