Using a real world scenario, one of my clients was comparing two centers in the Las Vegas market. Both deals were roughly the same terms with the exception of rent and TI allowance. Both landlords were providing free rent up front, both providing work letters, both have limited personal guaranty's, etc.
Center A final deal terms:
Average monthly rent $6,615.42
Tenant improvement allowance: $100,000.00
Total square footage: 254 thousand (grocery anchored center)
Center B final deal terms:
Average monthly rent $7,689.92
Tenant improvement allowance: $200,000.00
Total square footage: 1.2 million (Regional draw with grocery anchor component)
On the surface you can see that while center B is providing more TI, its amortized over the 10 year term at roughly a 5% interest rate. That's a fair cost of capital and likely representative of what a tenant could expect from a bank loan. The issue here is that if the lease is renewed after the initial 10 year term the TI allowance would be paid back, landlord is made whole yet the rent will increase by another 10% in the option. In the long run center A is more expensive deal.
Looking solely at the economics of an LOI will not tell the entire story. What would 267% more visitors to the center be worth to the prospective tenant? Having the potential to capture 2,476,000 more visits is invaluable in my opinion. When stepping back and examining real data and placing a value on free marketing the tenant would receive from being in Center B it paints a clear picture.
Center A stats:
Visitors on an annual basis: 924k
Center B stats:
Visitors on an annual basis: 3.4 million
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