Curious how these types of credits are structured (same can be said for TI and LC credits).
Assuming the owner just signed a major lease to bump up the occupancy and then wanted to sell. New tenant has commencement date 6-9 months down the road, but the TI and LC dollars as well as free rent (10 months on a 10 year lease) are all quantifiable. Broker indicates all leasing and free rent associated with this lease will be a seller credit. Is the total dollar consideration then simply credited off the purchase price at closing? Would seller put money into an escrow account such that as the costs were incurred, they were being paid out of said escrow?
Curious how people have seen this work, and also how a lender would want to structure it. If the new lease had 10 months free rent, I'd guess they would like to see that money escrowed to make-whole the cash flow during the free rent period?
Yes. The credits you're describing are common in situations in which Seller is passing off TI/LC/Free Rent onto a buyer. Depending on when the cost is due to the buyer, the buyer and seller will negotiate a discount to the future expense often based on some defendable discount rate. To the extent that that expense is in the next 12 Months, a seller will typically credit a buyer for the full amount. However, there are situations when a lease will provide free rent to the tenant at the end of the lease. To the extent that this is to occur several years down the road, the buyer and seller will agree a discounted credit based on the discounted value of the future expense.
^what he said As an institutional buyer I'm going to have any credits as line items on the settlement statement, a direct adjustment to the purchase price. Credits with a longer lead time will be reduced based on some sort of PV calculation (for example when the 1st of month of each lease year is abated, or RE Tax abatements are burning off over time)
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