What should a Tenant pay "up front" for a build to suit dental office? Be about 150K in finish out for owner.

Owner will be building a 10,000 sf center and Dentist wants 2000 sf and wants me (old GC) and Owner to do his finish out and add to lease. Not sure how to make this fair for all parties. Any help is appreciated.
In Leasing Property - Asked by Charles A. - Nov 14, 2011
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Audrey D.
Winder, GA

I recently worked on a deal for a center in NE suburbs of Atlanta for dentist looking for 2000s.f. Tenant offered $34/s.f. build out (vanilla shell), owner countered with $27. Deal never worked out. Tenant's portion of build out would have been due as work was completed. They were about $2 off from each other on rent rate as well. Hope this helps some.

Nov 15, 2011
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Robert W.
Akron, OH

What you describe is Tenant leasehold improvements that are being proposed to be funded by a building owner. This is done all the time there are many ways to approach it. The most common way is to get a solid estimate for the cost of improvements. The owner / landlord pays for the work to be done and then adds it to the rental. For example, let's say the office space "as-is" was proposed and agreed upon to rent for $15 /SF annually ($30,000 / year). Now the tenant want $150K of improvements placed into the premises by the LL on his behalf. Let's assume first of all that the owner is satisfied with the financial status and lease guaranty of the dentist -- absent that, the whole deal is questionable. Regardless of type or cost, one should almost always assume that the bulk of these improvements will be worthless at the end of the dentist's lease so they must be amortized over the term of the lease. If the cost is $150,000 and the lease is for 10 years and the owner desires a 10% return on his invested money, then that would add $1,982 / month or $23,787 annually to the lease. The rent for the finished space "as-custom-improved" would then be $53,787 rather than $30,000 a year. Whether or not that addition to rent goes away after 10 years (assuming the dentist stays on) is negotiable based on other factors such as if there are mid-lease rent escalations etc. Again -- one would want to be first satisfied with the financial condition and credit worthiness of the tenant prior to making the investment. Another way of handling it would be to keep the rent at $30K and have the dentist sign and guaranty a promissory note for the cost of the improvements -- treating it like a loan. Hope this helps you.

Nov 16, 2011
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Curt G.
Texarkana, TX

We are a developer and we usually make the Tenant pay %50 up front and then we amortize the rest throughout the base term of the lease.

Nov 16, 2011
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Jacob H.
Saint Paul, MN

What Robert W. describbed is the most common way I've seen it done. If that makes their monthly payment too high, then figure out how much above the agreed "as-is" rent they are comfotable going. Take the difference as a the possible payment for an amortized loan over the lease term. Once you figure out what that loan amount equals, whatever the difference is between the tenant improvement costs and that amount is how much they need to put down. When representing a landlord and the tenant wants improvements, we will require a Letter-Of-Credit from their bank. All that means is that the bank would be willing to let the landlord draw on this letter of credit if the tenant defaults.

Nov 21, 2011
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