1 00:00:00,000 --> 00:00:03,120 Welcome to Between Two Chairs, 2 00:00:03,120 --> 00:00:05,200 Demystifying Commercial Real Estate, 3 00:00:05,200 --> 00:00:07,800 the podcast that brings you the latest insights and 4 00:00:07,800 --> 00:00:11,000 trends on the South Florida commercial real estate market. 5 00:00:11,000 --> 00:00:15,520 With your hosts, Fernando Adonisibia Jr. and Jennifer Wallman. 6 00:00:15,520 --> 00:00:18,160 In each episode, we dive into the world of 7 00:00:18,160 --> 00:00:20,280 commercial real estate and break down 8 00:00:20,280 --> 00:00:23,800 complex concepts to make them accessible for everyone. 9 00:00:23,800 --> 00:00:26,240 Whether you're a real estate professional, 10 00:00:26,240 --> 00:00:29,080 a curious investor, or just interested in 11 00:00:29,080 --> 00:00:31,120 the South Florida market in general, 12 00:00:31,120 --> 00:00:33,920 Between Two Chairs is the podcast for you. 13 00:00:33,920 --> 00:00:35,840 So pull up a chair and join us. 14 00:00:35,840 --> 00:00:54,040 Welcome everybody to another episode of Between Two Chairs. 15 00:00:54,040 --> 00:00:56,120 My name is Fernando Adonisibia Jr. 16 00:00:56,120 --> 00:00:59,440 And with me is the always cold, 17 00:00:59,440 --> 00:01:02,680 just because she loves warm weather. 18 00:01:02,680 --> 00:01:04,800 Jennifer Wallman. Hi Jennifer. 19 00:01:04,800 --> 00:01:08,360 Hello, hello. Yes, I am always freezing. 20 00:01:08,360 --> 00:01:10,000 You see how I corrected that? 21 00:01:10,000 --> 00:01:12,000 Yes, yes. Thank you. 22 00:01:12,000 --> 00:01:14,440 I didn't say like cold of heart. 23 00:01:14,440 --> 00:01:18,280 I said cold just because you prefer warm weather. 24 00:01:18,280 --> 00:01:21,240 Correct. I wouldn't be freezing if people would just 25 00:01:21,240 --> 00:01:24,680 adapt to South Florida weather and lay off the AC. 26 00:01:24,680 --> 00:01:30,120 I don't know man. AC is a very important. 27 00:01:30,120 --> 00:01:32,360 Yeah, we probably wouldn't have as many people here 28 00:01:32,360 --> 00:01:33,520 if we didn't have AC. 29 00:01:33,520 --> 00:01:36,600 So yes, I'll just wear my jackets and park us. 30 00:01:36,600 --> 00:01:38,200 It's really interesting. 31 00:01:38,200 --> 00:01:41,000 I didn't intend it to be a transition, 32 00:01:41,000 --> 00:01:43,840 but actually it's a very good transition because, you know, 33 00:01:43,840 --> 00:01:47,160 it's really interesting as a commercial broker 34 00:01:47,160 --> 00:01:50,800 when you're negotiating a commercial lease 35 00:01:50,800 --> 00:01:54,480 that the topic of AC and who controls the AC 36 00:01:54,480 --> 00:01:57,280 and from what time to what time the AC is on 37 00:01:57,280 --> 00:01:59,720 and is the AC on in the weekends. 38 00:01:59,720 --> 00:02:02,960 Those are all legitimate important things 39 00:02:02,960 --> 00:02:07,240 to hammer out in a lease for a commercial lease. 40 00:02:07,240 --> 00:02:11,040 And it's very appropriate because the theme today 41 00:02:11,040 --> 00:02:16,960 is we wanted to do a dive into the tenant improvement credit 42 00:02:16,960 --> 00:02:20,400 component of the negotiations of a commercial lease. 43 00:02:20,400 --> 00:02:25,640 Right. So tenant improvements also referred to as TI or TIA 44 00:02:25,640 --> 00:02:27,480 for tenant improvement allowance 45 00:02:27,480 --> 00:02:31,120 or leasehold improvement allowance is a huge part 46 00:02:31,120 --> 00:02:34,280 of negotiations in any lease. 47 00:02:34,280 --> 00:02:38,720 And a lot of landlords that I know don't like 48 00:02:38,720 --> 00:02:42,240 tenant improvements, but most tenants need them, 49 00:02:42,240 --> 00:02:46,960 especially if they're, you know, really having to redo a space, 50 00:02:46,960 --> 00:02:50,960 for example, for a restaurant space or medical office, etc. 51 00:02:50,960 --> 00:02:54,560 And those usually have much larger TI's or if it's new, 52 00:02:54,560 --> 00:02:58,200 if it's new construction and you're only taking possession 53 00:02:58,200 --> 00:03:00,720 of something that's built out to vanilla shell, 54 00:03:00,720 --> 00:03:04,320 which sorry, vanilla shell is just space with the dry wall up 55 00:03:04,320 --> 00:03:07,480 and probably the AC ducks. 56 00:03:07,480 --> 00:03:08,560 And that's about it. 57 00:03:08,560 --> 00:03:11,720 And it speaks to the convertibility or the flexibility 58 00:03:11,720 --> 00:03:14,600 of commercial space in general, right? 59 00:03:14,600 --> 00:03:18,240 And that every company, every business is going to have 60 00:03:18,240 --> 00:03:22,680 a different set of requirements for how they want their space 61 00:03:22,680 --> 00:03:25,120 to be laid out and what their needs are. 62 00:03:25,120 --> 00:03:28,440 And we thought that we would kind of break down 63 00:03:28,440 --> 00:03:31,880 some of the key considerations in the negotiations 64 00:03:31,880 --> 00:03:35,440 and look at it from both the tenant and the landlord side. 65 00:03:35,440 --> 00:03:37,120 Let's dive in a little bit here. 66 00:03:37,120 --> 00:03:39,920 One of the considerations is the scope of the improvements, 67 00:03:39,920 --> 00:03:42,880 right? You know, some spaces, you might have a tenant 68 00:03:42,880 --> 00:03:45,120 that has very low requirements. 69 00:03:45,120 --> 00:03:49,200 They might do a little in regards to the scope of the work 70 00:03:49,200 --> 00:03:50,000 of the space. 71 00:03:50,000 --> 00:03:52,920 And then there are tenants that have some very, very big 72 00:03:52,920 --> 00:03:53,920 requirements. 73 00:03:53,920 --> 00:03:56,840 One of them you mentioned is if you have a 30,000 square foot 74 00:03:56,840 --> 00:04:01,840 space in a retail location and you have a tenant 75 00:04:01,840 --> 00:04:05,160 that is looking to open up a clothing store, for example, 76 00:04:05,160 --> 00:04:09,360 a boutique clothing store, their scope of the work 77 00:04:09,360 --> 00:04:12,360 is going to be very different than the scope of the work 78 00:04:12,360 --> 00:04:16,120 of a restaurant operator that is going to utilize 79 00:04:16,120 --> 00:04:17,560 the 30,000 square feet, right? 80 00:04:17,560 --> 00:04:19,920 Because the restaurant operator has to contend 81 00:04:19,920 --> 00:04:23,280 with grease straps, hood, there is a lot of infrastructure 82 00:04:23,280 --> 00:04:24,840 that has to be built. 83 00:04:24,840 --> 00:04:28,680 Aside from the actual cosmetic building of the interior 84 00:04:28,680 --> 00:04:29,480 of the space. 85 00:04:29,480 --> 00:04:32,000 And so the scope of the improvements 86 00:04:32,000 --> 00:04:35,080 is going to be one of the most important considerations. 87 00:04:35,080 --> 00:04:39,360 Well, and I think there's two different types of TI's, right? 88 00:04:39,360 --> 00:04:44,160 So there's the TI that adds value to the building itself. 89 00:04:44,160 --> 00:04:45,960 And then there's the TI that's just 90 00:04:45,960 --> 00:04:50,040 personalizing the space for your particular brand. 91 00:04:50,040 --> 00:04:54,600 So for example, in your example of the clothing store, 92 00:04:54,600 --> 00:04:59,720 if they need a rack system, if they need special lighting, 93 00:04:59,720 --> 00:05:02,480 if they need a certain type of paint, 94 00:05:02,480 --> 00:05:05,000 that doesn't really add a ton of value that's 95 00:05:05,000 --> 00:05:07,400 going to stay with the building, right? 96 00:05:07,400 --> 00:05:09,040 It doesn't really stay with the space. 97 00:05:09,040 --> 00:05:11,960 And in a lot of cases, the landlord might say, look, 98 00:05:11,960 --> 00:05:15,040 I know you're improving this for your particular brand. 