Negotiating Tenant Improvement Allowances | Brokers Round Table

Tenant improvement allowances are the funds that landlords give to tenants to help towards build out costs when leasing commercial space. Today, we're diving into strategies for negotiating tenant improvement allowances (TIA), how to properly structure tenant improvements, overseeing contractors / buildouts, and what is / isn't included in tenant improvement allowances.

Key Takeaways:

• Tenant improvement allowances can vary significantly based on property type, market conditions, tenant needs and landlord requirements.

• Restaurant and medical space TI deals tend to be more complex with higher costs than other property types.

• It's important for all parties, especially landlords, to have realistic expectations about TI budgets and costs.

• Treating certain capital improvements as capital expenditures rather than TI can make deals more attractive to sophisticated institutional landlords.

• Using market data and net effective rent calculations helps determine if a tenant's TI request is reasonable or aligned with market rates.

• Understanding motivations is key for brokers to negotiate effectively and find creative solutions in TI negotiations.

• Communication, setting clear expectations, and bringing value beyond just order-taking are important skills for brokers handling complex TI deals.

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About Your Host:

Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate developer and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.

Episode Transcript:

0:00

This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community, and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. If there's one thing I know about tenant improvement allowances, it's that every buddy does it differently. So that's why I wanted to dive into that topic today. tenant improvement allowance is also known as t i t IA, we're going to break it apart. We're going to talk about negotiating ti allowances, how to structure ti winnowed oversight and approval rights on what is considered tenant improvements and what is not as well as any you know, ownership TI and landlord restoration obligations as the lease is ongoing. Welcome back to the commercial real estate investor podcast. This is another brokers roundtable live from across North America at each of our offices. So gentlemen, welcome. Welcome back to the show. Chad, let's kick it off with you, man. Talk to us about negotiating tenant improvements. Let's let's start off from the the tenant perspective, then we'll go back around and talk about from the landlord perspective. So when you're representing a tenant, what do you want to make sure that you are negotiating for like, what are your must haves? And what are your wants as you're going through those negotiations?

1:30

Yeah, I think you've teed it up quite neatly by describing it as different in every scenario, because there's some tenants that will want and prioritize certain things over others, they might want to have a lower face rate, they might want to have a lower deposit, they might want to have no personal indemnity, they might be sensitive to the lease term, whereas other tenants might be more agnostic to that. And they might want to have more of a priority on the T eyes that gets spent in there. On industrial quite often, it's pretty cut and dry, you start seeing basic cosmetic things for the most part, new carpet new paint in the in the office area. And for the most part, a lot of warehouses are fairly ubiquitous and function the same for most users, where it starts getting more complexes, for an individual company that might need something advanced in there. And that could be a crane could be heavier power can be oversized doors, that's when it starts getting very complex. And it becomes a function of how much rent the tenant is willing to pay in order to get those higher T eyes in their industrials, pretty straightforward, like for the most part, you might see $5 A square foot for basic cosmetic improvements. And then anything over and above that might get amortized into the lease. But it gets it gets very complex when tenants want anything more than that basic ti that most landlords will offer. And I'm sure Jesse anatomy can get into the office and retail side on and becoming a lot more elaborate and specialized. But for the most part, most T eyes and industrial negotiation are pretty straightforward.

3:08

Yeah, I mean, that's one of the reasons that I typically recommend industrial real estate for beginners in, you know, beginner investors into commercial real estate. It's a little bit more straightforward. In some ways. It's more complex in other ways. But that it's always a nice thing, right? Because tenant improvements well, you can, you know, amortize it back into the rent and actually increase the value of the property based on your noi. It's another expense out of pocket. Right? And a lot of newer investors may not necessarily have that. Adam was Devin, a retail man. I mean, retail is such a beast when it comes to TI that's like half of what you guys negotiate.

3:41

Yeah, I was laughing during during that description, because because everything that was just said about how it was straightforward and turned upside down. This is this is gonna sound like I'm lying. But I was just going back and forth with an institutional owner developer on an attendant requesting $300 per square foot on a deal that literally came across my desk an hour ago if that so it is it's a completely different ballgame. Now is that is that? Are we going to agree to that? No. Is that standard? No. But $5 per square foot is is we just don't see a lot of that but but where the crane comment, I think made a lot of sense on the industrial. On the industrial side of things. Retail is like building a frickin battleship or a submarine kitchen, right? Like there is so much cost that goes into such a small portion of the space. They can get crazy, right? So especially on on restaurant deals, you just get really exorbitant ti requests. especially as it relates to first generation space, and without getting into the weeds, because I'm going to do that when I talk about this stuff. So apologies to all the listeners and and my sta, that's what this is for, let's do it. The the mechanical, electrical plumbing loads in restaurants specifically can just be exhaustive, like I did a deal that was, you know, flirting with 10,000 square feet where the the HVAC package was over half a million bucks just for HVAC. And you can just you the amount of money you can spend is insane. So, Tyler, I think I think what you said makes a lot of sense about how I've seen a lot of people that specialize in, you know, everything from residential to office to maybe just like soft goods, retail try to do more intricate restaurant deals, and it never ends. Well. I think that Ti is absolute case by case basis. I think the security involved in ti gets very, very tricky. Because if I'm representing the landlord, I'm saying, Are you crazy you want let's just use 100 bucks a foot because $100 a foot is kind of the new normal on restaurant deals, it's not shocking 100 bucks a foot five years ago, you would have got I would have gotten yelled at for presenting it now. Now it's become pretty normal with construction costs going crazy.

