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New build out questions

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Scott_Tope

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I’m in the process of moving to a new location and ran into problems that i’m not sure of and was hoping for some suggestions…

I’m currently up and running but the property owner has informed me the building is up for sale and being i’m on a month to month lease i’ve decided to start looking for a new place, Flash forward a few months and i’ve found the perfect new spot unfortunately it’s not currently a restaurant so after dealing with planning boards and building inspectors it’s been approved. This is where it gets tricky…

I am under the belief that anything attached to the building the landlord should pay for as we need to put up some walls, run ng lines, plumbing etc. But he has basically stated i’m on my own building it out including all costs. Since i’ve never went through anything like this before I was hoping to get some feedback on who is generally responsible for what. Any help would be appreciated!
 
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My experience is the landlord provides a “box” with nothing in it. Anything you need to make your business work is at your cost.
 
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Daddio knows his stuff.

The Landlord supplies basically an empty box. What they may supply in addition to that depends on the strength of your company.

If you are one of the top ten and willing to sign a long term lease the may do a great deal.

George Mills
 
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Surely not in the top ten and that’s kind of what I thought, just wanted to make sure I wasn’t getting the run around. Thanks guys
 
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A lease is a creature with a lot of moving parts. There is no such thing as a “standard lease”. The question you are asking has no single answer, but varies according to current local market conditions, landlord motivations and as George points out, who the tenant is. You may not be getting the run-around as you put it, but you also may not be getting the best deal. This is what tenant representation is for. If you need to ask these questions, you should NOT be handling your own lease. Get a commercial broker to represent you in the lease negotiation. They will understand what the moving parts are and also what is really the local situation for leasing.

It IS a common approach that LL’s pay for upgrades that add value to the property and there are plenty of LL’s who will pay for those upgrades but there is no RULE. The LL’s that do this are the LL’s that are motivated to achieve higher nominal rents. Essentially, if the tenant will pay another $500 per month and a LL can finance $80,000 of improvements for that amount, a lot of landlords will be willing to consider it. First of all they can finance it and second of all it argues for higher per square foot rent in the other units they own and supports a higher valuation for the property.

In a very tight leasing market, LL’s do not need to sweeten deals with permanent upgrades to property but that is rarely the case. On the other hand, if you are leasing a plain box and doing all the build-out, you should be getting a rate per foot that is significantly less than you would pay for a space that has those upgrades in place. For example, a space that has been a restaurant in the past and has grease trap, electrical upgrades, ADA bathrooms etc etc should lease for noticeably more than a plain rectangle the same size in an otherwise comparable location.

One challenge is that banks are not lining up to lend on tenant improvements for the simple reason that there is no way for them to take possession of them if the business fails. On the other hand, banks are generally willing to lend to landlords for building upgrades as their interest is still protected by the deed of trust.

So, no simple answer. In a tight leasing market with a relatively unmotivated LL, you may well not be able to get the LL to pick up any of these costs, but in my experience (I am a licensed broker who does leasing and have done it nationally) more often than not, LL’s provide a TI (tenant improvement) allowance or actually pick up the cost of many upgrades.

PLEASE get yourself a commercial broker (NOT a residential realtor who says he/she can do leases too). The LL should pay their commission just like the seller pays the buyer’s broker commission when you buy a house.
 
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Flash forward a few months and i’ve found the perfect new spot unfortunately it’s not currently a restaurant so after dealing with planning boards and building inspectors it’s been approved.
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Does this mean that you already signed a lease!!? I can’t imagine doing planning and inspections etc without a lease… but if you already signed the lease your deal is done and governed by the document you signed. No landlord is going to jump back in and agree to pay for things they did not agree to in a lease.

If your lease is not signed then stop planning until you have agreement with the LL regarding who is paying for what and be willing to walk away from a deal that does not make sense. None of this means that a deal where the landlord does not pay for anything is a bad deal. If the rent is low enough that can be a very good deal. Remember that there is no “standard” way to do this… however, in my experience, LL’s help pay for some things more often than not.

As I posted above, take into account the market rate for similar property and recognize that there are several ways to spend or save money in a lease:

By no means a complete list, but some of the items that can be worked on to change the total cost to tenant:
  1. Initial rent
  2. Rent Holiday
  3. Rent escalation
  4. Tenant improvement allowance
  5. Landlord’s work
Then there are the terms of lease options…

Again, GET A QUALIFIED BROKER working on your side of the deal.
 
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I echo bodegahwy’s thoughts, particularly his #2 above … particularly if you’ve already signed a lease. You could explain that you will need to meet the demands for all the approvals, including improvements to the real estate, and that you would like to ask for either buildout assistance or rent abatement (bodega’s #2) for a few months. The rent abatement would help offset the additional unexpected costs and the deferred opening because of the time to make the improvements. You may also want to offer a lease extension in order to elicit this landlord support. Alternatively, you could ask for a monthly rent decrease to partially offset the unexpected capital expenses.
 
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I have not signed a lease yet and already negotiated no rent until we are ready to open. They are getting a lease together for me to look at and I am expecting favorable terms based on the work involved. I love this location but unless everything lines up I don’t have a problem walking away.
 
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One of my favorite sayings about negotiations is “Don’t ask, don’t Get”

In your shoes I would be asking for the LL to pay or at least help pay for the following:
  1. Grease Trap
  2. Hood system/Make-up air
  3. Upgraded HVAC
  4. Anything ADA related but especially bathrooms.
  5. Electrical service upgrades (adding 3 phase if it is not already to the premises)
HVAC is required in most places to receive a certificate of occupancy and is therefor part of the building but if the LL already has one in place I can see them being reluctant to pay for a new one.

These are “permanent” improvements that you will not take with you and which will be useful to any future restaurant tenant thereby increasing the rent the property can earn in the future.

Flooring, walls, lighting are more likely to be changed by some future tenant but sometimes LL’s will contribute to those as well. (Mine did in my retail store)

There are many ways for a LL to help pay:
  1. Actually pay.
  2. Lower rent
  3. Rent Holiday
  4. No rent increases or reduced increases
What works for a LL will depend somewhat on their motivations. If they have cash or access to credit they tend to prefer to just pay or give you the rent holiday because they can still show a higher rent rate to the bank or potential buyers.

If that is a problem taking less rent over the lease is a good way to go whether that is a lower initial rent or an adjustment to the rent increases.
 
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Again I agree with the advice from bodegahwy. When he says “Don’t ask, don’t get” it reminds me of my philosophy of " Don’t leave anything on the table", which extends from asking for what you would “like” to negotiating for reduced costs and prices that you may have to pay for virtually anything. The worst that can happen is that your request is rejected or countered with something that will meet you in the middle. The best time to negotiate is always before signing on the dotted line or writing a check. Again, good luck in moving forward.
 
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