In other cases, a corporate real estate tenant may negotiate, as one of its key Lease terms, that a Landlord provide the Tenant with a “Turnkey” Build-Out of the Tenant’s desired interior layout. With this type of agreement, the Landlord pays the full costs of the architectural and engineering services, construction, construction management and any required permits or fees. The costs of the TI construction are incorporated into the agreed Lease rate and the Tenant has no direct costs for this construction. The Landlord assumes the management responsibility for the project and, except for Tenant caused delays, assumes the schedule risk for the project. The Tenant is essentially handed the keys to its new space when the construction is complete.
With a Turnkey Build-Out, the process often begins with an interior architect working with the Landlord and Tenant to create a Pricing Plan. A Pricing Plan will show the Tenant’s required build-out (walls, doors, millwork, etc.) 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 numerous miscellaneous notes required for the proposed construction. If the Landlord approves the Pricing Plan, it is provided to several general contractors experienced with office TI construction to obtain preliminary pricing for the proposed TI Construction.
If the preliminary prices are acceptable, things can move forward. However, if the preliminary prices are too high, the Landlord may refuse the cover the full costs. At this point, the Tenant may: continue to negotiate or walk away from the deal; modify its plans to lower the costs; or agree to pay some portion of the costs, either as a cash payment of through higher rent payments. If an agreement is reached, the Landlord will authorize the architect to prepare detailed Construction Drawings.
Ensuring Good Results
The key for both the Landlord and Tenant is developing plans that clearly identify what will be built and delivered to the Tenant. Misunderstandings over this process are usually avoided with detailed plans, good communication between all parties involved in the negotiation and design process and strong oversight of the general contractor by the Landlord.
In the next issue, we will explore the issues related to structuring an effective work letter, usually an attachment to the Lease, spelling out the responsibilities of Landlord and Tenant, including the allocation of costs, responsibility for decision making and numerous other details related to the Tenant Improvement construction.
For expert advice on Turnkey Build-Out for corporate real estate, contact Guidance.
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.
Often a “Tenant Improvement Allowance” or “TI Allowance” is provided by a Landlord to be used to reconfigure an office space to better suit a Tenant’s specific needs. This can be as minor as adding new paint and carpet to spruce up a tired space or as extensive as the full build-out of office space from a “Shell Condition.”
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.