the market minute
(**transcribed from audio – linked above**) good afternoon and welcome to the market minute. this is eric odum. i’m the principal broker for Florida ROI Commercial Property Brokerage in tampa, fl, and today we’re going to do something a little different on the market minute. we’re going to start a series called the “no free lunch” series. the genesis of no free lunch goes back to a business colleague of mine who used to refer to “no free lunch” as a client that was wanting something of value but not wanting to pay for it.
ultimately he would call the client out and he would say, “you know mr. client there are no free lunches. whether you like it or not someone is going to pay for that deal”.
so let’s talk a little about tenant improvement in relation to no free lunch. frequently, my clients will come to me and they’re wanting office space or restaurant space, industrial space… whatever it might be, and they’ll say, “you know, eric, help us find something here in the greater tampa bay area.
and, so, we go an exhaustive search and line up a bunch of properties. we go do the tours. we invest a lot of time. what’s the phone system like? what is the ingress and egress of the space? what are all the details of the space that will make it work for the client?
we finally find that perfect space and the client says, “ok. let’s put together an offer. ” great we sit down and talk about it. “eric, the space is teriffic except for the breakroom. the breakroom is a little tired, eric and we need to have some new cabinets in the breakroom.”
ok, that’s not a problem.
“but we also need new flooring in the break room and we need to knock this wall down. did i mention we are going to be hiring a new sales manager next month and he needs an executive office? so, we need to build another office and we need to break down this conference room and add an executive office space. then we need to move this other wall….”
well you get the picture of what’s happening here. there are a lot of modifications that need to be done. the location is perfect but maybe the layout is not exactly what they want. they want it to be new and spiffy and maybe have some changes done. that happens. tenant improvement is normal with almost every transaction that we deal in. it’s just the level of tenant improvement that we’re going to talk about.
now the client will throw me one more curve ball and they’ll say, “eric, we only want to do a one year deal.”
that’s when i sort of sit back and say, “you know what? that deal is not going to happen!” and they always look at me shocked.
“well what do you mean, eric? we’re adding value to the space and anybody that comes in after us will realize this is exactly what had to be done to the space to make it functional.”
well no, that’s really not the truth, because somebody was in there before and probably two or three parties were in there before the party that my client will be replacing. the landlord only had to replace paint and carpet and keep it clean and keep it orderly and they can found a tenant.
so, they’re not going to be very excited about making tens of thousands of dollars of improvements, they’re not going to see as necessary. on top of that, they’re going want to get paid back over the term of the lease. there’s no way you can spend fifty or a hundred thousand dollars on tenant improvements and have that landlord get paid back in a one year term and have it make fiscal sense.
typically, these extensive build-outs are on leases of five or more years. the landlord now is going to look at this like a loan. remember, they’ve already had clients in the space. they really don’t believe alot of work has to be done, because there have been multiple parties in there prior and they’re going to see this as an additional cost of doing business with them, as a direct result of this new tenant request. so, they’re going to want to see a very strong corporate financial statement, a very strong balance sheet. not just one years or two years, they want to see three, four, or five years plus of having solid earnings history and if not they’re going to look to a personal guarantee.
so it’s going to be very similar to how a bank is going to look at a deal. the bank is going want to make sure the credit is in order because that’s the way the landlord is going to see it. so, what i’ll tell my clients as a rule of thumb, if it doesn’t make sense at the current cost that’s being quoted for you on the rent to do the build-out (discounting the price) then it’s probably not going to make sense for the landlord. so, what we want to do to save time and aggravation and frustration, we want to find a space that has a limited amount of build-out.
i don’t want to scare people because sometimes you have to move walls and sometimes you need to have things done, but a limited about of build-out to the space makes a deal more “doable.” in the end, there are no free lunches. somebody’s going to pay for it and i can guarantee you that the landlord is not going to cut a deal that he or she’s going to have to pay for.
hopefully, this is going to be some guidance for folks that are coming into the market to rent, perhaps, to understand when they’re going out to looking for property. we are going to continue on with our no free lunch series next month.
as always, feel free to give us a call if you have any questions or concerns. i’m eric odum, the principal broker for roi commercial property in tampa, florida. hope you all have a great day. check it out. i’m going to include a link on our web page which is www.roireal.estate.
join us next time for the market minute.