6:28

Yeah, back then they probably would have reported you to the real estate commission, like this guy needs a licensed license with

6:35

purchase. But the so if I'm on the landlord side, I'm saying 100 bucks a foot, you're I want to personally guarantee I want letters of credit. I want yada yada yada secure to securitize this, right. So that's when I'm wearing my landlord hat. I'm saying that, but I do a lot of tenant rep work. And when I'm wearing that hat, I'm saying, Hey, buddy, okay, here's my delivery condition checklist, deliver it to me, go ahead, you think you can do it cheaper? Go nuts. So the cost of delivering what I would consider a restaurant grades shell has tripled in the last couple of years. So 100 bucks, a foot just does not go very far. Now I'm going to shut up and let somebody else talk because I can literally talk about this for for the entire allotted time. So I want to hear the Office perspective. And then I'm happy to circle back if people ask specific questions about about retail restaurant ti because it's a massive part of the game.

7:32

Yeah, I mean, I definitely want to dive into that more. Because I mean, that's the thing that I've always thought it's like restaurants and medical office space, those two are hands down the craziest on on tenant improvements. Now, they're also two of the best, you know, tenants you could represent. But that makes those negotiations really, really complicated because these businesses really do I mean, you know, some of them actually need it. Some of its like, you know, the the owner of the Buffalo Bills, getting the state to basically pay for another multibillion dollar stadium when they're a multibillionaire themselves you know, maybe it's just a little bit of incentive to actually sign that lease but Jesse let's let's dive into Office ti because, you know, when I when I first got started, I was working on mostly like Class B office space. We didn't even necessarily have to do ti because everybody just wanted paint and carpet. But it's it's gotten a little more complicated just like restaurants over the years. catch us up kind of what's going on in the office world. Jesse might be on mute.

Nope, still on mute. Oh, God, here we go. Yeah.

8:56

So in terms of the the office site, a lot has changed over the last couple of years, especially given COVID where a lot of the basically the tenants wants right now is turnkey built out space. So to just back up when I got in the industry, you hear ti ta ta and you're trying to figure out what are all these terms and TA usually the tenant allowance it's very specific sometimes ti in our industry is used as tenant inducement, which might not necessarily be an allowance, it might be free rent or others concessions that the landlord makes. So in terms of the actual improvement allowance, I think what a lot of people don't realize is that it's not just cash that the landlord is giving you there are certain components I just pulled up one of the leases that we did recently and you have to before COVID Before all the you know we were looking only for the most part for turnkey space for tenants. A lot of times it would be very specific as to what you can use that for so you would have to use it as it sounds improvement allowance of some sort. Now I think we're a little bit more open to using it towards towards Rent words, different fees, project management fees associated with a build out, because oftentimes now, individuals are not actually or companies are not actually building out complex space in the office side, they're getting relatively turnkey space, but they still want some sort of cash injection from the landlord. I think the other piece, both the both of the guys here, kind of hit the nail on the head, when it comes to, you know, people will ask us, Well, what's the allowance for this deal for a certain net rent, and it's usually not that easy, because it does come down to the tenants covenant, if it's a tenant, where you're going to trust giving them, you know, 3040 $50 cash. Now, in terms of the actual brass tacks of like what we're seeing in the market. You know, I think 40 $50 would have been a big TI, you know, four or five years ago, at least in our market. Now, that's, you know, that's not the craziest thing. You know, we see landlords actually mark actually marketing $75 for certain tenants, depending on the asset and how much they want to move it. But yeah, a lot of the new developments we're seeing is actually getting up to, you know, 5060 $70. And then what they actually ended up giving can be higher than that. And they, you know, they don't want to market that to the to the general population.

11:11

Can you speak to the difference in like Class A versus B versus C on those on those ti just ranges? Yeah,

11:21

I mean, certainly, it's probably a function of the ownership types. You know, oftentimes, the deeper pockets on the triple A stuff where you're, you know, there's the ability to actually put a large amount of cash into the deals. In terms of the bill, though, I think the Class B stuff is, is in a position where some of this, some of this stuff is fairly dated. So there is going to be some cash that needs to be put in the deal. But oftentimes, what I've seen with clients is when we look at, say, $40, or $50 of cash in, you know, for my say, tenant client, sometimes it's easier just to say, hey, let's allocate that $50, to the landlord to build out the space as part of leasehold improvements, because they have the contractors in the building, they're familiar with the building. So oftentimes, we we kind of do it that way. Because like I said, a lot of this stuff now, you know, I'm having clients that are asking for small tenant allowances that aren't really even building anything out, they're applying it to rent or other expenses.