99 00:05:15,040 --> 00:05:17,640 But when you leave, we want you to take out the racks. 100 00:05:17,640 --> 00:05:19,480 We want to have you take out that stuff. 101 00:05:19,480 --> 00:05:21,240 And that happens a lot, like especially 102 00:05:21,240 --> 00:05:23,240 an industrial warehouse, right? 103 00:05:23,240 --> 00:05:25,920 With refrigeration, sometimes the landlord 104 00:05:25,920 --> 00:05:27,360 will actually say, OK, you're going 105 00:05:27,360 --> 00:05:29,560 to put in the refrigeration system. 106 00:05:29,560 --> 00:05:31,480 But when you leave, we want it taken out, 107 00:05:31,480 --> 00:05:34,720 because it narrows who can actually use their space. 108 00:05:34,720 --> 00:05:40,160 So I think it's the type of what goes in, whereas in a restaurant 109 00:05:40,160 --> 00:05:43,400 space, that gets value, right? 110 00:05:43,400 --> 00:05:48,000 Because second generation space of a restaurant is easier to lease. 111 00:05:48,000 --> 00:05:50,400 So a tenant might be more willing in that case. 112 00:05:50,400 --> 00:05:52,840 Those are definitely capital improvements 113 00:05:52,840 --> 00:05:55,280 that can be depreciated over time. 114 00:05:55,280 --> 00:05:57,920 They're faramortized over time, so they might be more willing. 115 00:05:57,920 --> 00:06:02,400 So it's super important whether you're representing the tenant 116 00:06:02,400 --> 00:06:04,280 or you're representing the landlord, 117 00:06:04,280 --> 00:06:08,680 that you are really clear on what the improvements are. 118 00:06:08,680 --> 00:06:12,280 Are they really capital improvements to the space? 119 00:06:12,280 --> 00:06:13,280 Right. 120 00:06:13,280 --> 00:06:17,000 Somebody putting in a gym and putting in special flooring, 121 00:06:17,000 --> 00:06:18,040 may or may not be. 122 00:06:18,040 --> 00:06:19,920 A lot of times, I've seen the landlord say, 123 00:06:19,920 --> 00:06:22,360 no, you have to take that stuff out when you leave. 124 00:06:22,360 --> 00:06:25,480 But again, to our point on medical space or something 125 00:06:25,480 --> 00:06:30,640 like that, also with a capital improvement, 126 00:06:30,640 --> 00:06:34,160 and I'm thinking of the medical spaces that we've done, 127 00:06:34,160 --> 00:06:38,960 a dentist is less likely to leave because of the expense 128 00:06:38,960 --> 00:06:41,560 and the amount of work that goes into a TI. 129 00:06:41,560 --> 00:06:45,360 It's a lot harder to move that equipment than it is to move 130 00:06:45,360 --> 00:06:48,760 clothing racks and shelving when a tenant leaves. 131 00:06:48,760 --> 00:06:52,920 So it's more likely that a landlord would be willing to help 132 00:06:52,920 --> 00:06:56,920 with tenant improvements for one of those capital improvements, 133 00:06:56,920 --> 00:07:02,120 and somebody staying kind of tying a tenant to a space 134 00:07:02,120 --> 00:07:05,200 beyond the initial term of the lease. 135 00:07:05,200 --> 00:07:07,320 Yeah, and when you're looking at the scope of the improvements, 136 00:07:07,320 --> 00:07:11,480 of course, the tenant is looking to ensure 137 00:07:11,480 --> 00:07:13,360 that all of those improvements are 138 00:07:13,360 --> 00:07:16,080 going to align with their business needs. 139 00:07:16,080 --> 00:07:19,720 But they also ideally would like for the tenant improvement 140 00:07:19,720 --> 00:07:23,960 credit to be sufficient to cover all of those customizations. 141 00:07:23,960 --> 00:07:26,640 On the landlord side, to your point, 142 00:07:26,640 --> 00:07:29,840 they may want to limit the scope of those improvements 143 00:07:29,840 --> 00:07:31,800 either because they want to maintain the building's 144 00:07:31,800 --> 00:07:33,920 integrity, which is going to be important, 145 00:07:33,920 --> 00:07:37,800 but also they want to make sure that all those improvements 146 00:07:37,800 --> 00:07:39,880 are adding value, ultimately. 147 00:07:39,880 --> 00:07:42,560 And so the landlord is not only thinking 148 00:07:42,560 --> 00:07:46,440 about the tenant and the use of that specific tenant 149 00:07:46,440 --> 00:07:48,600 and those improvements, but what's 150 00:07:48,600 --> 00:07:52,920 going to happen once the tenant is no longer there? 151 00:07:52,920 --> 00:07:55,640 Is it going to be easy to release the space 152 00:07:55,640 --> 00:07:56,840 if the tenant leaves? 153 00:07:56,840 --> 00:07:59,560 So you're always looking for that flexibility. 154 00:07:59,560 --> 00:08:03,680 And then it naturally leads to the next consideration, 155 00:08:03,680 --> 00:08:07,600 which is the amount of the allowance. 156 00:08:07,600 --> 00:08:09,160 And so obviously, the tenant is going 157 00:08:09,160 --> 00:08:11,080 to push for the maximum allowance, 158 00:08:11,080 --> 00:08:13,480 but the landlord is going to take into consideration 159 00:08:13,480 --> 00:08:17,520 a set of factors to consider how much TI credits are 160 00:08:17,520 --> 00:08:20,080 going to be given out for this lease. 161 00:08:20,080 --> 00:08:23,200 And they're going to look at the term of the lease, 162 00:08:23,200 --> 00:08:24,360 the length of the lease. 163 00:08:24,360 --> 00:08:27,520 They're going to look at the tenant's credit worthiness, 164 00:08:27,520 --> 00:08:29,800 how the improvements might increase the property's 165 00:08:29,800 --> 00:08:31,280 marketability. 166 00:08:31,280 --> 00:08:36,040 And so those TI allowances, like in anything in real estate, 167 00:08:36,040 --> 00:08:39,320 but specifically in commercial leasing, 168 00:08:39,320 --> 00:08:40,760 everything is negotiable. 169 00:08:40,760 --> 00:08:44,960 But the negotiations are based on so many different factors. 170 00:08:44,960 --> 00:08:48,920 What we often have running to this scenario in which you 171 00:08:48,920 --> 00:08:52,040 may have a tenant that has more leverage based 172 00:08:52,040 --> 00:08:54,800 on the number of units that they have already opened up 173 00:08:54,800 --> 00:08:56,560 based on their credit worthiness, 174 00:08:56,560 --> 00:08:59,480 based on their status on the marketplace. 175 00:08:59,480 --> 00:09:01,440 And then you have some people that are 176 00:09:01,440 --> 00:09:04,040 brand new starting a brand new endeavor. 177 00:09:04,040 --> 00:09:05,920 They don't have a lot of experience. 178 00:09:05,920 --> 00:09:09,320 And so that is also going to be part 179 00:09:09,320 --> 00:09:10,960 of the consideration of the landlord, 180 00:09:10,960 --> 00:09:12,400 because ultimately the landlord is going 181 00:09:12,400 --> 00:09:13,760 to put up that money upfront. 182 00:09:13,760 --> 00:09:15,920 So the landlord is thinking, how likely, 183 00:09:15,920 --> 00:09:18,360 when I amortize this expense, am I 184 00:09:18,360 --> 00:09:21,320 to recoup it and actually have a tenant that 185 00:09:21,320 --> 00:09:24,200 is going to see the lease through all the way to the end? 186 00:09:24,200 --> 00:09:24,800 Right. 187 00:09:24,800 --> 00:09:28,040 And it all depends on the terms of the lease. 188 00:09:28,040 --> 00:09:34,520 I mean, don't come in asking for TI when your lease is 189 00:09:34,520 --> 00:09:35,600 a year or two years. 190 00:09:35,600 --> 00:09:36,200 Right. 191 00:09:36,200 --> 00:09:38,040 So forget. 192 00:09:38,040 --> 00:09:39,120 Don't even bother. 193 00:09:39,120 --> 00:09:41,240 You might be able to get some free rent. 194 00:09:41,240 --> 00:09:44,520 You might be able to get a month off of or two weeks off 195 00:09:44,520 --> 00:09:47,000 of rent to paint and do whatever, 196 00:09:47,000 --> 00:09:49,120 but you're not going to get TI. 197 00:09:49,120 --> 00:09:52,680 Longer lease, to your point, credit-worthy tenant. 