Rick Hughes

There was an occasion where an elderly lady in Manhattan called the police regarding an “indecent exposure” incident. Quickly, NYC’s finest rushed to the scene to answer the disturbing call. Upon arrival of the “crime scene,” the policeman asked where the offense had occurred. The offended complainant said “out of my bathroom window!” Upon entering the bathroom, the officer in charge observed a window that was seven feet above the floor; and the “victim,” being a diminutive soul, could not have viewed anything out of the window.

The officer said, “Ms. Jones, I can’t see anything out of this window. How can you have an indecent exposure complaint from here?” The spry old women said, “Officer, if you stand on the back of this toilet, rise up on your tippy toes and peer out the window, you can see into the neighbor’s bathroom and observe that naked man taking a shower!”

The moral of the story is this: “It depends on your point of view!”

In a recent RealPoints post, there was an expressed opinion that there was a concerted effort afoot to abscond unused tenant improvement dollars, use them for the payment of rent to the detriment of the landlord and to the direct benefit of tenants (and of course the broker, too!). Some points are valid, but the general concept of preconceived motive seems a bit off track.

It is correct that in the early stages of a tenant’s search, particularly if led by a competent and professional real estate broker, a general tenant improvement, or “TI” number is thrown out. (Ever move into a new house and not want to change few things? Patsy says I have to redo everything or it’s not a home we are interested in. But that is another story!)

Early on, the tenant needs some level of benchmark to make the first cut. In truth, not all spaces are created equal. We have represented some tenants that loved the space “as is,” and the deal was based around that. But most of the time, the space needs to be amended in some manner, be it minor to major, to fit the tenant’s needs.

So round two comes about. Usually, at this point, a space plan is done and the tenant’s needs are matched with the existing improvements. On smaller deals, the pros in our business move to a turnkey solution. Said differently, “Landlord, here is what we need. Re-price this option and tell us your new proposal.” That works for the landlord and the tenant. In this case, no “subterfuge” is occurring. But on larger deals, the tenant wants to control the buildout of the space. The tenant is making a long-term commitment and wants to make sure that the dollars available are working specifically for the tenant. So the deal is based on the TI.

In my experience, it is about a 50/50 proposition. Half the time, the amount of the allowance is too much, and the other half of the time, the tenant comes out of pocket. (Ever gone back to the “home office” and say, “Dad, I need more money! I underestimated the amount needed!” Or said differently, “I don’t really know what I am doing down here in Big D! I need more money.”)

So the tenant is ultimately in charge of managing the money needed. Most often, by the time the deal is ready to be consummated, the tenant still does not know how much funds are needed to make the space work. If you have time, the best solution for all is to drill down further and make sure the landlord turnkeys the space. Trust me, this is the solution Corporate America wants. No surprises.

But if you can’t get it all figured out, the tenant will take a risk and agree to an amount. What they don’t want is to lose the “benefit of the deal,” as the rent used to make a decision was based on the space, the credit of the tenant, the terms of the rent, and the amount of improvements offered by the landlord.

Now, the benefit can come in many ways. First, if you miss high, you can have a traveling “remodel amount,” assuming the term of the lease is long enough to justify a remodel. (We have been in our current only three years, and are about to remodel in the midst of the 10-year term. Stuff happens!) Had we not spent our entire amount of improvements, we could use that excess TI to the benefit of the tenant as well as the landlord. Unfortunately, we have to come out of pocket and improve the building again for the landlord.

The second way to handle it is to reduce the rent. Landlord invests less, tenant pays less. We are fine with that! (Oh, by the way, our commission goes down. We actually think it is our job to negotiate “lower rents” and get lower fees. But I digress.)

As I mentioned earlier, though, most of the time, the tenant actually does come out of pocket and makes this whole discussion meaningless.

So where does this go? Most professionals thoroughly understand the overall economics of the tenant, as well as the landlord. (We represent landlords, too!). We know that there is a price to pay for every component. But we are hired by the tenant to represent them. Most tenants need help, as they typically go through this process only once every seven to 10 years. Landlords hire their own professionals to represent them and, in fact, most landlords are professionals themselves.  They do this every day for a living.

Here is the bottom line. If it doesn’t work for you, just say “No”. It is a perfectly reasonable answer!

It all comes back to one’s point of view. So landlords, if this gives you heartburn, just say “No!”