12:22

Before we get into negotiating on the landlord side, I want to throw this out there. I mean, what are your thoughts on the tenant rep side? For negotiating for free rent, versus like a rent abatement versus tenant improvements? I mean, that seems to be, you know, mostly an either or situation, sometimes you can negotiate both, but you're gonna get a little bit of smaller both. I mean, as a landlord, I much prefer giving free rent, right? Because I don't have to come out of pocket for anything, I don't necessarily have to worry about it. And I can actually give the tenant kind of an equivalent amount of capital that way. But I mean, I know it depends on a case by case scenario. So you know, Chad, we'll start with you. I mean, what are your thoughts on that for? I mean, that's probably more common in industrial than it is in the other two?

13:07

Yeah, it's pretty common. Even even in a hot market, it's not uncommon for a tenant to be able to negotiate free rent of some amount, it might be short, it might be one month of a fixed dream period, it might be one month gross free rent. But yeah, that it is pretty common. And for the reasons that you mentioned, as well, a landlord doesn't have to be out of pocket any money. They, if they have to forego collecting rent for a month or so that property might have sat vacant for that month anyways. So I think a lot of landlords are more receptive to offering free rent, but it still comes down to it being a lever. If if you're pulling a lever where you're asking for free rent, that means something has to give on the other side. So does that mean that the rent has to go up? Is it the longer term lease, there's so many variables that go into it that a tenant can just expect to say, well just throw in three months of free rent into the offer and hope that they give it to us? Because the landlord's ultimately going to run numbers on what they budgeted? What this deal is going to cost them, they're going to start doing an ner calculation. And it's it's an input no different than a tentative sentence. So a tenant improvement incentive. So I, I think, generally speaking, landlords will be more receptive to free rent. But it's, that's not a given though, either. It's, some lenders will just say, No, these are the terms of my of my lease, and I'm just going to hold firm to it, I'll offer a TI because this work needs to be done regardless. So it really can depend. And that's, that's probably an answer that's so wishy washy here that that we're probably all going to echo is that it really is difficult because in any given deal, you've got a tenant that's unique and you've got a landlord that's unique and you probably have brokers involved that are also going to have unique styles. So it's it's what makes our business so interesting is that there's no two deals that look anything similar whatsoever. Yeah,

14:58

that's definitely some jobs secure Are you there? Adam, let's get to you next and then go to Jesse. I mean, you know, with retail and office TI, the norm just going up as much as it has, I mean, that's had to have kind of shifted how you guys are approaching some of these deals. But it's also had to have created a very interesting environment out there where there's still some of the old school landlords that are looking at it from a different perspective. I mean, you know, you hear $100 a square foot and TI, that's crazy. Because before COVID in Nashville, like $35 a foot and TI was an insane number, like only the cream of the crop class, a new construction spaces would get that. I mean, what's your approach today compared to what it was five years ago?

15:43

I'm having to deal with you. Yeah, absolutely. So there's definitely like a haves and have nots when it comes to TI right. Got you most. And again, I'm speaking for what I do, right, I tend to handle, you know, kind of boozier institutional grade retail, kind of urban core kind of markets, right? So I'm not the best person ask about your class B Class C strip centers, and, you know, secondary and tertiary markets, right. So, caveat, that said, there's definitely like a haves and have nots. On ti the people that are willing to play the TI game can usually get a commensurate rent, right? Like, I mean, we're doing rents, your rent that would have been 3536 38. You know, pre COVID is now you know, we're doing deals in these in some of these markets. Net. So for us, I know that people in New York and, and even DC and Boston, those aren't, those numbers aren't shocking. But in Charlotte, you know, 30 used to be huge than 40 used to be huge. And now, you know, I sent an LOI out at 60 the other day. So there is there is definitely a rise in rent that goes along with these larger T eyes. So that that is that is the good news. But agreed that it's a very different conversation than it was a couple years ago. And just to touch on the free rent question that was asked in the chat took a second ago. free rent is very, very common in retail. You know, some people call it a fixturing period, build out period, these build outs are very complicated. And the minimum, if I'm representing it, representing a tenant, the minimum I would ask for is six months free rent, to get something done, but savvy tenants are now tying that time to receipt of permits all applicable permits, right with the exception of liquor. So so that has changed. And without getting into the minutiae that free rent is kind of just SOP now, so I'll shut up and and listen to Office. Yeah,

18:08

I mean, it's, it's interesting, because while you were talking, I ran the math on a 2000 square foot space, asking $30 A foot and rent, right? Pretty normal for you know, let's say Nashville, if I was going to give $75 a foot and ti on that, and I was going to bake it, amortize it back into the rent over a five year period at 8%. It adds $18.25 a square foot to the base rent. So now I have to charge $48 A foot instead of 30. In order to justify that, which makes sense as to why rental rates have gone up so much in the past few years. I mean, I don't know necessarily where I'm going with that. But interesting food for thought, as you're thinking about. I mean, at the end of the day, somebody mentioned this earlier, it's all levers, right? Which lever am I going to pull to make this financially work? Okay, well, today, I guess we're giving a whole bunch of TI. So that means we're gonna have to charge a whole lot of rent at some point land, you know, tenants will say, Actually, I just want cheap rent. I don't want any TI and it might shift back, but I don't know. Interesting. Jesse. What about what about Office?