198 00:09:52,680 --> 00:09:53,160 That's right. 199 00:09:53,160 --> 00:09:54,920 Better chance of getting more in. 200 00:09:54,920 --> 00:09:58,760 And TI is done on a price per square foot. 201 00:09:58,760 --> 00:10:03,240 So that's negotiated in the lease on a price per square foot. 202 00:10:03,240 --> 00:10:06,320 And to your point again, the landlord 203 00:10:06,320 --> 00:10:10,240 isn't going to give you 100% of what you want as a tenant. 204 00:10:10,240 --> 00:10:13,640 They're going to only really be willing, to the extent 205 00:10:13,640 --> 00:10:14,960 that they're willing to do any. 206 00:10:14,960 --> 00:10:19,160 I know a couple that are like vets or says she's allergic to TI. 207 00:10:19,160 --> 00:10:23,520 So it's all going to depend on the value 208 00:10:23,520 --> 00:10:25,680 that the landlord thinks they're going 209 00:10:25,680 --> 00:10:28,120 to get not only out of the term of the lease 210 00:10:28,120 --> 00:10:31,080 and you as a tenant, but that equipment 211 00:10:31,080 --> 00:10:33,280 after you leave those improvements, 212 00:10:33,280 --> 00:10:36,000 after you vacate the space. 213 00:10:36,000 --> 00:10:37,440 Yeah, for sure. 214 00:10:37,440 --> 00:10:39,520 And timing is very important. 215 00:10:39,520 --> 00:10:41,760 The length of the lease and the likelihood 216 00:10:41,760 --> 00:10:45,200 or the confidence that the landlord has 217 00:10:45,200 --> 00:10:47,520 that the tenant is going to see it through to the end 218 00:10:47,520 --> 00:10:48,520 of that lease term. 219 00:10:48,520 --> 00:10:50,480 And for example, it's very different when 220 00:10:50,480 --> 00:10:53,360 you do a 10-year lease than if you do a five-year lease 221 00:10:53,360 --> 00:10:55,080 with a five-year option to renew. 222 00:10:55,080 --> 00:10:57,840 The five-year option means that the tenant, usually 223 00:10:57,840 --> 00:10:59,840 within six months before the end of the lease, 224 00:10:59,840 --> 00:11:01,600 would have to let the landlord know 225 00:11:01,600 --> 00:11:04,640 that they want to renew for another five years. 226 00:11:04,640 --> 00:11:06,320 From the landlord's side, when they're 227 00:11:06,320 --> 00:11:09,560 looking at the scope of the work and the amount of money 228 00:11:09,560 --> 00:11:11,760 that it has to be invested, they're 229 00:11:11,760 --> 00:11:13,600 going to evaluate it based on those five years. 230 00:11:13,600 --> 00:11:15,520 They can't count on the other five 231 00:11:15,520 --> 00:11:17,960 because the only one that has the option to renew 232 00:11:17,960 --> 00:11:20,000 is the tenant at that point, whereby 233 00:11:20,000 --> 00:11:22,080 when you have a 10-year lease, then the landlord 234 00:11:22,080 --> 00:11:26,600 can look at amortizing that cost over a longer period of time. 235 00:11:26,600 --> 00:11:28,640 And usually, the landlord will say, well, 236 00:11:28,640 --> 00:11:31,760 I'm going to recoup my loss after X amount of months 237 00:11:31,760 --> 00:11:32,400 of the lease. 238 00:11:32,400 --> 00:11:34,280 And then after that, then I'm going 239 00:11:34,280 --> 00:11:36,960 to start to see the money coming in. 240 00:11:36,960 --> 00:11:39,040 That becomes a part of the consideration. 241 00:11:39,040 --> 00:11:41,040 Another thing is, which a lot of people 242 00:11:41,040 --> 00:11:43,400 don't think about, is the responsibility of construction 243 00:11:43,400 --> 00:11:46,800 management, which is something that also is negotiated 244 00:11:46,800 --> 00:11:48,200 as part of the TI. 245 00:11:48,200 --> 00:11:50,720 And there are some landlords that are especially 246 00:11:50,720 --> 00:11:53,320 institutional landlords, buildings that are owned by REIT, 247 00:11:53,320 --> 00:11:54,400 for example. 248 00:11:54,400 --> 00:11:58,120 They have a very clear structure as to how they are going 249 00:11:58,120 --> 00:11:59,360 to execute their TI. 250 00:11:59,360 --> 00:12:02,960 And they would prefer to have their construction group 251 00:12:02,960 --> 00:12:06,800 execute on the build-up, because they have a lot more control 252 00:12:06,800 --> 00:12:08,520 over that expense. 253 00:12:08,520 --> 00:12:11,120 The tenant, you have some tenants 254 00:12:11,120 --> 00:12:15,080 that want to have total control, and they rather handle it 255 00:12:15,080 --> 00:12:15,520 themselves. 256 00:12:15,520 --> 00:12:17,080 They feel that they could do it better. 257 00:12:17,080 --> 00:12:18,280 They could do it faster. 258 00:12:18,280 --> 00:12:21,880 In my experience, when you have a landlord that, for example, 259 00:12:21,880 --> 00:12:24,760 has a 100,000 square foot office building, 260 00:12:24,760 --> 00:12:26,760 they have the building in great shape. 261 00:12:26,760 --> 00:12:29,120 They have a solid team. 262 00:12:29,120 --> 00:12:31,120 Usually, it works better when the landlord 263 00:12:31,120 --> 00:12:33,920 handles the construction management. 264 00:12:33,920 --> 00:12:36,240 That, obviously, is going to come at a cost that 265 00:12:36,240 --> 00:12:38,240 is deducted from the tenant improvement credit. 266 00:12:38,240 --> 00:12:42,280 But if you have the right team, they can save you on time. 267 00:12:42,280 --> 00:12:46,160 So that ultimately saves money for everyone involved. 268 00:12:46,160 --> 00:12:46,360 Right. 269 00:12:46,360 --> 00:12:49,880 And usually, even if the tenant's doing improvements 270 00:12:49,880 --> 00:12:52,840 on their own, depending on how the lease is written, 271 00:12:52,840 --> 00:12:55,160 and we'll get into some of the clauses in a little bit, 272 00:12:55,160 --> 00:12:57,400 but the landlord isn't going to say, well, 273 00:12:57,400 --> 00:13:00,200 here's a check for 100 grand. 274 00:13:00,200 --> 00:13:01,760 They're going to say, OK, you're 275 00:13:01,760 --> 00:13:04,240 going to have certain timelines in which you 276 00:13:04,240 --> 00:13:06,120 need to complete certain tasks. 277 00:13:06,120 --> 00:13:07,680 You're going to show me the receipts. 278 00:13:07,680 --> 00:13:11,160 I'm going to pay the receipts as they come due. 279 00:13:11,160 --> 00:13:15,120 It's not like you're going to get a check up front from the landlord 280 00:13:15,120 --> 00:13:17,680 to handle the improvements. 281 00:13:17,680 --> 00:13:19,440 And you're going to be on the timeline, 282 00:13:19,440 --> 00:13:21,840 and those improvements are going to have 283 00:13:21,840 --> 00:13:25,600 to be clearly specified for when you use them. 284 00:13:25,600 --> 00:13:27,360 It's not like you're going to get the TI, 285 00:13:27,360 --> 00:13:30,800 and you get to spread it over the life of the lease. 286 00:13:30,800 --> 00:13:31,240 Correct. 287 00:13:31,240 --> 00:13:33,840 I mean, there's usually an addendum to the lease that 288 00:13:33,840 --> 00:13:35,280 has to do with scope of work. 289 00:13:35,280 --> 00:13:37,040 And it's usually titled scope of work. 290 00:13:37,040 --> 00:13:39,560 And in there, it lays out who's going to do what, 291 00:13:39,560 --> 00:13:42,560 and it also lays out how that payment is going to be made. 292 00:13:42,560 --> 00:13:46,480 Sometimes the tenant is actually carrying the cost, 293 00:13:46,480 --> 00:13:48,400 and then they're getting reimbursed 294 00:13:48,400 --> 00:13:52,080 as they hit certain construction milestones. 