Are Private Equity Deals Changing Risk for NNN Retail Owners?

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By Marc Perlof | MarcRetailGuy CA #01489206 August 17, 2026 If you own retail real estate, here’s what just changed for you. A tenant asks for a $100,000 tenant improvement allowance. The landlord thinks the request is unreasonable. The tenant thinks it is necessary to open the business. Who is right? Possibly both. The problem is that landlords and tenants often look at tenant improvement allowances, commonly called TI, from different points of view. The tenant sees money needed to build and open the business. The landlord sees money being invested into a property and a lease. Both sides may be looking at the same $100,000 but thinking about it very differently. The TI amount matters, but it should not be negotiated by itself. Rent, lease term, annual increases, free rent, tenant strength, guaranties, options, and TI are all connected. The real question for an owner is not simply, “How much TI am I giving?” It is, “What am I receiving in return?” The Tenant Sees the Cost of Opening Opening a retail business can require a large investment before the first customer walks through the door. Depending on the business and condition of the space, the tenant may need to pay for construction, equipment, signs, permits, inventory, employees, and marketing. From the tenant’s point of view, the TI allowance helps reduce the cash needed to open. That is why the tenant may focus heavily on the TI amount. The landlord, however, has a different concern. The Landlord Is Investing Capital For the landlord, TI is real money going into the lease. The owner should ask what the property receives in return for that investment. Is the tenant signing a longer lease? Is the rent strong? Are there annual increases? Is the tenant financially strong? Is there a guaranty? Will the improvements have value if the tenant leaves? The same $100,000 TI allowance can create very different risks. A $100,000 investment into a strong tenant signing a long term lease may make financial sense. The same investment into a tenant with limited financial strength, a weak guaranty, and improvements with little value to the next tenant may be much riskier. The amount is the same. The investment is not. TI, Rent, and Free Rent Are Connected A lease negotiation often includes several economic items. A tenant may ask for TI, lower rent, free rent, or some combination of all three. An owner should look at the total package because each option affects the property differently. TI requires capital upfront. Free rent delays cash flow. Lower rent can reduce NOI throughout the lease and may affect the property’s value. This does not mean one structure is always better. The answer depends on the lease term, rent increases, tenant strength, cost of construction, cost of vacancy, and the owner’s available capital. The mistake is negotiating each item as if it has nothing to do with the others. A Simple Example Assume a tenant is negotiating a 10 year lease and offers the landlord two choices: Option 1: $100,000 in TI with $10,000 per month in starting base rent. Option 2: No TI with $9,000 per month in starting base rent. At first, Option 2 may look better because the landlord keeps the $100,000. But the $1,000 monthly rent difference equals $12,000 per year. Before considering rent increases or other lease terms, the lower starting rent creates $120,000 less base rent over 10 years. There is another issue. Lower NOI may also affect the property’s value when a buyer underwrites the income. This does not automatically make Option 1 the better deal. The owner still needs to consider the timing of the $100,000 investment, the tenant’s financial strength, default risk, rent increases, the value of the improvements, and whether the owner has the cash available. The point is simple: saving money on TI does not automatically create the better financial result. Free Rent Is Also Part of the Investment Free rent can also be misunderstood. A tenant may view free rent as time to complete construction, hire employees, stock inventory, and open the business before paying full rent. For the landlord, it is income that is not being collected. Assume the monthly base rent is $10,000 and the tenant receives four months of free base rent. That is $40,000 in base rent the landlord does not collect. Depending on the lease, the tenant may still pay NNN expenses during the free rent period, or those expenses may also be reduced or delayed. The details matter. An owner who gives $100,000 in TI and $40,000 in free rent is making a larger investment than the TI number alone suggests. Leasing commissions, landlord work, and other concessions can increase the total investment further. This does not mean free rent is bad. It means the owner should measure the full cost of the lease package. More TI Should Be Supported by the Lease If an owner is being asked to invest more capital, the rest of the lease should support that investment. That may mean a longer lease term, stronger rent, annual increases, better security, a stronger guaranty, or other terms that reduce risk. If the tenant wants more TI, more free rent, lower rent, limited guaranties, and flexible options, the owner should ask whether the total package still makes financial sense. Occupancy alone does not make a lease a good investment. A Simple Payback Test One useful screening test is how long it takes the owner to recover the total lease investment. That should include TI, free rent, leasing commissions, landlord work, and other concessions. As a rough guide, an owner may want the total lease investment recovered within the first 25% to 40% of the firm lease term. On a 5 year lease, that usually means about 1 ½ to 2 years. On a 10 year lease, that may mean about 2 ½ to 4 years. This is not a perfect rule, but it is a useful warning sign. If most of the lease term is needed just to recover the upfront investment, the owner may be taking too much risk. Look at the Whole Deal The highest rent does not always create the best deal. A tenant offering higher rent may require more TI, more free rent, a larger leasing commission, or more landlord work. Another tenant may offer slightly lower rent but require much less capital and have stronger financials. That is why lease negotiations should be viewed as one investment decision, not a collection of separate deal points. Final Thought Landlords and tenants often misunderstand TI allowances because they are looking at the same money from different sides. The tenant is trying to reduce the cash needed to open. The landlord is deciding how much capital to invest and what income, security, and long-term value will be received in return. Before agreeing to or rejecting a TI request, owners should ask one question: What is the total investment I am making, and what am I receiving in return? If a tenant offered you a choice between higher TI and higher rent or no TI and lower rent, would you know which deal creates the better result for your property? In next week’s blog, How TI Decisions Affect Retail Property Value and Buyer Underwriting , we will look at how buyers review tenant strength, remaining lease term, future TI costs, lease rollover, and the durability of a property’s NOI. #RetailRealEstate #CommercialRealEstate #RetailLeasing #TenantImprovements #TIAllowance #CommercialLeasing #MarcRetailGuy Based in Los Angeles. Serving Southern California. Active across California. Advising clients nationwide.