19:14

Yeah. Well, that's also you know, I think we talked about this on the show before where when COVID was, at the beginning, when everything was happening. Everybody was saying, Well, why have an office net rents gone down? And it's like, no, because inducements whether it's free rent or allowances went up, but the net rents stayed the same. So what that tells you is the net effective rent the ner was actually going down. It just wasn't being illustrated in the net rents. In terms of the free rent question of free rent versus inducement? I don't know what listing I have right now that doesn't have kind of a $20 tenant allowance baked into it. In terms of what the preferences, it's, you know, really is dependent like Chad was saying dependent on the landlord. It's not necessarily one or the other, I would say a fun kind of factoid is that a lot of times in our market, the brokers get paid 50% on lease execution and 50% on rent commencement. So if you negotiate your your tenant, I say client, a six months free rent or one year free rent, you're actually shooting yourself in the foot. We've had this conversation with landlords before that it should be on commencement or occupancy. And that's just kind of an aside. But in terms of the what, what landlords are also doing is that when they have the free rent, I'm not sure if if Adam or Chad, you see it on the retail or industrial side, that the like, Adam was saying, we'll call it a fixturing period, but we'll also do it what we call out of term. So it could be a five year plus six month deal where that six month period is the rent free period. And oftentimes landlords do that, because they don't want it affecting their, you know, quote, ner the net effect of rent to kind of mess up their economics on their side. But yeah, that's that's kind of what I'm seeing. Do

21:00

you guys ever just add the additional back end on deals like that, so they can still get their full 10 year term? Like, it's, it's in effect, and you're in six month deal, or some or something like that? We got a lot to just kind of pull those?

21:15

Yeah, yeah, for sure.

21:17

Yeah, we do that same thing, too. I mean, you know, it just helps to make sure. I mean, one always did it as a broker to make sure I was getting paid on a full 10 year deal. And stuff like that. I mean, obviously. So I mean, I guess I guess I've kind of carried that habit and ownership, I don't know that it necessarily actually matters or changes valuations or anything like that. But I from from an ownership perspective, but I guess it's nice to have a clean 10 year, deal starting out. Let's, let's talk about the landlord side. And, Adam, we'll start with you. You know, negotiating tenant improvements from the landlord side, what are you needing from the tenant in order to justify one, the amount of capital you're going to be giving them but to to securitize it.

21:57

It's really different if you're talking about first gen space or second gen space, right. And we've kind of been tiptoeing around that a little bit in this conversation. mean the difference, let's say I have a first generation space that is right on our corner. And it is really going to be kind of our infill anchor, right? Because, you know, Burlington Coat Factory isn't isn't the anchor anymore for urban deals, right? It's these hip restaurants that you can then kind of craft a merchandising narrative around and, and then, you know, really get a rise in the stackable view through rents in either office or resi. Right. So let's say it's this, it's the sexy restaurant corner, you're able to justify rents, using the math that I just said, right? Like, we're not going to get top billing upstairs in the stack if we don't have something cool downstairs. So that's something to important to remember. The other thing that is really important to remember, and this will get you thrown out of boardrooms, right. This is like a dirty little secret. Here's the thing, we're gonna have to pony up money upfront to get this thing to a restaurant show. Right? But if but once you have a second generation, restaurant or retail Bay, if it was worth 30, to go into sec, when somebody is looking at a second generation, it's worth 35, or 40. Right. And that is just it's just the nature of the business people want it, they they look at it and say, Wow, I can go in there and get up and running in 90 days instead of 240. I can spend you know 200,000 instead of 400,000. Because all the expensive crap is paid for in the back the HVAC and, and all the drainage and MEP like I mentioned. So there's a couple of different ways to justify it. Now, somebody's still got to write a check, right? Like that's still somebody still has to write the check. But it's a little easier to get a well capitalized and savvy landlord on board with a big TI. If you have approvals. If you're able to check the contractor if you get to approve construction plans before it's done. You know, there's some guardrails that you can that you can build in to make sure your money is being spent in an intelligent way. We,

24:17

we recently encountered a landlord that is, I guess, newer to restaurants that went out and built a space didn't consult any commercial real estate brokers on how to do it. I know first big red flag right there. But they they went ahead and installed. I mean, they built a cold dark shell. They stubbed in the MEP. And then they already did the grease trap. And they tried to list it with us with no further tenant improvements because they said it's already it's already zoned for a restaurant and it already has the the restaurant infrastructure in it. So you know any tenant needs to come in here and do whatever they want to do. I mean, how do you deal with clients like that to help them understand because I would have met And there's a lot of commercial real estate brokers out there. There's a bunch of newer commercial real estate brokers that listen to this show. How do you handle a landlord that has unrealistic expectations like that.