295 00:13:52,080 --> 00:13:54,280 And sometimes the landlord says, we 296 00:13:54,280 --> 00:13:57,080 don't have to worry about that if you let me manage it. 297 00:13:57,080 --> 00:14:00,560 And I'm going to have my construction crew do it. 298 00:14:00,560 --> 00:14:02,720 And then, of course, I'm going to pay it out 299 00:14:02,720 --> 00:14:03,800 as they finish the work. 300 00:14:03,800 --> 00:14:06,520 There is a, again, everything is negotiable. 301 00:14:06,520 --> 00:14:08,800 So that's all part of the negotiations. 302 00:14:08,800 --> 00:14:11,520 I work with a group that it's funny, 303 00:14:11,520 --> 00:14:14,920 because we just had a meeting about two, three months ago. 304 00:14:14,920 --> 00:14:18,520 They have a great reputation in the marketplace. 305 00:14:18,520 --> 00:14:20,080 They have about nine locations. 306 00:14:20,080 --> 00:14:22,680 And I think they have come to the realization 307 00:14:22,680 --> 00:14:25,480 that they're great at doing what they do, 308 00:14:25,480 --> 00:14:31,240 but they're not great in building and construction. 309 00:14:31,240 --> 00:14:34,160 They realize that they don't have the team. 310 00:14:34,160 --> 00:14:37,080 They've jumped from architect to architect, 311 00:14:37,080 --> 00:14:38,840 from general contractor to general contractor, 312 00:14:38,840 --> 00:14:41,800 because for one reason or another, 313 00:14:41,800 --> 00:14:44,120 in one space, the build-out didn't work out. 314 00:14:44,120 --> 00:14:45,840 And in the other one, they took forever. 315 00:14:45,840 --> 00:14:49,080 They just realized that it's far easier for me 316 00:14:49,080 --> 00:14:51,280 to have a landlord that wants me in their space that 317 00:14:51,280 --> 00:14:53,720 is willing to do the work and to my specs, 318 00:14:53,720 --> 00:14:55,160 but I don't have to manage that work, 319 00:14:55,160 --> 00:14:57,680 because they will do it faster, better, 320 00:14:57,680 --> 00:14:59,400 because this is what they do all day. 321 00:14:59,400 --> 00:15:01,520 And so that's part of the consideration here 322 00:15:01,520 --> 00:15:04,320 when you're making that decision as to who's 323 00:15:04,320 --> 00:15:05,720 going to manage the construction. 324 00:15:05,720 --> 00:15:09,960 Another item that I have here is cost overruns. 325 00:15:09,960 --> 00:15:12,680 And then this is, again, one of those things 326 00:15:12,680 --> 00:15:17,440 where I find that in every aspect of the negotiation, 327 00:15:17,440 --> 00:15:19,080 this is where experience matters, 328 00:15:19,080 --> 00:15:22,280 because you kind of want to lay out the expectations 329 00:15:22,280 --> 00:15:24,600 to the tenant if you're representing the tenant. 330 00:15:24,600 --> 00:15:28,640 And to the landlord as to who's responsible for what 331 00:15:28,640 --> 00:15:32,840 and what happens if you overrun the cost of construction. 332 00:15:32,840 --> 00:15:37,200 And this comes up, especially after the pandemic. 333 00:15:37,200 --> 00:15:39,720 There was such a precipitous increase 334 00:15:39,720 --> 00:15:42,520 due to inflation of construction costs 335 00:15:42,520 --> 00:15:47,360 that the landlords had to kind of stop and recalibrate 336 00:15:47,360 --> 00:15:51,360 their numbers, because the amount of TI and the price 337 00:15:51,360 --> 00:15:55,080 per square foot on TI just skyrocketed, right? 338 00:15:55,080 --> 00:15:58,600 Something where they may have spent $50 a square foot 339 00:15:58,600 --> 00:16:02,320 to build out a really nice class A office space. 340 00:16:02,320 --> 00:16:04,680 All of a sudden, it was close to $100. 341 00:16:04,680 --> 00:16:05,400 It doubled. 342 00:16:05,400 --> 00:16:09,040 And so those things become points of contention later on 343 00:16:09,040 --> 00:16:10,920 as you're finishing construction. 344 00:16:10,920 --> 00:16:15,200 So you kind of want to make sure that that is laid out 345 00:16:15,200 --> 00:16:17,000 and ironed out in the lease. 346 00:16:17,000 --> 00:16:19,200 Usually landlords want to cap their TI, 347 00:16:19,200 --> 00:16:22,120 and they want to make it clear that anything that goes above 348 00:16:22,120 --> 00:16:25,880 that allowance is the responsibility of the tenant. 349 00:16:25,880 --> 00:16:27,800 And of course, the tenant is always 350 00:16:27,800 --> 00:16:32,160 concerned about that price cost overrun. 351 00:16:32,160 --> 00:16:34,400 And another thing that I think is important, 352 00:16:34,400 --> 00:16:36,800 if you're a tenant that is looking for commercial space 353 00:16:36,800 --> 00:16:38,840 and you are entering into this, is 354 00:16:38,840 --> 00:16:41,640 to consider that there's usually language about what 355 00:16:41,640 --> 00:16:43,920 they consider tenant delays. 356 00:16:43,920 --> 00:16:46,160 And I think that that's another important component, 357 00:16:46,160 --> 00:16:50,720 because that might run into your tenant improvement credit. 358 00:16:50,720 --> 00:16:52,840 Your rent commencement date. 359 00:16:52,840 --> 00:16:55,000 All of that becomes very, because then there 360 00:16:55,000 --> 00:16:56,960 is usually a back and forth about, 361 00:16:56,960 --> 00:17:00,800 well, I didn't consider that a tenant delay 362 00:17:00,800 --> 00:17:03,840 because I gave the architect my information, 363 00:17:03,840 --> 00:17:06,080 and then the architect took another week to come back. 364 00:17:06,080 --> 00:17:07,760 And then when they came back, they 365 00:17:07,760 --> 00:17:10,400 realized that they couldn't do what we were asking them to do, 366 00:17:10,400 --> 00:17:12,680 because the zoning had changed. 367 00:17:12,680 --> 00:17:14,360 And so that provided a delay. 368 00:17:14,360 --> 00:17:17,520 Because now, especially when you're working with big companies, 369 00:17:17,520 --> 00:17:19,960 that it's not one individual making the decision. 370 00:17:19,960 --> 00:17:22,840 It's a group of people at a corporate level 371 00:17:22,840 --> 00:17:24,200 that is making those decisions. 372 00:17:24,200 --> 00:17:26,200 So that becomes an important component. 373 00:17:26,200 --> 00:17:27,000 Agreed. 374 00:17:27,000 --> 00:17:28,000 Agreed. 375 00:17:28,000 --> 00:17:30,800 And again, it comes down to the clauses in the lease. 376 00:17:30,800 --> 00:17:34,720 And that's why you need to pay really, really close attention 377 00:17:34,720 --> 00:17:39,120 to all of the different items that go into TI, 378 00:17:39,120 --> 00:17:43,480 because it's more than the price per square foot. 379 00:17:43,480 --> 00:17:46,760 It's way more than just the credit and the price per square 380 00:17:46,760 --> 00:17:49,400 foot, because it can be a domino effect. 381 00:17:49,400 --> 00:17:51,800 And to your point, we saw that a lot with that lease, 382 00:17:51,800 --> 00:17:54,400 again, with leases that we did during COVID, 383 00:17:54,400 --> 00:17:56,120 and that got stuck in that. 384 00:17:56,120 --> 00:17:58,120 So we've already gone over, you're 385 00:17:58,120 --> 00:18:00,360 going to look at how much the landlord is 386 00:18:00,360 --> 00:18:01,320 willing to give. 387 00:18:01,320 --> 00:18:04,640 It's either a price per square foot or a lump sum figure. 388 00:18:04,640 --> 00:18:08,080 It's going to specify within the lease 389 00:18:08,080 --> 00:18:11,000 what eligible improvements are allowed. 