Unless a space is specifically offered “As-Is “, Landlords typically provide some sort of Tenant Improvement ( “TI “) Allowance – usually dollars/Rentable Square Foot ( “RSF”) – as part of the Lease package offered to prospective Tenants. The Tenant Improvement Allowance provided varies and is often quoted as “negotiable” by the Landlord or its listing brokers.
Determining the Tenant Improvement Allowance
The amount of Tenant Improvement Allowance that a Landlord is willing to offer a Tenant depends upon several factors including the length of the Lease term, the Tenant’s credit strength, the vacancy rate in the building (which impacts a Landlord’s level of motivation) and the type of building owner (institutional vs. private). Because the Tenant Improvement Allowance is a concession offered to Tenants, Landlords will offer a more generous Tenant Improvement Allowance in soft markets and less Tenant Improvement Allowance as the office markets strengthen.
Who Oversees Construction?
In many cases where Landlord offers a Tenant Improvement Allowance, the Landlord will hire the architect, engineers and general contractor and will provide the construction management for the project, typically charging a fee of 3% – 5% of the construction costs. This method can be advantageous to a Tenant who does not have the time or expertise to effectively manage a Tenant Improvement Construction project. In addition, schedule delays (unless caused by the Tenant) become the Landlord’s responsibility, and the Lease Commencement date will typically be the date that the Landlord has “substantially completed” the Tenant Improvement Construction and the Premises are available for occupancy.
When the Tenant Controls the Process
In other cases, a Tenant may hire the architect, engineers and general contractor and assume the management responsibility for completing the project. The Tenant gains more control but will also assume significantly more responsibility and risk for completing the required Tenant Improvements. Delays in the schedule may hurt the Tenant if the Lease is structured such that the Lease commences, for example, 90 days after Lease signature. If there are construction delays, the Tenant may be responsible to pay rent even though the Premises are not ready for occupancy.
Know the Costs Upfront
Under either arrangement, the key issue for the Tenant is developing a detailed construction plan and securing accurate advance construction costs estimates so that the Tenant is confident that its Tenant Improvement Allowance will fully cover the construction costs or, if not, the Tenant knows in advance the additional amounts it must pay to complete the project.
Benefits of Using a Project Manager
Tenant Improvement design and construction is time consuming and requires attention to detail. Numerous decisions are required ranging from office and conference room sizes and locations, to paint, carpet and counter surface selections, to details about electrical outlets and lighting. Changes made after construction has started can be expensive. Many Tenants engage outside Project Managers to help them successfully navigate the Tenant Improvement Construction. Experienced Project Managers easily earn their fees by savings Tenants thousands of dollars in the design and implementation stages of a project.
In the next issue, we will further explore Tenant Improvement Construction by looking in greater detail at issues related to building out space from a shell condition.
For more information on Tenant Improvement Allowance, please get in touch with us.
Guidance Corporate Realty Advisors
COMMERIAL REAL ESTATE PRIMERS
Commercial Office Building Landlords and Property Managers utilize several methods and lease structures for quantifying building rental rates and operating expense charges. Learn how different pricing formats can disguise the true cost of a new lease.
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With new office construction, a Landlord often 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.
The Guidance Advantage
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.