Cut a dark 4,000 sf bay into two, and a 400 amp panel almost ended it

An owner I'd been talking to for a year had a former furniture showroom sitting dark in an 18,400 sf six-bay strip. Fourteen months vacant at $14 psf NNN asking, three tours, no offers. Nobody wanted 4,000 feet at that corner.

We demised it into two suites of roughly 1,900 sf each and leased both inside five months. A quick-service restaurant at $26 psf NNN on a ten-year term, and a physical therapy operator at $21 psf on seven years. Owner cost came in at $266k all in: demising wall and separate metering at $48k, restaurant allowance at $102 psf, therapy suite at $38 psf.

New base rent is $89,300. The owner was also eating roughly $32k a year of taxes, insurance and common area cost on that vacant footage, which now gets recovered. Simple payback on the $266k lands a bit over two years if both tenants perform.

What nearly killed it was electrical. The whole phase-two side of the building had 400 amps at the main, and the restaurant needed 200 for itself with a hood and gas equipment. Upgrade quote was $41k with a sixteen week utility timeline that ran past the tenant's opening date. We solved it by moving the service upgrade into the tenant's allowance and giving two extra months of free rent, which cost the owner about $8,600 in abated rent instead of $41k in capital.

Second scare: the existing sandwich operator two doors down had an exclusive use clause on sandwiches, written broadly enough that our restaurant's menu touched it. Took a signed waiver and a rent credit of one month to get past it.

What I'd keep: measuring demand at 1,800 to 2,200 feet before designing anything, and pulling every existing lease's exclusive use clause before I show a space to a food tenant.

5 replies

0ehernandez74PO2BPRO5

The two-year payback assumes both tenants perform. What does the arithmetic look like if the restaurant goes dark in year three and you've amortized nothing? I'd also want to know whether the allowance was paid on completion or drawn in stages, because that changes what the owner is holding if the buildout stalls halfway.

1tashaford30PB2APRO7

The exclusive use clause is the part I'd never have thought to check, and I'm supposedly reading everything before my first purchase. How do you actually find those, is it just reading all six leases end to end?

2mitchell_ray4 Get yoursPRO6

Sixteen weeks for a service upgrade sounds optimistic to me for anything involving a transformer on the utility's side. Was the 400 amp existing service fed from a pad transformer you could swap, or did they have to pull new primary? That difference has been six months versus six weeks on jobs I've been on.

4tylerbrooks9PassivePRO5

Restaurant at $26 doing $102 psf of allowance is the piece I keep staring at. That's $194k in one tenant, and restaurants fail more than physical therapy does. Would the boring outcome, both suites leased to service tenants at $21 with $40 psf allowances, have produced a worse result after risk? Lower rent, half the capital, and the second generation space is easier to relet.

2gregpowell66AG4BPRO8

Demising wall and metering at $48k reads light to me unless the sprinkler main and restrooms already worked for two suites. Did you have to add a second ADA restroom set, re-head the sprinklers for the new layout, or cut a second exit? Those three items alone have run $60k on splits I've built, and the permit review on the exiting change took eleven weeks.

Cut a dark 4,000 sf bay into two, and a 400 amp panel almost ended it

5 replies