With new office construction, a Landlord typically installs the building’s common areas including lobby, restrooms and interior hallways. However, a Landlord may leave future Tenant spaces in “Shell Condition”, with no interior build-out. This Shell Condition presents opportunities, challenges and risks for the prospective new Tenant.
When space is provided in Shell Condition, a Landlord usually offers a Tenant Improvement (“TI”) Allowance of $x.xx/ Rentable Square Feet (“RSF”) to complete the build-out of the office space, with a typical Tenant Improvement Allowance being $10.00 – $40.00/RSF. A build-out from Shell Condition involves much more that constructing walls, adding doors, paint and carpeting. In this situation, the exterior walls often must be insulated and dry walled, the HVAC distribution ducts, VAV boxes and thermostats must be installed, sprinkler lines must be distributed from the main lines and drop head installed, a ceiling grid and ceiling lights must be installed, an electrical panel must be installed and electrical power must be distributed throughout the Premises. In addition, plumbing and drain lines must be installed for any planned break room or coffee bar. The devil is in the details here, because what is – or what is not – paid by the Landlord will have a major impact on the ultimate costs of this construction to the Tenant.
Who Pays – The Tenant or Landlord?
It is not enough to look up into the open ceiling and see that HVAC trunk, sprinkler or electrical lines are already installed. In many cases, Landlords will pre-install these required components, but will then charge these costs back to the Tenant out of the Tenant Improvement Allowance. It is important for the Tenant to request the Landlord’s “Base Building Specifications” so that the Tenant understands the details regarding what the Landlord is (or is not) providing, at its cost, as part of the building’s “core and shell” or “base building” packages. For example, one Landlord may provide rooftop cooling equipment (with a total specified tonnage of cooling) at Landlord’s cost. Another Landlord may provide this same equipment, but charge the Tenant for the equipment out of the Tenant’s Tenant Improvement Allowance.
Additional Considerations on Costs
When building out from a Shell condition, the Tenant should utilize a qualified Interior Architect to produce a Pricing Space Plan. A Pricing Space Plan will show the Tenant’s required build-out (walls, doors, millwork) and will contain keyed notes providing details about finishes (paint, carpet, counter surfaces), electrical issues (lighting, outlets, dedicated circuits), notes on the plumbing required for break rooms or coffee bars, and notes regarding items that will be paid directly by the Landlord.
The Pricing Space Plan is then provided to several general contractors experienced with Tenant Improvement Construction so that the Tenant can obtain preliminary pricing for its proposed project. Only after the Tenant has received back these pricing quotes will the Tenant know if the Landlord’s proposed Tenant Improvement Allowance will cover the planned construction. This is a critical step, because after the Lease is signed, any costs above the Tenant Improvement Allowance will become the Tenant’s responsibility. By obtaining construction estimates in advance, the Tenant enters into the Lease with its eyes open. The Tenant may adjust the plan to lower its costs, negotiate with the Landlord for a higher Tenant Improvement Allowance, or agree to pay any differential. In some cases, the Landlord may agree to amortize the additional costs above the Tenant Improvement Allowance by adding these charges to the Lease rate.
In the next issue, we will further explore Tenant Construction issues by looking at issues related to effectively using a turnkey construction package.
Please contact us with questions about office space construction and shell construction options.
Guidance Corporate Realty Advisors
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Guidance Corporate Realty Advisors provides corporate tenant / buyer representation services to corporate real estate users in the Denver metropolitan area including Boulder, Colorado. Guidance also provides these services in all major U. S. markets, as well as markets in Canada, Asia, South and Central America, and Europe.