390 00:18:11,000 --> 00:18:14,960 And they might allow a lot of eligible improvements, 391 00:18:14,960 --> 00:18:21,080 but only certain ones are going to fall under the landlord's TI. 392 00:18:21,080 --> 00:18:24,320 So the scope of the work might be a lot larger 393 00:18:24,320 --> 00:18:28,480 than what the TI covers, because again, to our original point, 394 00:18:28,480 --> 00:18:31,360 anything that doesn't materially improve 395 00:18:31,360 --> 00:18:36,480 the value of the real estate, and that's more branding 396 00:18:36,480 --> 00:18:40,000 and more personalizing the space is going to fall on the tenant. 397 00:18:40,000 --> 00:18:43,080 The disbursement process, we talked about how and when 398 00:18:43,080 --> 00:18:46,320 that TI is going to be paid out, the time restrictions, 399 00:18:46,320 --> 00:18:48,600 as to when the payouts are going to happen. 400 00:18:48,600 --> 00:18:51,040 And usually that comes with something, right? 401 00:18:51,040 --> 00:18:52,400 It's not just the bill. 402 00:18:52,400 --> 00:18:53,680 It's the invoice. 403 00:18:53,680 --> 00:18:56,760 It's they've met a certain metric, et cetera. 404 00:18:56,760 --> 00:19:00,280 And then you have to make sure that all of the timing 405 00:19:00,280 --> 00:19:05,040 within your TI coincides with the various times 406 00:19:05,040 --> 00:19:08,760 within the lease between lease commencement, rent 407 00:19:08,760 --> 00:19:10,600 commencement, et cetera. 408 00:19:10,600 --> 00:19:14,040 The reversionary term, so it's going to state 409 00:19:14,040 --> 00:19:18,640 what part of those TI's stay with the property 410 00:19:18,640 --> 00:19:22,800 once the lease ends, and which ones the tenant needs 411 00:19:22,800 --> 00:19:25,120 to remove and put back. 412 00:19:25,120 --> 00:19:27,240 So that's going to be very specific. 413 00:19:27,240 --> 00:19:31,160 And then obviously all of the compliance wording, 414 00:19:31,160 --> 00:19:35,480 that any TI's, especially if the tenant is responsible, 415 00:19:35,480 --> 00:19:38,680 are going to have insurance requirements. 416 00:19:38,680 --> 00:19:41,360 The contractors are going to have special requirements 417 00:19:41,360 --> 00:19:45,280 if they're hiring code compliance, zoning, obviously, 418 00:19:45,280 --> 00:19:46,320 all that kind of stuff. 419 00:19:46,320 --> 00:19:49,240 Within the TI section, there's usually 420 00:19:49,240 --> 00:19:54,160 several very specific clauses within that portion that 421 00:19:54,160 --> 00:19:55,800 relate only to the TI. 422 00:19:55,800 --> 00:19:57,040 Yeah, absolutely. 423 00:19:57,040 --> 00:19:59,560 Because it's probably the one thing 424 00:19:59,560 --> 00:20:03,320 that is going to require the most focus and energy 425 00:20:03,320 --> 00:20:05,440 once the lease is executed. 426 00:20:05,440 --> 00:20:08,680 And so it becomes a really important thing 427 00:20:08,680 --> 00:20:11,640 to make sure everything is ironed out prior to signing 428 00:20:11,640 --> 00:20:12,360 that lease. 429 00:20:12,360 --> 00:20:16,960 One thing that also happens is that the way that the TI is 430 00:20:16,960 --> 00:20:20,760 dispersed, which we discussed, also works in the way 431 00:20:20,760 --> 00:20:24,760 that you may negotiate with a landlord x amount per square 432 00:20:24,760 --> 00:20:27,080 foot of TI credit. 433 00:20:27,080 --> 00:20:32,520 But obviously, if it costs 20% less to do the buildout, 434 00:20:32,520 --> 00:20:35,400 the tenant doesn't keep the other 20%. 435 00:20:35,400 --> 00:20:38,640 It's not a set amount of money that the tenant can count on. 436 00:20:38,640 --> 00:20:41,440 Sometimes I've spoken to tenants that didn't really 437 00:20:41,440 --> 00:20:42,640 understand that part. 438 00:20:42,640 --> 00:20:45,280 I wasn't part of representing them in the lease. 439 00:20:45,280 --> 00:20:48,200 But after the fact, I had a group that came to me and asked 440 00:20:48,200 --> 00:20:50,400 me, we had this issue with the lease. 441 00:20:50,400 --> 00:20:53,600 Now we're looking to renew, but this issue was never resolved. 442 00:20:53,600 --> 00:20:56,360 This is five years after they had already moved in. 443 00:20:56,360 --> 00:20:57,160 Everything was ready. 444 00:20:57,160 --> 00:20:58,560 And they were still, in their mind, 445 00:20:58,560 --> 00:21:02,480 they felt that the landlord still owe us a credit for that 20%. 446 00:21:02,480 --> 00:21:05,160 And I said, well, first of all, that's something you would have 447 00:21:05,160 --> 00:21:06,360 had to negotiate. 448 00:21:06,360 --> 00:21:07,080 In the lease. 449 00:21:07,080 --> 00:21:10,960 And interestingly, I had a situation in which we did 450 00:21:10,960 --> 00:21:13,440 negotiate that the full amount of the credit 451 00:21:13,440 --> 00:21:14,960 will go to the landlord. 452 00:21:14,960 --> 00:21:16,640 And the way that it was negotiated 453 00:21:16,640 --> 00:21:19,160 was that the tenant felt that we could probably 454 00:21:19,160 --> 00:21:21,880 do all the work that we want to do based 455 00:21:21,880 --> 00:21:23,920 on the amount of tenant improvement credit. 456 00:21:23,920 --> 00:21:25,600 There might be some money left over. 457 00:21:25,600 --> 00:21:27,440 We don't want to give up on that money. 458 00:21:27,440 --> 00:21:30,960 And so the way we negotiated is that the landlord agreed 459 00:21:30,960 --> 00:21:32,920 that if there was money left over, 460 00:21:32,920 --> 00:21:35,400 that the tenant can use it for FF&E. 461 00:21:35,400 --> 00:21:37,240 So that was really interesting. 462 00:21:37,240 --> 00:21:41,080 Also because the landlord is aware that whatever things that 463 00:21:41,080 --> 00:21:45,200 are affixed to the space, they were going to keep. 464 00:21:45,200 --> 00:21:47,040 But it had to be negotiated. 465 00:21:47,040 --> 00:21:49,440 One thing that you mentioned that I think it's also important 466 00:21:49,440 --> 00:21:52,560 to understand, because sometimes you don't realize it 467 00:21:52,560 --> 00:21:57,320 until you go through it, is the importance of permitted uses 468 00:21:57,320 --> 00:21:58,520 and code compliance. 469 00:21:58,520 --> 00:22:01,200 Companies that haven't leased out a lot of space for office, 470 00:22:01,200 --> 00:22:04,000 for example, they are surprised to know, 471 00:22:04,000 --> 00:22:07,440 as they're going through it, that the layout of the office 472 00:22:07,440 --> 00:22:11,960 furniture is a big component of how many people can be there. 473 00:22:11,960 --> 00:22:15,280 And whether they're going to be able to achieve having 474 00:22:15,280 --> 00:22:18,520 the density that they're looking for for their employees. 475 00:22:18,520 --> 00:22:21,360 Sometimes there are code changes that happen 476 00:22:21,360 --> 00:22:24,600 that it's impossible for the landlord to really be up 477 00:22:24,600 --> 00:22:28,800 to date, because it all depends on how you lay out the space. 478 00:22:28,800 --> 00:22:32,320 And so I had a situation where the way that the space was laid 479 00:22:32,320 --> 00:22:36,000 out required them to build another firewall. 480 00:22:36,000 --> 00:22:39,280 Just because of the fact that it was a very elongated, 481 00:22:39,280 --> 00:22:42,200 rectangular space, and the way that it was laid out, 482 00:22:42,200 --> 00:22:45,480 there are fire codes that were not going to be met. 483 00:22:45,480 --> 00:22:47,800 The other thing that happened is that they 484 00:22:47,800 --> 00:22:50,360 had three conference rooms. 485 00:22:50,360 --> 00:22:53,160 Well, one of the conference rooms was huge. 486 00:22:53,160 --> 00:22:57,000 And the dynamics of having the three 487 00:22:57,000 --> 00:23:00,080 was triggering that firewall, which 488 00:23:00,080 --> 00:23:02,520 was going to be prohibitively expensive to do. 489 00:23:02,520 --> 00:23:05,040 But if they would have removed, which is, I think, 490 00:23:05,040 --> 00:23:07,800 what they eventually did, one of those spaces, 491 00:23:07,800 --> 00:23:10,040 then they wouldn't have had to build a firewall. 