Austin Pizza
The owner of a grocery anchored retail strip center has hired you to lease 4,500 square feet of vacant space in the building. The property is located in a fast-growing suburb northwest of Austin, Texas.
Your market and demographic demand analysis have identified a large demand for restaurants and food service in this submarket.
Using your prospecting and target marketing skills, you have called on several Austin area restaurants that lease this approximate size space in retail strip centers. One of the prospects you have called, Austin Pizza, is very interested in expanding to this submarket.
After showing the space and providing the owners of Austin Pizza the demographic analysis for the area, they have asked you to submit a Letter of Intent (LOI) to the property owner. They want to move quickly on leasing the space, but they know the space will need significant tenant improvements for their restaurant and that it will take them 2-3 months to complete the improvements before they can open to the public.
LOI offer from Tenant:
- Tenant Name: Austin Pizza
- Suite: 103
- Address: 2800 E Whitestone Blvd.
- Cedar Park, TX 78613
- Lease Start Date: November 2021
- Rentable Area: 4,500 square feet
- Load Factor: 0
- Lease Term: 60 months (5 years)
- Rental Rate: $26.75 / sq ft / year
- Rent Escalations: 3% per year
- Rent Concessions: 2-months free base rent
- Lease Type: Absolute Net Lease
​​​​​(all operating expenses are reimbursed to landlord by the tenant) - Year 1 Tenant Expense: $29,592
- Tenant Exp Escalation: 2%
- Tenant Improvement (TI): $25,000
- TI Allowance: $12,500
- Move-in Costs: $10,000
- Leasing Commission (LC): 4%
You represent the landlord in this lease transaction. To assist the landlord with their decision, you will need to prepare a Lease Analysis with the lease terms presented in the LOI to determine the “VALUE” of this lease for the landlord.
LOI Counteroffer 1:
All terms remain the same except for the following:
Counter Yr. 1 Rental Rate: $28.00 / sq ft / year
Rent Concessions: 3-months free base rent
TI Allowance: $25,000 (landlord pays 100% of tenant improvements)
Considerations for this counteroffer: Higher move-in cost for the landlord. Will the higher rental rate provide a better long-term lease value to make up for the higher initial costs and additional free rent? Are there other long-term advantages for the landlord in considering this option?
LOI Counteroffer 2:
All terms remain the same except for the following:
Counter Yr. 1 Rental Rate: $26.00 / sq ft / year
Rent Concessions: 1-month free base rent
TI Allowance: $0 (tenant pays 100% of tenant improvements)
Considerations for this counteroffer: In exchange for a lower move-in cost for the landlord and less free base rent, the landlord considers a lower rental rate. What is the long-term impact of the lower rate on the lease value? What is the long-term impact of the lower rate on the property value?
Tasks:
- Complete the Comparative Lease Analysis with Landlord perspective and present your recommendation to the Landlord. Use a 5% Discount Rate for the Net Present Value (NPV) calculation.
- Complete the Comparative Lease Analysis with Tenant perspective. Using the Interest Based Negotiations chart, in what ways does your recommendation to the Landlord also benefit the Tenant?