Landlords Are Stepping In To Help Tenants Build Out Space On Time

The lengthy permitting process in Los Angeles has motivated retail landlords to step in, especially on new build projects, and build out space for tenants rather than leaving them to their own devices. 

“We're in an environment in Los Angeles where not only is it about the story, finding the right tenant, getting the economic terms right, but it's also about time, it's about effort, it's about permitting,” KWP Real Estate Vice President Jaysen Chiaramonte said at Bisnow’s Southern California Hospitality & Retail Commercial Real Estate Summit. 

“It's about trying to make sure that the business owner who comes in is going to be successful in opening, hopefully, prior to starting to pay their rent, and be able to be there for a long time.” 

Typically, especially in first-generation projects, the landlord offers money for tenant improvements and then sends a tenant off to get their own approvals, Chiaramonte said.

That often led to tenants coming back empty-handed very close to the anticipated start of opening and rent-paying, he told attendees at the Omni Hotel and Resort Los Angeles.

Now, more and more landlords are taking on the responsibility for themselves, getting specifics from tenants and then doing build-outs to a certain degree as part of the construction on the entire building. 

“We're finding that landlords love this — they're getting their rent on time or sooner, [and] the tenants are staying for longer,” Chiaramonte said. 

In Northern California, Pegasus Investments CEO David Chasin said he was working on a deal with a national tenant, and even in that case, investors did not want to leave permitting in such a challenging market entirely up to the tenant. 

“Investors are getting a lot more sophisticated, a lot smarter in terms of working and partnering with their tenants to make sure that these spaces can actually get open in these impacted markets that are very difficult to open in,” Chasin said. 

This is especially true when working with smaller, more mom-and-pop tenants. In many cases, the buzziest tenants may not have the best credit. 

“Everyone may not want a Starbucks, right? They may want whatever the cool coffee is,” Chasin said. 

Smaller, local operators are often highly desirable but may not necessarily have the team to help shepherd them through the process, further making the case for an experienced landlord to step in and take the reins.

Sometimes, that even means doing a bit of building out before there’s a tenant as a way to make the space more attractive for those smaller-scale operators while shortening the period to rent commencement for landlords.  

“These mom and pops, they don't think in terms of 12 to 14 to 16-month time horizons,” Chiaramonte said. 

“They think in terms of three months or six months. We can go up to those tenants now and we can say, ‘Hey guys, we can deliver this space to you in the next 90 days. When you get here, all you have to do is beautify it.’”  

There are some cases, though, when a landlord may not want a tenant to be in a space for a decade.  

Lease terms are five years at Almquist, which operates food halls in Southern California, Director of Development and Leasing Harrison Taylor said. If tenants aren't paying percentage rent, Almquist does not provide lease-extension options, he said. Doing this functions as a “sales test” for these tenants, and turnover keeps the offerings at the food hall fresh. 

“It's pretty harsh, but it's incentivizing,” Taylor said. “It's sad to see tenants leave, but it also brings more consumers back because there's something new.”