25:11

So the difference between the way I handle it now, and the way I handled it 10 years ago is massive. Because then you know, 10 years ago, that deal, you might be counted on that deal to pay your mortgage or, you know, get baby new shoes, whatever it is. And you'll kind of tell people what they want to hear in order to get the business because you need the sign, you need whatever. So I might have been less honest. Or maybe I just didn't know as much as I know now, right? So somewhere in between, in between there, we'll call it. Now I'll just straight up say like, Listen, this is what I would do. And this is what I would need to lease this space. And it's pretty straightforward. I mean, I have a, you know, a Rolodex of, of work letters and condition reports that are condition requirements that all of these people need. And I'm like, if you didn't do this, then you're throwing, you're just throwing bad money out there, or throwing good money at about problems. So I'm pretty honest and straightforward with what needs to be done. I had a call with a huge institution, maybe two weeks ago, where I basically told them like, listen, everything in your plan is wrong. Everything. Like I get that your core and shell or multifamily architect also does retail and also does restaurants. And don't worry, we got it, you don't need to bring in a specialist. I'm just Life's too short, man. I've tried to go in and fix stuff too many times. And it never worked. And everybody's just pissed off at each other. So I'm a little blunt in the way I respond to that stuff now. Because otherwise you're just gonna you're gonna spend wheels, you know, so So I'm pretty blunt these days with the way I attack

26:57

that. Yeah, I love that. And look, kitchen build outs are so specialized. I mean, we're doing a boutique hotel right now we hired a different architect specifically to work on the bar and kitchen, because they are so different. The layouts mean, you wouldn't believe some of the layouts that that regular architects think that a kitchen should have. I mean, clearly they've never worked on kitchens before. The

27:20

number of arguments I get into with multifamily architects, which is so crazy, like I don't, I don't get paid to argue with really good Korn shell. High Rise office Architects like it's just it's not my job description and like, Listen, I've done 100 of these things, but you know if you if you think a 200 amp panel can power a 6000 square foot restaurant. Okay, fine. Oh, you want to put a grease trap in even though you have no idea what kind of restaurant it is and you don't know what the menu is? You don't know what size the city is going to require? You want to put that okay, go nuts. Oh, no. Progress. No ventilation. Okay. Yeah, yeah. Oh, they can wielder trash around the block at five o'clock. And through the through the building lobby. Okay. Yeah, good idea. No, yeah, perfect.

28:07

Oh, parking is on the second floor and the stairs down from the parking lot on the opposite side of the building. Perfect. Customers are

28:14

gonna love the figured out. They figured out my favorite one. They figured out in New York. Like, yeah, there's a million people that can walk to you in New York. It's not. Yeah, Matthews, North Carolina is not the same thing. It's

28:25

totally different. Jesse, what about you on the on the landlord side and office space? Because I mean, especially over the last couple years? I mean, I'm curious to know, you know, within the post COVID world, I mean, how are our office landlords approaching? You know, their ti negotiations?

28:41

Yeah, I think just in terms of your the question on realistic or setting realistic expectations. The one nice thing with most of Office is pretty standardized. The the clients, we have kind of understand the market, they get the situation, I think the biggest change in the last few years is that things are just taking longer from the landlord side. People are, you know, it's the first time in a lot of markets that they've seen a tenants market in years. So the fact that, you know, for the first time in a long time, the landlords are actually having to roll their sleeves up having to put proposals out instead of just waiting for offers. So I think that all kind of factors into the tenant allowance, there's just a little bit more room for the, the tenant side to negotiate. In terms of the realistic expectations, though, you know, at this point in my life, and I'm sure just like, to Adam's point, as I as I get older, I'm probably gonna have less and less patience. I think you got to, you have to set the stage as quickly as possible. If there's something unrealistic, you kind of have to nip it in the bud. And it's hard to do, almost impossible to do in the beginning of your career, because you're just trying to say yes to everything, but it really doesn't serve you well to, you know, basically go on with this unrealistic expectation that a landlord might have because it's just going to hurt you in the currency of your agreement or, or worst case you You know, after six months or a year, you don't renew because an expectation that was not realistic wasn't met.

30:08

Yeah, I mean, it's it's an interesting scenario, right? Like, I will never forget the first client that I fired. I will I actually love telling people like, Yeah, I'm not going to do that we're not going to work on that I don't have the time to do something like this. You know, that's not how this should be done. I mean, because it is a very powerful thing to realize, like, oh, cool, I'm kind of at that point in my career, where I can choose the things that are going to be good for my mental health, as well as my bank account, not just one or the other. Which is just kind of funny. But there is something to be said for being the guy that says, No, I'm actually not going to do that. And here's why. Because a lot of times, those tenants or landlords will actually come back and be like, Wait, why? You're the only person that has told me? No, it's kind of like, you know, the really attractive girl that you're the you're the only guy that's ever said no to her, or you ignore her. You know, they got to figure it out. They're like, Why? Why are you ignoring me? Same thing, it's never good. You're never good at that one. It's just takes practice this point. It's too late for me. It's too late for you, man. You're married. Oh, man. Chad, what about you, dude, how's how's the industrial world?

