The Emergence of the “Amenity Lease”

by | 30 November 2020

It is true that the majority of retail leases signed in the Twin Cities are with national or credit franchises. This is due in part to the fact that local deals are becoming increasingly difficult to complete for a number of reasons, including: credit issues, a smaller pool of prospects and construction costs steadily rising for the past several years. For example, if a space is in raw condition, build-out costs can be up to $30 per square foot to bring the space to shell delivery condition, then the tenant still has to bring the space from delivery condition to their finish requirement. Total costs, depending on the type of retailer and space condition, can range from $75 per square-foot to $300 per square-foot. For some local retailers, these skyrocketing construction costs have become entirely cost prohibitive to starting, expanding or relocating their businesses.

So how do landlords, owners or developers, who are looking to attract tenants to their office buildings or luxury multifamily developments land the perfect unique, local retail tenant who will complement the building’s brand, vibe or “hip factor” and contribute to lease-up by increasing the value of the project space?

Enter the Amenity Lease – a new-to-market concept that is gaining quick momentum in the Twin Cities.

The Amenity Lease is a term used to describe the transaction when a property owner makes capital investments into their building by funding between 75%-100% of the retail or restaurant tenant improvement including Furniture, Fixtures and Equipment (FF&E). The tenant brings their expertise, concept and operating experience and pays either below market rent or a percentage of sales in their lease agreement.

This lease structure allows mostly local brands that are popular or have a strong reputation, who might not have the capital, or need to invest in expansion to new locations, to move into luxury, multifamily or Class A office buildings. This also benefits the property owner by contributing to the overall ambiance of the project as a strong selling point amenity to increase occupancy, shorten lease up timing and potentially, higher rental rates. While this structure is still very new to the Twin Cities’ market, it is gaining fast momentum, especially with restaurant and high-end fitness concepts who are presented with more location opportunities than they can consider. There are a few innovative Twin Cities’ concepts who have already proven that the partnership works well and to everyone’s advantage.

An example of an Amenity Lease in the mixed use multifamily category is Yoga Fit, an experiential, high-end Anytime Fitness studio. The group already negotiated several Amenity Leases in luxury multifamily developments in mostly urban locations to the success of the landlord and the tenant alike. Yoga Fit is the perfect candidate for an amenity opportunity, because the concept is highly desired by the market: It is a destination use, boutique fitness brand with high-end finishes, offering specialized classes to both the tenants in the project and the immediate trade area. If a prospective tenant has a choice between leasing space in a building with or without a high-end boutique fitness use, amenity tenants definitely stack the cards in the project’s favor.

Another example can be found in Minneapolis CBD office tower/skyway market. When the new owners of Fifth Street Towers stepped in to reposition the property, they not only made substantial capital investments to common areas, adding tenant lounges, napping pods and rooftop decks, but they have also included a new bar and quick serve tapas restaurant in the skyway called Sphere, a fine eat in/take out and bar/happy hour concept in the downtown skyway, which created energy and activity after 3:00 in the afternoon when the skyways are typically “dead.” The owners worked with a local experienced restaurant group to create, design and operate the concept. Thus, adding a one-of-a-kind amenity to the building that has elevated the profile of Fifth Street Towers and has helped to attract new tenants.

A final example of the success of the Amenity Lease comes from local, successful restaurant concepts that have the opportunity to expand to many second-generation options currently on the market. Because construction costs to open a new restaurant are so astronomical, Amenity Leases are helping to bridge the capital investment gap for local, innovative restaurant operators. For example, a multi-location, James Beard-winning local operator recently said, “Why should I put my own capital into a new location when I have so many opportunities presented to me every week? The only way to do new sites is partnering with the landlord and having them build the space for me. In exchange, I’ll design the concept with a vibe that matches the project’s brand, design and operate it and pay a percentage of sales. It’s a win-win relationship.”

The Amenity Lease model works best when a multifamily development or an office building with prime commercial space is looking to create or endorse their “brand” by securing a tenant that will augment their “vibe.” The local, grassroots trend is only gaining popularity through the emergence of the Amenity Lease, a natural evolution for landlords to find ways to attract restaurants and retailers to their project for a win-win relationship in the changing landscape of commercial real estate.