Creative lease negotiations
The building we found was perfect for my client, Susan, for her new dental office. But, she wasn't too excited with leasing because of the level of tenant improvements needed. We were able to structure a lease that gave Susan some relief for the cost of the improvements, plus the opportunity down the road to purchase.
Susan felt the property suited her well, but not being a dental office she was confronted with an enormous cost to improve the 2,500 square foot building and site of over $150 per square foot.
We were able to show John, the owner, that about $25 per square foot of the cost would provide for non-dental office specific improvements. He was great to work with and was willing to absorb this cost as a tenant improvement (TI) allowance to have a good-quality long-term tenant.
John had a couple of options available to him in providing the TI allowance to Susan. It could be in the form of a reduction of the monthly rent over the term of the lease or it could be paid directly to the contractor on the project. There were tax ramifications of each for both John and Susan. John decided to provide her a rent reduction during the ten year lease.
A ten year lease secures Susan’s short-term future, however a dental practice can be in existence for much longer. She preferred to ultimately own the building so we looked at the tools available to us: a right-of-first-refusal-to-purchase, a right-of-first-offer-to-purchase and an option-to-purchase.
A right-of-first-refusal-to-purchase would give Susan the chance to purchase the property first if John were to ever place the property on the market and receive an offer from an outside buyer. If John were to receive an offer he first must allow Susan the option to purchase under the same terms and conditions in the offer.
The right-of-first-offer-to-purchase would give Susan the choice to be the first in line to make an offer to purchase before John can place the property on the market. John is not under any obligation to sell, but if he refuses the offer made by Susan he cannot offer the property for sale to the general public for less favorable terms for six months.
An option-to-purchase gives Susan the unilateral right to purchase the property at a set time for set terms. The date when Susan must exercise the option is set as well as the other terms of the sale. John and Susan decided that this was the best option and established that it will need to be exercised during the sixtieth month of the lease. The price and other terms were set as well.
As part of the option to purchase Susan gave John option money of $10,000, which will go towards the purchase price if the option is exercised. If the option is not exercised, John will keep the $10,000, the option expires and Susan continues as a tenant for another five years.