Most commercial office Lease transactions involve some sort of interior Tenant Improvement (“TI”) construction. These projects can be as minor as installing new paint and carpet to spruce up a tired space or as extensive as a full office build-out from a “shell condition.”
Unless a space is specifically offered “as-is”, Landlords typically provide some sort of TI Allowance – usually dollars/Rentable Square Foot (“RSF”) – as part of the Lease package offered to prospective Tenants. Alternatively, a Landlord may agree to provide the required construction on a “turnkey” basis, with the Landlord covering all costs of design and construction, based on a mutually agreed set of Construction Documents.
To prevent surprises, misunderstandings and unanticipated costs, the details of the TI construction should be spelled out in the Lease document. For anything other than the most minor construction, a Tenant Improvement “Work Letter” addendum or attachment should be made part of the Lease document.
A well drafted Work Letter will spell out all key issues related to the construction of the planned TIs including:
- Who will prepare a Pricing Plan and the necessary construction documents, including mechanical and electrical engineering plans?
- Does the Tenant have any say in the choice of the architect?
- What is the process for Landlord and Tenant reaching agreement on the scope of work defined by the Construction Drawings? Does the Tenant have the opportunity to review and approve the final Construction Drawings?
- What is the project budget and how much is the Landlord contributing to the total project cost?
- How will any additional costs be charged to the Tenant (via an increase in monthly rental payments or via a cash payment)?
- Does the Tenant have any say in the choice of the general contractor?
- Who is hiring the general contractor and supervising the TI construction process?
- If the Landlord is supervising the work, will it charge a management fee (how much)?
- Is there an identified schedule? Who is responsible for delays in construction?
- Is the Lease commencement date a fixed date or it the commencement date tied to the completion of the TIs?
- Are there penalties for delays in making decisions (by both Landlord and Tenant) or for not completing the project on the agreed schedule?
- What is the process for the general contractor to coordinate with Tenant vendors such as IT wiring contractors, furniture installers, etc.?
- Is there a “walk through” inspection after the TIs are completed? Does the Tenant have a period of time to identify any issues?
- What is the warranty provided by the Landlord and the general contractor?
If you’d like more advice about Tenant Improvement Work Letters, please contact us.
Guidance Corporate Realty Advisors
COMMERIAL REAL ESTATE PRIMERS
Ten Tips for Prospective Office Space Tenants
Negotiating the complexities of Corporate Office Space Leasing transactions is not unlike leading a successful trek up a tricky Colorado 14-er. Not only does it take knowledge of the terrain and expertise, but careful preparation and attention to details from beginning to end. Here are ten valuable tips to take into account before you journey out on negotiating for new space, or to renew or expand a lease for your business.
Build-out from Shell Construction
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.
Effectively Utilizing a Tenant Improvement Allowance
Unless a space is specifically offered “As-Is,” Landlords typically provide some sort of “TI Allowance” that is typically a dollar allowance per square foot as part of the lease package offered to Tenants. The amount of TI 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.
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.