492 00:23:10,040 --> 00:23:13,120 Now, obviously, all of that created a lot of delays, 493 00:23:13,120 --> 00:23:14,840 because people had to make decisions. 494 00:23:14,840 --> 00:23:20,360 But ultimately, those places that one of the conference rooms 495 00:23:20,360 --> 00:23:22,160 was no longer a conference room, it 496 00:23:22,160 --> 00:23:26,360 became a meeting room of max four people, for example. 497 00:23:26,360 --> 00:23:27,800 So then what does that mean? 498 00:23:27,800 --> 00:23:29,640 Well, now they had to change the furniture that 499 00:23:29,640 --> 00:23:32,200 was going to go into the place, because you don't get 500 00:23:32,200 --> 00:23:36,160 your certificate of occupancy until you have certificate 501 00:23:36,160 --> 00:23:40,280 of use, until you actually have all the furniture in the place 502 00:23:40,280 --> 00:23:42,200 and you have your final inspection. 503 00:23:42,200 --> 00:23:45,240 So again, those are little things that happen that sometimes 504 00:23:45,240 --> 00:23:47,120 you're like, well, I got the TI to do this 505 00:23:47,120 --> 00:23:48,640 and I wanted to build this. 506 00:23:48,640 --> 00:23:51,760 But those are considerations that, and usually, 507 00:23:51,760 --> 00:23:55,720 in the least, there's language to say, look, 508 00:23:55,720 --> 00:23:58,240 we're going to abide by the building codes and the zoning 509 00:23:58,240 --> 00:23:59,280 laws, right? 510 00:23:59,280 --> 00:24:02,360 And there are certain things that we just 511 00:24:02,360 --> 00:24:05,280 don't have total control over. 512 00:24:05,280 --> 00:24:09,400 So I will say that one of the things 513 00:24:09,400 --> 00:24:13,960 that you mentioned that is about who owns the improvements. 514 00:24:13,960 --> 00:24:16,360 You want to dive into a little bit more of that. 515 00:24:16,360 --> 00:24:19,920 Is that always negotiable, or is everything that is built out 516 00:24:19,920 --> 00:24:21,160 owned by the landlord? 517 00:24:21,160 --> 00:24:22,240 I think it depends. 518 00:24:22,240 --> 00:24:26,360 It depends on a lot of things we've talked about it before. 519 00:24:26,360 --> 00:24:28,320 What good does it do for a landlord 520 00:24:28,320 --> 00:24:31,040 to pay and own a brand, right? 521 00:24:31,040 --> 00:24:33,720 Something that's related to a company's brand, 522 00:24:33,720 --> 00:24:39,040 whereas an AC or a grease trap or a hood makes sense. 523 00:24:39,040 --> 00:24:43,000 At the end, I'm thinking of medical space, right? 524 00:24:43,000 --> 00:24:45,600 I'm thinking of a deal that we're doing. 525 00:24:45,600 --> 00:24:50,840 So if you have an x-ray room or you have an MRI room, 526 00:24:50,840 --> 00:24:54,400 a lot of times those rooms are built around the equipment 527 00:24:54,400 --> 00:24:57,560 because of the width of the doors and everything else. 528 00:24:57,560 --> 00:24:59,800 So when that medical tenant. 529 00:24:59,800 --> 00:25:01,440 And the thickness required. 530 00:25:01,440 --> 00:25:02,400 Right, exactly. 531 00:25:02,400 --> 00:25:04,640 And whether it's leaded, et cetera. 532 00:25:04,640 --> 00:25:06,480 So you're building a room. 533 00:25:06,480 --> 00:25:08,920 And I'm thinking a bank is another thing, right, 534 00:25:08,920 --> 00:25:10,600 when you have a safe built in, right? 535 00:25:10,600 --> 00:25:15,960 So there are certain things that are done that are actually, 536 00:25:15,960 --> 00:25:18,520 they seem like they're going to be great for the landlord. 537 00:25:18,520 --> 00:25:20,440 But at the end of the day, they're 538 00:25:20,440 --> 00:25:24,240 a headache because how do you remove a bank safe? 539 00:25:24,240 --> 00:25:27,920 You know how expensive it is to remove a bank safe from a bank? 540 00:25:27,920 --> 00:25:33,920 That's why most landlords and owners who buy a bank 541 00:25:33,920 --> 00:25:38,560 try to think of creative ways to incorporate that safe. 542 00:25:38,560 --> 00:25:41,720 So even though to a bank, it's like, no, but look, 543 00:25:41,720 --> 00:25:43,400 I mean, it's got so much value. 544 00:25:43,400 --> 00:25:44,600 This is expensive. 545 00:25:44,600 --> 00:25:47,240 It's this or something with doctor's equipment. 546 00:25:47,240 --> 00:25:50,280 At the end of, let's say you've got a 10-year lease 547 00:25:50,280 --> 00:25:53,160 with three five-year renewals. 548 00:25:53,160 --> 00:25:55,880 So now you're in the space 25 years. 549 00:25:55,880 --> 00:26:00,600 Is that space, is that equipment still relevant? 550 00:26:00,600 --> 00:26:01,960 I'm sure there's something newer. 551 00:26:01,960 --> 00:26:04,560 So now if that tenant leaves, now it's 552 00:26:04,560 --> 00:26:09,080 that landlord's responsibility to remove it and the cost. 553 00:26:09,080 --> 00:26:11,120 So now you're almost paying for it twice, right? 554 00:26:11,120 --> 00:26:12,800 You're paying for the improvement 555 00:26:12,800 --> 00:26:14,800 to the building during the lease. 556 00:26:14,800 --> 00:26:18,040 And when the lease is over, if it's not the tenant's 557 00:26:18,040 --> 00:26:21,000 responsibility or the tenant goes bankrupt or leaves 558 00:26:21,000 --> 00:26:27,280 or whatever, now you're paying to take apart that room 559 00:26:27,280 --> 00:26:29,360 to remove that equipment. 560 00:26:29,360 --> 00:26:32,800 So either new equipment can go in or a different use 561 00:26:32,800 --> 00:26:34,080 can go into that space. 562 00:26:34,080 --> 00:26:39,320 So I think that's why it really depends on whose side 563 00:26:39,320 --> 00:26:40,280 you're representing. 564 00:26:40,280 --> 00:26:43,520 And you need to understand both sides, right? 565 00:26:43,520 --> 00:26:47,600 Yeah, I think that is an incredibly valid point. 566 00:26:47,600 --> 00:26:52,840 I remember working on a space in Wilton Manors that had, 567 00:26:52,840 --> 00:26:54,560 it was an end cap. 568 00:26:54,560 --> 00:27:01,640 But the operator was basically mining crypto very early on. 569 00:27:01,640 --> 00:27:02,920 This is many, many years ago. 570 00:27:02,920 --> 00:27:05,320 This is at the onset of it. 571 00:27:05,320 --> 00:27:09,720 And they had left towers of all the data towers 572 00:27:09,720 --> 00:27:11,560 where they would put all the servers, right? 573 00:27:11,560 --> 00:27:13,560 Obviously minus the servers. 574 00:27:13,560 --> 00:27:16,000 Well, the problem was that, first of all, 575 00:27:16,000 --> 00:27:19,160 to find another operator that is going to utilize that. 576 00:27:19,160 --> 00:27:21,840 And the landlord then looked into, well, 577 00:27:21,840 --> 00:27:24,280 because they had not negotiated in the lease 578 00:27:24,280 --> 00:27:27,600 that they would have to remove the towers or remove 579 00:27:27,600 --> 00:27:28,280 anything inside. 580 00:27:28,280 --> 00:27:30,600 It was a very poorly done lease at that time. 581 00:27:30,600 --> 00:27:34,000 And the landlord said, well, let me see if I could sell the towers. 582 00:27:34,000 --> 00:27:36,560 Well, the problem is that the towers were obsolete 583 00:27:36,560 --> 00:27:39,440 because they were not conducive to distributing 584 00:27:39,440 --> 00:27:43,160 the heat that is created within those things. 585 00:27:43,160 --> 00:27:45,040 So nobody wanted the towers. 586 00:27:45,040 --> 00:27:46,760 So they ended up in a landfill. 