NNN lease option negotiations

I own a single tenant commercial property in Michigan. The 10 year NNN lease will be up & there is a 5 year lease option available beginning next December. The tenant is offering to exercise that option, but with a substantial reduction in rent. An analysis of comparable retail properties with NNN leases in the area shows rents anywhere from 10.00 to 18.00/sq.ft. Most of the comps have multiple tenants, as there are very few single tenant properties with NNN leases currently on the market. My tenant is currently paying 15.50/sq. ft. & the lease option bumps it to 16.50. The tenant’s offer is 13.50/sq ft., siting that his annual franchise fee & advertising expenses, as well as maintenance costs have gone up considerably, and that property values have gone down.
I am considering countering with 14.50/sq.ft. (the initial lease rate in 2002), & extending the option period to 10 years. My thinking is that lease rates in the greater Detroit Metro area will be fairly flat for years to come, my loan is due in 5 years & I will be in a much better position at that time to shop for a new loan if there is still another 5 years on the lease. I also feel this will be an attractive offer for the tenant to be able to lock in a lower rate for 10 years.
It is not easy for me to offer a lease option at a dollar a square foot less than what I am currently getting & lock it in for another 10 years, but I think it is in step with today’s market reality. I would like to keep this tenant, as he is always current with the rent, is not a complainer & is maintaining the property well. Do you think I am on the right track as far as my approach to this counter-offer goes? Also, should I ask for the tenant’s annual gross sales receipts as part of the terms of the lease? I’m sure when the time comes to shop for a loan, the lenders will want to see these figures.

Getting something in return

Guess that this principle is so engrained in me that if I were awakened from a sound sleep with ANY offer, I’d automatically come back with something a little more favorable for me.

So by all means, you bet, make the effort as it might work and make you a little better deal.


I’ll ditto John’s comment… your alternative satisfies my cardinal rule of negotiations… “Never give without getting”. :wink:

In my mind the tenant’s offer of $13.50 was designed to get a counter of $14.50, a dollar less than he’s paying, and two less than the renewal rate. You don’t say where in MI you are, but there are few markets with a surplus in demand in that state, and nationally the retail sector is still very weak.

In this climate that’s not a bad deal to keep a tenant in place, avoid the vacancy loss and upfit cost of finding a new tenant, and positioning the property for refi in 5 years. I would consider building in rent bumps of say 5% every 3 years, or perhaps 10% at the 5-year mark.

As to access to the tenant’s gross sales figures, I’d go further than that. You are right that it is valuable to have for refi purposes (and sale), but you also have grounds to make sure you’re not the only one coming to the table to help the tenant out. I routinely ask to see two years of profit and loss statements from tenants seeking concessions. I would assume the store is profitable or the tenant wouldn’t be talking. Keep in mind it is very costly to move a business, so you have some pricing power in regards to the rent bumps noted above. My argument would be that I don’t mind helping in tough times, but I’d like to have a piece of the upside when business gets better, which it will.

We discussed this topic at length recently in the following two posts:

NNN Rent Remodel and Rent Negotiation 01-26-12

Rent Concessions 11-08-11

Also, in the second post there is a link to a 2009 post that echoes the same thoughts:

Commercial Lease Rent Bumps 10-25-09

(I’m also reminded that I intended to turn those posts into articles, but have not done so yet. I’ll add that to my writing wish list!)

Best regards,


[QUOTE=John Merchant;883763]Guess that this principle is so engrained in me that if I were awakened from a sound sleep with ANY offer, I’d automatically come back with something a little more favorable for me.

So by all means, you bet, make the effort as it might work and make you a little better deal.[/QUOTE]

Thanks, John

That’s as I suspected. Tenants are asking for concessions because they know they can get them, and that’s as it should be in a market economy. Keep in mind that the pendulum will swing the other way and the next renewal cycle will likely shift the power back to your side.

I’ve had the same discussions with our tenants. I’d counter his comment about “fiscal sense” to ask if he’d calculated the cost of moving his business. Each dollar per square foot of rental rate costs him $8900 per year. Wouldn’t be hard to justify a premium to avoid the costs of moving, advertising the new location, and the loss of sales during the transition and ramp up at the new location.

And yes, your fallback is to concede something on the bumps, but only after “getting”; e.g. the longer lease term.

All this is just filler conversation really… you will negotiate until he thinks he’s paying to much and you think you’re renting too cheap, which means it’s probably a good deal for both of you.