31:24

Yeah, I love everything you guys are saying about that. And I've had conversations like that as well, where I've said to the, to the person, there's plenty people will tell you what you want to hear. But I'm here to tell you what you need to hear if you want to lease the space. And that can be a little bit off putting. But I also believe that sometimes we get paid for having awkward and uncomfortable conversations with people. And that's what our businesses are, we're not just order takers, where somebody tells us what they want to eat, and we go and punch it into the kitchen, and then we bring back the plate, we bring a lot more to the table. And having the confidence to say bold things like that, even if it's very uncomfortable and pretend potentially pisses off the person, maybe lose that business, that's better than taking on a property and spinning your wheels wasting time having to be accountable for something that you can't even control. And with you guys, that's that's been an evolution of my career as well as picking and choosing what to work on and what not to work on. On the on the TI side from the landlord standpoint, industrials, a bit interesting from the standpoint that some upgrades can actually be considered capital expenses, as opposed to a tenant improvement. So one that I've done recently is we had a fairly large industrial property that didn't have a lot of overhead doors. So the tenant that moved in there, I was representing the landlord, big institutional group, that tenant needed some more overhead doors put in, we actually treated it as a capital expense, because that that's going to be useful for all tenants going forward. So instead of actually labeling that intended, a tenant incentive, we actually just put that as a building cost, a capital expense on there. However, there's also some things that can be treated very specific to the tenant that's going in there that might not have any value could actually be a liability to future tenants. And something like a jib crane has an example, that might work for the one tenant going in there. But if that tenant leaves, we might not find another tenant that has a use for that. And now we have to take that out decommission it, there's a lot of expense that goes into that as well. So it's, if he keeps going back to that initial comment about it being case by case basis, but but it really is, and, and forward thinking landlords will appreciate that. Tenants need to have certain things and they'll want to provide that to them. So long as the economics makes sense on it, but those same landlords might treat it that its value add to the building itself. So I think it's it really is, you have to come to a consensus. And I really believe that as brokers is that we're not, we're not paid by the landlord, we're not paid by the tenant, we're paid by the deal. If the deal doesn't happen, we don't get paid anything. So we're really we're all trying to represent our client's best interest, and we're trying to move everything forward. But if a deal doesn't happen, landlord doesn't have a tenant, the tenant doesn't have a space and the brokers didn't get paid. So there is an effort that everybody wants to be moving that forward. And the only way to have that is to have open and transparent communication.

34:32

Chad, can you can you dive into the Go ahead, Adam.

34:36

No, I was just gonna say that we do that a very similar thing in retail, even even down to the doors, right? Like if there was a really tired facade on a building, we could have a landlord dig into putting in some kind of like porous or operable storefront system like nanowalls or accordion doors or something like that. Infrastructure can also be treated as a capital expense. notes a big part of the deal. You're running a vent hood to a roof or out of a space making sure all the utilities are upsized. So I've seen it skin that way. And in fact, that is my overwhelming recommendation on first generation space is to is to dump that into a CapEx budget, as opposed to a TI budget. So I couldn't agree more. With with that being a smart solution.

35:26

Kyle, I see your question, and we'll get to it right after this. I want to make sure that we kind of pick this apart a little bit more. Chad and Adam, Can y'all dig into that a little bit further? Why is it advantageous to treat it as a capital expenditure, as opposed to a tenant improvement allowance, because that's something that a lot, I feel like a lot of brokers don't know. And either one of y'all could take it, I mean,

35:45

the most natural one is that it gets excluded from the deal economics solely, especially sophisticated landlords, they're going to have very elaborate and precise budgets on what numbers that they need to hit. And it's, it's interesting how some tenants will come in, and they'll try to push the envelope on and they'll try to make a really aggressive deal. And this is on the big landlords side, other landlords might treat it differently. But these landlords, it's just, it's just a budget decision just really comes down to the economics to the economics of these deal, when you run the calculations doesn't make sense, then yes, we can proceed on a deal. If you have an item like putting in some extra overhead doors, which can be a sizable cost as you're cutting through concrete, if you have that included in the deal economics, it's not going to pencil A lot of times, but if you can treat that as a capital expense, that's not getting factored into the deal. So there are a whole approval process, which often goes through multiple layers of, of management decisions. If you can treat that as a CapEx expense versus actually being baked into the deal. It just makes the numbers that much more palatable and easy to digest. So that'd be the main reason is just treating it as a CapEx removes it from the economic factors that go into that decision.

37:02

That's exactly how I would have answered it. So

37:06

perfect. We're on the same platter on this

37:09

video, those things are already baked in early, the institutional partners already bought in, you know, those numbers have been approved six months earlier, and it doesn't get into some pissing contest or, you know, it's even the most sophisticated landlords have to win, right that you get into the heat of that negotiation. Like who the hell is this guy think he is wanting 150 bucks of a foot ti he would much rather put it $50 Extra into the show the corn shell and it's only $100 Ti it's just the nature of the beast. But Chad, you you said it perfectly.

37:39

Yeah, sometimes in this game, it's all ego, which is hilarious. It's, it's 661 and half a dozen the other but just the way that you phrase it and it's worded totally changes how somebody feels about it. So funny. Guys,

37:54

I'm so sorry. I gotta take kids to baseball. Love you guys do it.

37:58

Enjoy baseball.

37:59

Sorry, I have to go early.

38:01

Man.

38:02

Yeah, I've got a I got I got it. I'm basically like an Uber driver for sports. But I always love these conversations. And I learned something every time and I really appreciate you guys.

38:12

Yeah, me excited to see it. We'll see you next time. So Kyle, Kyle was saying had an interesting deal on a new office build out shelf space. So Jessie, we may volley this one over to you original proposal from landlord came back at $80. And Tia tenant countered at $125. That's a huge counter, tried to advise them that doing so would make them look less attractive as a potential tenant because there are others that are looking at the space tried to advise them to come in lower, but they insisted, what is your opinion on that scenario? Because I'm afraid they may they may miss out.

