Build-out allocation - Posted by John

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Build-out allocation - Posted by John

Posted by John on March 18, 2004 at 11:27:09:

I am constructing a 9,000 sf retail shopping center and am trying to figure out how much to allow tenants for their build-out. I have been told $15/sf is the going rate in the area but I would think some sort of multiple of monthly rent would be a better way to do it. Are there rules of thumb to follow for new construction build-out allowances? This is my first venture into commercial construction/real estate and I am obviously concerned about the effect the build-out allowance has on the financing and cash flow of the project.

Thanks and regards,

Re: Build-out allocation - Posted by Thomas Mote, CPM

Posted by Thomas Mote, CPM on March 24, 2004 at 18:26:10:

There are so many ways to do this, but the one that I have found to be the most helpful is to use a dollar per square foot annually over the life of the lease. This not only helps reward a credit tenant for signing a longer lease, but helps you flatten out your recovery (you are going to build this into the economics of your deals I assume). That way, the more you pay, the more you get, and you should be better off all other things being equal.

For example, a tenant wants $15/sf in allowance, but only wants to sign a 2 year lease. Look at that as $7.50/sf/yr, pretty high. If that same tenant wanted to do a 5 year deal, that would only be $3/sf/yr. That’s a lot more like it.

To find out what the going rate is, shop your local retail broker as a prospective tenant. Find out what other landlords are offering and try to compete. If you do it primarily by phone, you can get everything you need in about 15 minutes (call at least two).

At the end of the day, you don’t want to do a long term deal with a slug, pay all the upfront costs of a big TI bill you are counting on amortizing over the life of the lease, then have them shut their doors because they didn’t have a real business going. Reserve high TI for solid credit and/or security on a lease (do a letter of credit with a buydown or something like that).

Most commercial brokers will even quote you square foot rates with TI/sf/yr as one of the basics of a proposal. TI funds are incentives from the landlord–you are investing in the property.

I hope that helps. Let me know if you have any questions.

From my personal experience, determining the right build-out allowance for tenants in a new retail shopping center can indeed be a bit tricky. While $15/sf is a common rate in many areas, it’s not the only method to consider.

In my ventures, I’ve found that using a multiple of the monthly rent can sometimes be more effective. For instance, offering an allowance equivalent to a certain number of months’ rent can help ensure that both you and the tenant are aligned in terms of investment and return expectations.

However, it’s essential to balance this with the overall impact on your project’s financing and cash flow. Too high an allowance could strain your budget, while too low might make your spaces less attractive to potential tenants.

A good rule of thumb I’ve followed is to assess the market standards while also considering the type of tenants you want to attract. For high-end retailers, a more generous build-out allowance might be necessary, while smaller, more cost-conscious businesses might be comfortable with a more modest budget.

Ultimately, it’s about finding a balance that works for your specific situation. Make sure to run the numbers, consult with local real estate professionals, and perhaps even seek advice from experienced commercial property owners. This way, you can offer a competitive allowance without compromising your financial stability.