587 00:27:46,760 --> 00:27:49,440 But he had to pay to have somebody come in here 588 00:27:49,440 --> 00:27:54,520 and basically take out 25 of those towers. 589 00:27:54,520 --> 00:27:59,800 And so, yeah, I think that that's definitely the case. 590 00:27:59,800 --> 00:28:04,240 I would say that the other thing to consider when you're looking 591 00:28:04,240 --> 00:28:08,120 at, well, how much TI and how much tenant improvement can 592 00:28:08,120 --> 00:28:11,800 be negotiated, that we have to look at market conditions. 593 00:28:11,800 --> 00:28:14,040 Those things are extremely important, right? 594 00:28:14,040 --> 00:28:17,160 Everybody knows how office is doing nationwide. 595 00:28:17,160 --> 00:28:20,280 Well, in South Florida, we have the healthiest office market 596 00:28:20,280 --> 00:28:21,320 in the country, right? 597 00:28:21,320 --> 00:28:23,880 It's still double digits vacancy factor. 598 00:28:23,880 --> 00:28:27,520 But it's very different in Class A than it is Class C. 599 00:28:27,520 --> 00:28:29,640 Class A buildings usually will offer, 600 00:28:29,640 --> 00:28:32,960 will be more generous with TI on a 10-year lease 601 00:28:32,960 --> 00:28:36,320 because they usually have already earmarked a marketing 602 00:28:36,320 --> 00:28:41,280 budget and an expense budget for getting a quality credit, 603 00:28:41,280 --> 00:28:43,560 tenant-worthy tenant in there. 604 00:28:43,560 --> 00:28:48,840 Also, rents are better, right, than in a Class C building. 605 00:28:48,840 --> 00:28:52,920 And so retail is going to have a different consideration. 606 00:28:52,920 --> 00:28:56,680 And even within a retail center, having an end cap 607 00:28:56,680 --> 00:28:59,160 or having a freestanding corner building 608 00:28:59,160 --> 00:29:00,600 within the shopping center is going 609 00:29:00,600 --> 00:29:03,200 to have different considerations than if you 610 00:29:03,200 --> 00:29:07,480 are in an inline space that is 1,000 square feet. 611 00:29:07,480 --> 00:29:11,560 So there are a lot of factors that go into whether you're 612 00:29:11,560 --> 00:29:15,640 going to get six months worth of TI or 12 months or 18 months. 613 00:29:15,640 --> 00:29:19,640 It all depends on the way they negotiated or no months. 614 00:29:19,640 --> 00:29:25,040 You know, we did a lease with a landlord that basically 615 00:29:25,040 --> 00:29:27,600 did not believe in TI. 616 00:29:27,600 --> 00:29:31,560 But they were willing to give a lot of free months, 617 00:29:31,560 --> 00:29:32,840 you know, months of free rent. 618 00:29:32,840 --> 00:29:35,480 Well, and I think that's why, right? 619 00:29:35,480 --> 00:29:38,560 So rent abatement, which is the free rent, 620 00:29:38,560 --> 00:29:41,480 is so much easier to negotiate because it's basically 621 00:29:41,480 --> 00:29:43,400 time-specific, right? 622 00:29:43,400 --> 00:29:46,640 Whereas all of these issues that we've brought up, 623 00:29:46,640 --> 00:29:49,240 who's going to pay for what, who's going to deduct what, 624 00:29:49,240 --> 00:29:51,200 how are things going to be repaid, 625 00:29:51,200 --> 00:29:53,520 it's easier to just say, we understand 626 00:29:53,520 --> 00:29:55,080 you don't have the money up front, 627 00:29:55,080 --> 00:29:58,080 but you'd be paying for the lease to start anyway. 628 00:29:58,080 --> 00:30:01,920 So we're just going to give you free rent. 629 00:30:01,920 --> 00:30:05,840 And I was negotiating a deal that required almost them 630 00:30:05,840 --> 00:30:08,120 rebuilding the space. 631 00:30:08,120 --> 00:30:13,920 And it was going to be for a five-year lease with a five-year 632 00:30:13,920 --> 00:30:16,320 option for a restaurant space. 633 00:30:16,320 --> 00:30:21,120 And we got them to agree to 18 months free rent. 634 00:30:21,120 --> 00:30:23,560 So, and people were like, how'd you get 18 months? 635 00:30:23,560 --> 00:30:26,920 I mean, the restaurant market was booming. 636 00:30:26,920 --> 00:30:29,960 And it was basically because they were 637 00:30:29,960 --> 00:30:31,960 going to have to rebuild the entire space. 638 00:30:31,960 --> 00:30:34,840 At the end of the day, my tenant didn't go through with it 639 00:30:34,840 --> 00:30:37,600 because there were just too many other issues with the space. 640 00:30:37,600 --> 00:30:38,080 Right. 641 00:30:38,080 --> 00:30:41,480 But depending on what you're going to do, 642 00:30:41,480 --> 00:30:46,000 the landlord recognized the value, and not only in this tenant, 643 00:30:46,000 --> 00:30:50,680 but in this tenant basically building out the space for them. 644 00:30:50,680 --> 00:30:53,080 That then, whether the tenant succeeded or not, 645 00:30:53,080 --> 00:30:55,560 wasn't going to matter because the landlord was going to be, 646 00:30:55,560 --> 00:30:57,680 it was going to be very easy for the landlord 647 00:30:57,680 --> 00:31:01,120 to release the space based on the improvements 648 00:31:01,120 --> 00:31:05,840 that they were going to do because of the lack of improvements 649 00:31:05,840 --> 00:31:06,720 that had been done to that space. 650 00:31:06,720 --> 00:31:09,640 The tenant has to consider that, OK, 651 00:31:09,640 --> 00:31:12,280 so I'm going to get 18 months of free rent. 652 00:31:12,280 --> 00:31:13,760 I'm going to do the build out. 653 00:31:13,760 --> 00:31:15,480 But part of the consideration of the tenant 654 00:31:15,480 --> 00:31:18,760 is obviously, how quickly can I get this build out 655 00:31:18,760 --> 00:31:21,120 so that I can actually take advantage of those months 656 00:31:21,120 --> 00:31:24,680 of free rent to recuperate my initial investment 657 00:31:24,680 --> 00:31:26,640 in this tenant improvement. 658 00:31:26,640 --> 00:31:27,140 Right. 659 00:31:27,140 --> 00:31:30,440 And this is where I think it's important for tenants 660 00:31:30,440 --> 00:31:33,840 to realize whether do you really have the right team 661 00:31:33,840 --> 00:31:36,520 and are you going to be efficient in the way 662 00:31:36,520 --> 00:31:37,680 that you do this build out? 663 00:31:37,680 --> 00:31:39,400 And are you taking into consideration 664 00:31:39,400 --> 00:31:42,840 time to get permitting, code compliance, zoning laws, 665 00:31:42,840 --> 00:31:46,520 all those things into account to be able to do that? 666 00:31:46,520 --> 00:31:49,520 And even the best operators in their business 667 00:31:49,520 --> 00:31:52,800 are not necessarily great at doing the constructions. 668 00:31:52,800 --> 00:31:56,120 You've got to have a good team around you 669 00:31:56,120 --> 00:31:57,120 to be able to execute. 670 00:31:57,120 --> 00:32:00,560 Not only that, but when you get into all of that, 671 00:32:00,560 --> 00:32:03,400 my first, when we use the TI calculator, 672 00:32:03,400 --> 00:32:06,960 so there are tenant improvement calculators. 673 00:32:06,960 --> 00:32:10,560 You input the lease information, the tenant improvement 674 00:32:10,560 --> 00:32:14,000 details, any additional factors in terms 675 00:32:14,000 --> 00:32:16,640 of what you think construction costs are going to be, et cetera. 676 00:32:16,640 --> 00:32:20,280 And it helps you come up with a final price and decision 677 00:32:20,280 --> 00:32:24,240 and to make sure that the numbers align with the wording 678 00:32:24,240 --> 00:32:25,040 and the lease. 679 00:32:25,040 --> 00:32:28,680 But before you do that, and a lot of tenants don't do that, 680 00:32:28,680 --> 00:32:31,320 they're just looking again to our point, the price per square 681 00:32:31,320 --> 00:32:33,200 foot that they're getting. 