38:49

Yeah, so I guess the first thing without any context with a market if, you know, if you're in a market where tenants are getting 100 125, then obviously it's a different question. But if you have comps that are, you know, in line with that, say 80 or even lower, I think that that needs to be illustrated to the client that you're you're asked might lose you the property. There might be a worth making a distinction here sometimes that this is tenant allowance, cash, and sometimes these are leasehold improvements that the landlord is saying that they're going to put into the space. So based on the question, it sounds like it's an actual Tia so it'd be curious to see what what market this deal is. And because that's a pretty substantial even in my market, like the landlord having $80 as a as an allowance is big. Countering 125 is even obviously even bigger. But yeah, I think that with anything like this with clients, you have to show them what is going on in the market. And if they're disconnected from that, then it's your job to show them. Yeah,

39:50

I feel like we're gonna find out that cows like representing apple and they're in San Francisco or something. I mean that because that's crazy. Like that's a lot of tea. I mean $80 AT T of TI and office spaces a lot. I get that it's coming into your shell. But yeah,

40:06

it's the shell piece. Right? That's that's a big challenge right now because we are dealing with properties that we're selling right now that are in Shell condition. And they have to have a bid allowance in there because they're competing with some beautiful, absolutely turnkey space.

40:20

Carl said he's in Bentonville, Arkansas, which is even more surprising. $42 per square foot asking price. Yeah. Yeah, I mean, Carla, I agree with Jesse on this one. I think that any issue like this, that pops up in brokerage can always be solved by data. Right? So if you have the data to kind of back up your assumption that 125 is too. Oh, he said The Waltons actually in the building. I mean, as soon as he said Bentonville, I was like, Yeah, Walmart has to be involved somehow. You know, if you have the data that shows the ticket, that $125 is way too high. I mean, there's, there's really two things you could do work to convince them that $125 is too high, or tell them that you're not going to work with them. Because that's a very unrealistic ask if they think that you know, I mean, if markets 80 And they want 125, no matter what, there's basically, like only one way that you can go about doing that. And that's asking the landlord to bake it back into the rent, like, I don't know, most landlords are not gonna be willing to accept that. I wouldn't say double your

41:30

rent. Like, that's, I don't know what ad is over 9% on the 10 year deal, but it's a lot.

41:38

It's a lot of money. 125. I mean, we saw what $75,000 did at 8% interest on a 2000 square foot space earlier, $18 a foot increase, so it's quite about. Alright, well, let's, let's, let's move on to the next one. This is this is trying to get into like a commercial real estate investment brokerage issue where I think we're gonna have to have a part two, let's talk about structuring tenant improvements. When whenever we're doing these deals, typically, like from the landlord side, there's a very different way that I want it as opposed to on the tenant side, as a landlord, I want the tenant to go through the bill, that process pay for everything themselves, then come back to me at the very end of the process with receipts for all of the work done lien waivers from anybody that touched the job site. And then once I've received those, I'll give them their tenant improvements within 30 days of receipt of all the documents that I need. There's a couple of reasons for that. One, I get to ensure that the money that I'm giving them for tenant improvements is not being spent on FF money, right? They're not spending it on random business stuff. It's going into my building, which means I get to depreciate it, and it's actually improving the property. But to the last thing that I want, as a landlord is some you know, subcontractor to come up out of nowhere saying, Hey, I never got paid on this. I'm putting a lien on your property, because then it's my problem. Right? So that's typically how I want it as a landlord. Let's talk about it from the tenant perspective, though, how do you typically negotiate it from the tenant side? And Jesse, I'm gonna start with you, and we'll go to Chad.

43:14

Sure. I think it's our markets pretty standard, that everything you just described is the way that deals end up penciling out the idea, even sophisticated tenants or tenants will get confident the idea of just handing them cash is fairly uncommon. Usually, the stipulations are pretty clear that, you know, the receipts have to be present presented, the work has to be confirmed, the permitting, sometimes they'll even be, you know, additional project management fees that the landlord adds in because they might have to review or see some of the drawings, even if that's kind of BS, and they're just, you know, looking at it came from a credible source. But yeah, for us, it's pretty standard that they will have to do all of this before the landlord cuts a check. Now the bigger the client are, the bigger the tenant gets, the more that you can kind of peel away some of that stuff, but it's uncommon to just hand cash.

44:11

Grid Chad, what about you and industrial? Yeah,

44:14

same thing, it'd be very uncommon for a landlord to give money up front. So if it was on the tenant side, and was that important than get a line of credit, secure some additional source of funds so that you can pay your way through it? Because that's really what's going to come down to, if a tenant is wants that money up front, it's because they need that money. It's the tenants that have that money available. It's not an issue to them, they know that they'll have that money back at some point down the road. So tenants that just don't have the money to do it in the first place. So they either need to find a line of credit or get some additional money because it's there's I can't think of many landlords that would be open to providing drawers on that. But I mean, it's it's all risk tolerance. I I'm guessing that there is a landlord out there that would consider doing that, for the right tenant on the right deal with the right securitization, right level of comfort, knowing that their pain draws at certain levels, I suppose it's possible. But that's probably going to be a flip flag for the landlord already that if the tenant doesn't have access to money for short term interim finance, and even, that's probably a red flag. Because if the money is coming back to the many ways you really just need to bridge or have interim interim money available. So for a tenant not to have that would probably be concerning.

