Two Tenants, One Vacancy, and an $84,000-a-Month Clock
A 22,000 SF inline space has been vacant for 11 months. Asking rent is $32/SF NNN; operating expenses are $9.50/SF and taxes $4.25/SF, all recoverable. Two proposals are on the table and both tenants are ready to sign this week.
Tenant A: seven-year term, $30/SF with 5% annual escalations, six months free, $45/SF TI, 4% leasing commission on gross base rent.
Tenant B: five-year term, $33/SF with 3% annual escalations, three months free, $25/SF TI, 3% commission. B's financials are slightly stronger, but it is a newer concept with three locations.
The owner wants to hold out for the $32 asking rent. The lender has a 1.20x DSCR covenant and the asset refinances in 24 months.
1. Compute net effective rent for both proposals. Show the work.
Read the worked answer
Tenant A (7 years, $30 base, 5% escalations): Base rent by year: 30.00, 31.50, 33.08, 34.73, 36.47, 38.29, 40.20. Total over term = $244.26/SF.
- Free rent: 0.5 x $30.00 = $15.00
- TI: $45.00
- Commission: 4% x $244.26 = $9.77
- Total concessions: $69.77
Net = $244.26 - $69.77 = $174.49 over 7 years = $24.93/SF/yr NER.
Tenant B (5 years, $33 base, 3% escalations): Base rent by year: 33.00, 33.99, 35.01, 36.06, 37.14. Total over term = $175.20/SF.
- Free rent: 0.25 x $33.00 = $8.25
- TI: $25.00
- Commission: 3% x $175.20 = $5.26
- Total concessions: $38.51
Net = $175.20 - $38.51 = $136.70 over 5 years = $27.34/SF/yr NER.
B is $2.41/SF/yr higher NER, about $53,000/yr on 22,000 SF, despite the shorter term. Note the nuance: A's back-end rent overtakes B by year five ($36.47 versus $37.14 is close; by year seven A is at $40.20), so A wins on long-run rent and term while B wins on net effective rent today.
2. What is the cost of another month of vacancy, and how does that change the recommendation?
Read the worked answer
Carrying cost per month = 22,000 x ($32.00 + $13.75) / 12 = about $83,900/month - base rent forgone plus unrecovered opex.
Over the 11 months already lost, that is roughly $920,000 of value, far more than the $53,000/yr NER gap between the two deals. That reframes the question: the decision is not A versus B, it is sign something this week versus pay $84,000 for another month of optionality.
Recommendation: take Tenant B if its financials clear - higher NER, lower TI outlay, shorter concession period - and negotiate a five-year renewal option at a set rate so you capture the rollover without a second round of free rent and TI. Take A instead if B's credit fails, or if the 24-month refinance means the lender will weight WALT heavily; seven years of term is worth real money at refinancing, and the NER gap is small next to a covenant breach.
What is not defensible is holding out for $32. The market has priced the space at roughly $25-$27 NER after concessions, and every month of waiting spends $84,000 to chase a number no tenant is paying.
3. What counter or structuring move do you make, and where is your walk-away point?
Read the worked answer
Counter A: reduce TI from $45 to $35 and free rent from six months to four, keeping the seven-year term and 5% escalations. That is worth roughly $10/SF plus $5/SF, moving A's NER from $24.93 to about $27.07 - competitive with B while retaining the longer term. Alternatively keep the concessions and push starting rent to $32.
Counter B: add a five-year renewal option at $36.00-$37.00/SF with one month free and $10/SF TI, and a personal guaranty or corporate guaranty given the three-location operating history.
Walk-away: do not sign below an NER of roughly $24/SF on a five-year term, and do not sign any deal that fails the 1.20x DSCR test at the in-place rent. Practically, the walk-away is not a rent number - it is the point at which another month of vacancy costs more than the concession you are refusing. At $84,000/month, that point arrives quickly.