682 00:32:33,200 --> 00:32:37,080 Is there a comparable property nearby that maybe 683 00:32:37,080 --> 00:32:42,640 is more price per square foot but doesn't require 684 00:32:42,640 --> 00:32:44,360 the tenant improvements? 685 00:32:44,360 --> 00:32:48,360 Because when you add in everything all together 686 00:32:48,360 --> 00:32:51,440 into the pie and the time and the potential overruns 687 00:32:51,440 --> 00:32:55,960 and everything, oftentimes the cheapest option 688 00:32:55,960 --> 00:32:57,560 isn't really one the cheapest. 689 00:32:57,560 --> 00:33:00,360 It's often not always the best option. 690 00:33:00,360 --> 00:33:05,000 So all of those need to be taken into account more so 691 00:33:05,000 --> 00:33:08,320 than just how much is the landlord charging me for rent, 692 00:33:08,320 --> 00:33:10,360 how much are they giving me in rent abatement, 693 00:33:10,360 --> 00:33:12,240 and how much are they giving me in TI? 694 00:33:12,240 --> 00:33:15,920 Yeah, and sometimes people lose sight of that. 695 00:33:15,920 --> 00:33:19,040 And I think it's so great that you mentioned it in that way 696 00:33:19,040 --> 00:33:24,000 because a good operator knows, especially if they have 697 00:33:24,000 --> 00:33:26,360 experience and they have multiple locations, 698 00:33:26,360 --> 00:33:30,680 they know I can generate X amount of money per square foot 699 00:33:30,680 --> 00:33:34,480 in my location, the moment that it opens. 700 00:33:34,480 --> 00:33:37,960 And so they have to say, if I can save, 701 00:33:37,960 --> 00:33:41,280 if I have to spend more money on a price per square foot 702 00:33:41,280 --> 00:33:47,280 of lease, but I can be open eight to 10 months sooner, 703 00:33:47,280 --> 00:33:50,360 the revenue and the profit margin that I'm going to gain 704 00:33:50,360 --> 00:33:53,640 on those eight or 10 months is well going to surpass 705 00:33:53,640 --> 00:33:56,040 the few bucks per square foot that I'm trying to save. 706 00:33:56,040 --> 00:33:56,880 Correct. 707 00:33:56,880 --> 00:34:01,120 And sometimes that, when you're negotiating, 708 00:34:01,120 --> 00:34:03,720 especially if you're a tenant, you fail to look at that part 709 00:34:03,720 --> 00:34:05,680 of it because you're just looking at, 710 00:34:05,680 --> 00:34:08,680 you're thinking you're comparing apples to apples. 711 00:34:08,680 --> 00:34:10,240 There's a space, they're asking for this, 712 00:34:10,240 --> 00:34:11,640 this space, they're asking for this, 713 00:34:11,640 --> 00:34:13,760 this is the amount of TI, this is the amount of TI. 714 00:34:13,760 --> 00:34:15,440 And so now it becomes a negotiation, 715 00:34:15,440 --> 00:34:16,760 well, I could get the space for less 716 00:34:16,760 --> 00:34:19,360 because I need to do the work, I'll do the work, 717 00:34:19,360 --> 00:34:21,000 but they don't take into account, 718 00:34:21,000 --> 00:34:25,160 well, how about once I move into the space, 719 00:34:25,160 --> 00:34:28,920 how much can I generate and what gets me there sooner 720 00:34:28,920 --> 00:34:30,720 so that I can actually start to make money? 721 00:34:30,720 --> 00:34:33,600 And so, yeah, I think that's very good. 722 00:34:33,600 --> 00:34:36,440 So I hope this helped out in our goal 723 00:34:36,440 --> 00:34:39,520 to demystify commercial real estate. 724 00:34:39,520 --> 00:34:41,640 We've done a few of these where we go deep 725 00:34:41,640 --> 00:34:43,920 into certain aspects of it. 726 00:34:43,920 --> 00:34:46,200 One, because I think it's infinitely interesting, 727 00:34:46,200 --> 00:34:49,600 definitely to us, but also because, 728 00:34:49,600 --> 00:34:52,120 when you sometimes dive into the details, 729 00:34:52,120 --> 00:34:55,000 that's where you sometimes get like an aha moment 730 00:34:55,000 --> 00:34:57,640 to have a full understanding 731 00:34:57,640 --> 00:34:59,880 of what commercial real estate is about 732 00:34:59,880 --> 00:35:03,880 and what negotiating a commercial release is really about. 733 00:35:03,880 --> 00:35:04,960 Correct. 734 00:35:04,960 --> 00:35:09,520 And it's just this issue alone 735 00:35:09,520 --> 00:35:12,080 is why there are no standard leases, right? 736 00:35:12,080 --> 00:35:14,320 So that's why your attorney, 737 00:35:14,320 --> 00:35:18,400 your team of people to support your landlord 738 00:35:18,400 --> 00:35:21,120 or your tenant are so important 739 00:35:21,120 --> 00:35:24,720 because you need a really good lease writing attorney. 740 00:35:24,720 --> 00:35:27,120 You need somebody who understands 741 00:35:27,120 --> 00:35:30,920 who gets to write off the TI, 742 00:35:30,920 --> 00:35:33,240 who gets to depreciate it, 743 00:35:33,240 --> 00:35:37,320 who, you know, it all depends on how that lease is written 744 00:35:37,320 --> 00:35:38,760 and the wording in it. 745 00:35:38,760 --> 00:35:43,280 So that is another reason why we like doing these deep dives. 746 00:35:43,280 --> 00:35:46,560 And that's one of the reasons why commercial real estate, 747 00:35:46,560 --> 00:35:49,240 you're always learning because no two deal, 748 00:35:49,240 --> 00:35:51,520 no two leases, no two wordings, 749 00:35:51,520 --> 00:35:54,040 no two clauses are ever the same, 750 00:35:54,040 --> 00:35:58,560 even though they might be dealing with the same issue 751 00:35:58,560 --> 00:35:59,840 in the lease. 752 00:35:59,840 --> 00:36:01,160 So you have a fun fact. 753 00:36:01,160 --> 00:36:02,760 Yes, I do. 754 00:36:02,760 --> 00:36:05,360 All right, my fun fact is that Jennifer 755 00:36:05,360 --> 00:36:07,080 is gonna share a fun fact with us. 756 00:36:08,560 --> 00:36:13,560 So my fun fact is that Miami gets its name from a tribe 757 00:36:14,240 --> 00:36:17,480 who used to lived here called the Miami. 758 00:36:17,480 --> 00:36:20,560 They lived here in the 16th and 17th century. 759 00:36:20,560 --> 00:36:24,640 They were actually closer to Lake Okeechobee. 760 00:36:24,640 --> 00:36:27,920 And according to study.com, 761 00:36:27,920 --> 00:36:32,240 they were coastal mound builders versus Northern tribes 762 00:36:32,240 --> 00:36:33,640 who tend to be more in the mountains. 763 00:36:33,640 --> 00:36:36,520 So the Miami were coastal mound builders 764 00:36:36,520 --> 00:36:38,640 who built large-mounted villages 765 00:36:38,640 --> 00:36:40,640 near modern-day Lake Okeechobee. 766 00:36:40,640 --> 00:36:44,560 They were one of the longest lasting Native American tribes. 767 00:36:44,560 --> 00:36:47,160 And Christian missionaries reported 768 00:36:47,160 --> 00:36:50,760 that the last surviving Miami fled to Cuba 769 00:36:50,760 --> 00:36:54,840 after Spain lost Florida in 1763. 770 00:36:54,840 --> 00:36:56,080 Look at that. 771 00:36:56,080 --> 00:36:57,880 And then it became... 772 00:36:57,880 --> 00:36:58,720 Miami. 773 00:36:58,720 --> 00:37:00,200 Then it became in reverse. 774 00:37:00,200 --> 00:37:02,400 Well, at that time it was Miami. 775 00:37:02,400 --> 00:37:03,240 Miami. 776 00:37:03,240 --> 00:37:04,080 If you look in old school, 777 00:37:04,080 --> 00:37:06,680 Miami resident, they'll say Miami. 778 00:37:06,680 --> 00:37:09,280 And that's probably how you pronounce that tribe's name. 779 00:37:09,280 --> 00:37:10,120 There you go. 780 00:37:10,120 --> 00:37:11,680 Ha ha ha ha. 781 00:37:11,680 --> 00:37:13,800 Well, thank you everybody for joining us. 782 00:37:13,800 --> 00:37:15,320 We appreciate it. 783 00:37:15,320 --> 00:37:18,360 And I hope you have a great, great rest of your day. 784 00:37:18,360 --> 00:37:19,200 Bye. 785 00:37:19,200 --> 00:37:20,040 Bye. 786 00:37:20,040 --> 00:37:45,960 server