45:36

Yeah, we were, we were diving into Letters of Intent last week and a lunch and learn that I was doing with my commercial real estate team, or my brokerage team. And this, this TI discussion came up. And Phil, who's on my team, he, he moved here from San Francisco a couple years ago. And he had a completely different experience with how ti was handled, and it blew me away. So in San Francisco, apparently, I mean, he works in the office space. Apparently, the landlords, as soon as the lease was executed, would write a check and give the cash immediately to the tenant for their build outs. And I was like, Why in the world? Would a landlord do that? And Phil was like, Well, man, I mean, you know, they're dealing with a lot of these tech companies that have just finished, you know, a seed round or an A B round, whatever it is, for, you know, 10 2050 $100 million. And so they know that the company is good for it. I was like that. Well, that's, I guess that's a totally different environment.

46:39

They're good for that day. What happens if it goes wrong the next day, and they lose that 100 million? I still wouldn't do it. I wouldn't do

46:46

it either. I mean, what happens if you're ready to get checked to the next we work? To Adam Newman's new startup concept? Oh, man, I'd take a hard pass on that. Well, we're coming up on, you know, 30 minutes left, give or take. So I'm probably just gonna break off the last two parts, we can make this a part one and part two. Any other kind of final closing thoughts on negotiations or structures when it comes to tenant improvements? I want whoever taken

47:17

Yeah, happy to jump in. And then just so you can maybe add anything? Because I just had to comment on on Kyle's point there as well. And I'm not an office guy by any means. But I would just try to flush out why they want that extra $45 a square foot for that, like, what's, what's the real reason there? Are they trying to apply that towards rent? Do they want that money just up front? Do they need that money? What's the real reason there? And if it's, if it's just an ask if they're just like, well, you know what, we think the office market sucks. So we're gonna just try and bend the landlord over here? Well, let's, let's do an net effective rent calculation here. And like, let's actually plug this in to a model and show how that's going to reduce the net rent, I think you said $42 a square foot? How does that extra $45 a square foot impact what they're already giving? So 30 given 80? And they want 125? What's left at the end of the day? And is a landlord really going to look at a deal if they're only getting five or $10? On an ner? Or are they just going to wait, just leave it vacant until another tenant comes along? And you said the best Tyler's you can solve these problems with data. If if every other lease column that you have showed that $80 was fair? Well, that's you, you add that to an ner calculation, and it's pretty compelling that they're asked is just egregious. Now, on the other hand, 125 might be the market price like that. Maybe the landlord's trying to give a really low number. So I would just, I'd probe more just like I can appreciate the amount of information Kyle's already given. But I would just I'd really dig, just try and figure out what what's their reasoning behind wanting to increase the TBI by 50%? Because that's a sizable increase. But just try and figure it out, get to the bottom of it. And I think that that's, that's what are why we have so much value in the leasing equation, and property that I own myself, I would hire a leasing broker, if I didn't, if I wasn't a leasing broker in addition, just because of the value that they bring in trying to be arm's length from the situation but also being objective and bringing more to the table beyond it just I see this all the time. We can't be order takers in this business. If we are just order takers. We're going to be replaced by Tesla robots in no time. So we have to bring more to the table. And in my mind that's probing really figuring out what the motivation is and trying to come up with a creative solution? That's that's where I think we get paid for what we do.

50:10

Jesse, what about Yeah,

50:11

I really liked that can be ordered takers, I think yeah, I mean, in terms of closing thoughts, I definitely agree with everything, as Chad just said. And to echo what we've all kind of been saying this whole time is that every deal, it's a kind of a cliche, but every deal, especially in our industry is slightly different than the other. And there's very rarely a one size fits all. So I think, part of again, just adding the piece of value, what we add is that we look at a deal that slightly different and we have potentially a novel solution or a novel idea, something that fits for that particular deal. So, yeah, I think these are great questions. And I think a lot of what we covered is what we actually see boots on the ground.

50:53

Yeah, I agree. I mean, look, as a commercial real estate broker the question, why is your best friend, because if you don't know what somebody's motivations are, you know why they're approaching this, it's gonna be difficult for you to do your job, which is to negotiate a deal in which everybody wins, so that it gets closed. Right. You know, that's the problem. The attorneys, they're one sided. They only care about one side, they actually want deals to not happen for whatever reason. Geez, I mean, I can't tell you how many nightmares I've got with attorneys. Or, oh, yeah, dude, it happens all the time. And I tell my team, look, as a commercial real estate broker, you are the only one in this deal that wants it to happen. The landlord doesn't want it to happen. I don't know why the tenant doesn't want it to happen. I don't know why the the list the lawyer, the CPA, the contractor, nobody else in this deal wants this to happen except for you. You've got to figure out how to make it happen. So that's what we'll leave you guys with this week. We'll see all in a couple of weeks for another brokers roundtable. Thanks for joining us. We'll see you then. Sure. This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses are online community and monthly group coaching calls on how to confidently buy your first commercial property today at www dot c r e launch pro.com