Specify That Tenant's Additional TIA Won't Be Abated
In a strong tenants’ market, you might find yourself fighting for good tenants that help the synergy at your center or serve as a destination spot that will draw and keep foot traffic. You may be forced to offer incentives, like a tenant improvement allowance (TIA) that’s bigger than you want to give. If giving a higher TIA than you planned won’t work for you, you can offer the tenant a figure you can live with and then loan it the extra amount that it has requested. The loan should be classified as additional TIA, and should be amortized with interest in the tenant’s rent over the initial lease term.
But what if at some point the tenant can abate its rent, for example, if it takes you longer than expected to repair the center after it’s damaged and the tenant is allowed under its lease to stop paying rent until the work is completed? If you haven’t specified in your lease that the rent abatement doesn’t apply to the additional TIA, you’re taking the risk that you won’t be repaid for the loan on time. Instead, draft your lease to reflect that the additional TIA will be treated as a loan that must be repaid—no matter what happens.
Ensure Repayment, Despite Abatement
To stop the tenant from refusing to pay the additional TIA during the abatement period, make it clear in the lease that if the tenant’s rent abates for any reason, the abatement will not apply to the additional TIA. To achieve this, add abatement language when drafting the lease. State in the lease that whenever the tenant’s rent will abate, the tenant will be entitled to abate only the amount exceeding the portion of the monthly rent allocated to repaying the additional TIA. For example, suppose $450 of the tenant’s monthly rent has been allocated to repaying the additional TIA. You would want a rent abatement to apply only to the amount exceeding $450 of the monthly rent. Ask your attorney about using this language.
Model Lease Language
Wherever this Lease provides for the abatement of rent payable by Tenant to Landlord, including, without limitation, Clauses [insert #s of relevant clauses, e.g., casualty clause], the following limitation shall apply with respect to abatement of rent for the Premises initially demised hereunder: Only the rent payable by Tenant in excess of the monthly amount $[insert amount of monthly rent allocated to repaying additional TIA] shall be abated.
Provide for Termination Scenario
You also should add a lease termination clause. If the lease is terminated before the expiration date for any reason—for example, because the tenant defaulted under the lease—you should require the tenant to immediately repay you the remainder of the additional TIA that the tenant has not already repaid through its rent. To do that, state that if the lease is terminated, the tenant must pay you, within a short period of time—for example, 30 days after the termination date—an amount equal to the “present value” of the additional TIA multiplied by the number of months remaining in the initial lease term. Use the same interest rate that you used amortizing the additional TIA into the rent to compute the present value of money. That way, you will get the remaining portion of the additional TIA computed in current dollars.
Model Lease Language
In the event this Lease is terminated for any reason, Tenant shall, within [insert #, e.g., thirty (30)] days after such termination date pay Landlord the then present value of the product of $[insert original additional TIA amount] multiplied by the number of months remaining until the Expiration Date. The “present value” shall be computed by using the interest rate set out in Clause [insert #] hereof.
Keep in mind that a savvy tenant could demand that you reduce its termination payment to the extent that you have received insurance or condemnation award proceeds covering the tenant’s improvements built with the additional TIA. Otherwise, you would get a windfall of payments by both the tenant and the insurer for the same improvements.