Sign of the Times – TI Allowance via Rent Abatement

As another sign of the times and the tight lending standards that exist today, Landlords needing to backfill existing space have little capital resources available to contribute the extensive tenant finish out dollars we’ve all become accustomed to “receiving the last several years.”  With the capital intensive nature of new store development for restaurants, there are creative ways to achieve Landlord contributions to help offset the Tenant’s capital investment on a new location. “If the restaurant company has adequate cash reserves, one avenue to receive TI Allowance is in the form of rent abatement.”  Depending on the parameters of each deal, I’ve seen this range from as little as two months to as much as 18. “The benefits apply to each party: During the abatement period, the Landlord receives tenant payment of typical operating expenses such as taxes, insurance and maintenance that would otherwise add to the sunk costs of a landlord’s vacant space. This also helps accomplish the investment goals of the Tenant.”  By withholding rent payments during “these” positive cash flow months, cash reserves are increased, allowing for the allocation of capital to new or existing projects. Keep in mind, a tenant must take into account the time value of money when agreeing to a deal of this structure. “$200,000 paid back to a Tenant in monthly installments is not worth the same as having that cash in hand today.”  The Tenant’s negotiations and proforma should reflect this.