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Last Updated: Apr 20th, 2005 - 18:45:27 |
Q&A with Brian Schwellinger
Is a tenant improvement allowance of $25 per square foot for office space enough for a typical office? The landlord has said that we can keep any excess funds, which makes the deal even better, doesn’t it?
It is very tempting to take a tenant improvement allowance and assume that you will get what you need, or maybe have some extra cash for moving expenses or office equipment purchases—that’s why this trick is still in the landlord’s deal bag.
When I negotiate for my clients, landlords and their agents often start the process by quoting a rental rate that includes a tenant improvement allowance that the landlord is willing to provide for that specific rent. This information is generally a good starting point for quantifying options and generating a rough budget, but it is crucial to obtain more information in order to make a good comparison of your alternatives, and to make the best decision.
What sort of other information do I need to know?
First, there are some risk issues to consider when taking the allowance approach, such as:
Cost of labor and materials
Cost of unknown defects in the existing space (structural, HVAC, Code, ADA (Americans with Disability Act)
Cost of delays
Cost of oversights, mistakes, and fraud
Risk for performance and comfort of the premises for everything from mechanical to lighting, safety, etc.
Environmental
Also, if things cost more than you or the landlord expected, you pay the bill. If construction takes longer because of building issues that were not easily noticed in the planning stage, you the tenant endure the delay and pay for the solution. If contractors strike, find better jobs elsewhere, or decide to go deer hunting for two weeks and leave you with a move-in nightmare, you have to figure out how to deal with the situation.
A closer look at TI allowance lease language shows that the landlord will gladly give you the responsibility of insuring that the constructed space will meet current code requirements. Recent changes to codes have increased build-out costs dramatically over the past two years, primarily in the electrical and American’s with Disabilities Act areas, which are very detailed and difficult to interpret.
My landlord says that he will manage the construction and deliver the space with a clean certificate of occupancy and if it costs more, I’ll pay the difference. That sounds reasonable, doesn’t it?
The truth is that there is no accountability for being realistic in the TI allowance number if you, the tenant, pay the overage. If you buy this approach to the issue, you’d also be a prime candidate for the contractor who says he can get the job done for $5,000, but if it takes more than 40 hours you pay him $125 for each additional hour. The fox is in the hen house with no incentive to save money, because you’re on the hook for overage, which is not an accountable way to conduct business.
So what is the solution?
My approach in office and flex space transactions within a multi-tenanted building is to put the responsibility for budget, quality, delivery date, and code compliance clearly in the landlord’s realm. The rationale is simple: They own the building, they are the experts in real estate and construction, and they are responsible for the operation of the facility after delivery, so it
makes sense for the owner to take all responsibility for building the space out as the tenant requires.
This means no TI allowance?
Right. When the lease is signed I want to know exactly what type of space my client will get, to the last detail, and know that the rent will remain the same no matter what obstacles come up in the construction. I specify improvements down to light fixtures, number of outlets, carpet and installation, wall coverings, etc. Those details, along with a space plan, is enough information to complete construction drawings and proceed to construction.
My approach only works if tenants can clearly define what they need in the space. Each assignment requires that I prepare a detailed listing of improvements required for a facility. Room sizes, finish schedules, electrical requirements by room, communication needs, lighting, ceiling systems, plumbing and mechanical, etc., are clearly defined in writing, allowing the landlord to design a space plan and obtain detailed construction bids prior to preparing proposals. This documentation will ultimately be incorporated into a final lease, along with a space plan described as Landlord’s Work. The process is time-consuming and tedious, but the end result is that both landlord and tenant should have a clear understanding of what the deal is, which will avoid time-consuming and costly conflict.
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