I was recently consulting a client of mine on a lease renewal of a current tenant looking to add additional space and do some building improvements. We were comparing giving free rent to rent rate discounts to offset the tenant’s costs to improve the building. My client looked at it the same way we were thought in CCIM. More money sooner, is always best. The only issue is, sometimes it isn’t.
The problem was that this owner had a short to mid-term exit planned on this property. If he took a lower rental rate now, instead of rent credits to the tenant, it was going to affect his gross rents at the time of the sale which would directly hit his NOI and reduce his sale price by a multiple of the CAP rate at the time of the sale.
So, instead of paying $10,000 for a facade improvement over 6 months of rent abatement, reducing the PSF rent price would have translated into the facade work costing him as much as $100,000 in lost sales price. After we factored in cost of sale, taxes and cost recapture taxes, the lower rent method still made no sense in the long term.
In real estate, as in life, we need to look at the “right now” but we also need to have a strategy moving forward. If you are blindly making decisions on a property without knowing what your exit strategy is, you could be leaving a lot of money on the table.