Understand Your Options Before Trying to Negotiate
June 4, 2019
The most common format is straight cash. The landlord will allocate a specific dollar amount per square foot that will be applied toward your construction costs. This is most common among Real Estate Investment Trusts (REITs), and institutional landlords that are cash rich and trying to increase rents in their centers by offering cash upfront for the preferred rate. These monies are not given without security; Landlords will commonly ask for a personal guarantee or corporate covenant from a party with substantial assets to make sure their money doesn’t walk away.
Landlord’s work is another format of inducement. The landlord may choose to do the majority of the work required to bring the building up to the required standard. This is very common in restaurants, wherein HVAC upgrades, ecologizers, plumbing, electrical and gas requirements can become major obstacles. The landlord will take on additional work inside the membrane of the leased space to alleviate the build-out costs and bring your cost of opening down. Typically this is restricted to base building requirements and assets that the landlord can easily reclaim in the event of a default, but sometimes the inducement lends itself to items as customized as millwork and kitchen equipment. This type of inducement is used more often among private landlords that own or manage construction companies as well. It allows them to leverage their own resources to improve the space and your opportunity to open for business.
Net and gross rent-free periods are a typical method of inducement for the small or independent landlord. They will ask for the value of the base building requirements, and instead of giving cash or landlord’s work, may offer a net or gross rent-free period to compensate for this amount of money. In some cases, this will be spread over several years, so as to mitigate the risk on both sides, and costs the landlord less money up front. This inducement is in addition to the Gross Rent Free provision which is typically offered during the fixturing period of building out your space.
One thing you have to remember in all of these scenarios: All of this money, in one way or another, is being built back into your rent. Ultimately, you are paying for these benefits. The cost of taking this money from the landlord at their internally calculated interest rates may be much higher and more risky than the cost of borrowing from a bank. However, in some cases you may not have a choice. Landlords are motivated to lease their space and increase their rents, and inducements are usually the quickest path to both.
About the Author: Shawn Saraga
Shawn Saraga brings more than 13 years of experience to the Toronto office of SRS Real Estate Partners , and has helped sign hundreds of franchise agreements and leases over the course of his career. Shawn started his own company, Mr. Franchise, which worked with more than brands across Canada to recruit franchisees and provide tenant representation and marketing consulting services. A subsidiary, Marathon Realty, was created in 2012 to strengthen the real estate portion of the company and merged with Cushman & Wakefield in April of 2014. There, Shawn headed up a team responsible for recruitment, tenant representation and marketing consulting services to franchisors across Canada and abroad. Of the dozens of retailers that Shawn has worked with, many of them are notable national and international brands such as Burger King, Arby’s, Winmark, Kona Grill, Cacao 70 and many more.