When it comes time for a business to move into a new space, tenants have more than just a rental rate to negotiate. Oftentimes the landlord will provide a series of concessions, including a budget to complete tenant improvements. Understanding the buildout process can save you or your clients real money, and help create a more seamless negotiation process.
So when negotiating the tenant improvement aspect of a lease, it’s important to put your best foot forward. To start, make sure that you enlist the help of a team of specialists who understand the scope of the project. These people can help provide insight on work other tenants have completed, a solid project cost estimation and valuable information about hidden expenses, like management fees or move-in charges. It also is helpful to consult recent comps to understand concessions provided in other recent transactions. Bringing knowledge to the table will only make the negotiations process run smoothly.
In most cases, three factors impact the success of a lease negotiation: rental rate, free rent and the commercial buildout. Of the three, the area that is sometimes overlooked, is how to best negotiate the concessions available for building out the space. In most cases a Landlord will either provide a Tenant Improvement Allowance or a Turnkey Buildout. Here is what you should understand about both.
Understanding the Tenant Improvement Allowance
The Tenant Improvement Allowance is a Landlord concession designed to help a Tenant customize the space for their use, through design, construction, furniture procurement and technology. The Landlord provides this money on a per square foot basis, up to a certain dollar amount. Any expenses in excess of the allocated funding becomes the responsibility of the Tenant.
In most cases, the TI Allowance is negotiable. So how can you make sure to get as much money for your clients as possible, while also properly budgeting for the project? The key is to factor the ballpark expenses into the lease upfront.
Start by enlisting the help of a professional to tour the potential office spaces. An expert can help identify obstacles that could add costs to the construction process, in addition to provide space planning services and estimated furniture costs. Most businesses are happy to participate in these exercises because it helps them demonstrate their skillset to the client, which could lead to being hired for the project. Total all of the estimated expenses and then divide that by the rentable square footage of the office space. That cost per square foot number is what should be requested for a TI Allowance.
Things to watch out for:
Cost of technology and wiring
Furniture installation fees
Long lead times for equipment
Unforeseen expenses from modifying the plan
Understanding the Turnkey Buildout
Another avenue for Landlords is to provide a turnkey design. In this scenario, the Tenant and the Landlord agree to a work letter outlining what will be included in the process. The Tenant will not usually incur any out of pocket expenses in this scenario. While at a glance this could seem like the most advantageous option, business owners, Tenants and Brokers should make sure that all parties are on the same page as to what value is being provided.
To keep things on track, have an expert review the plans, even if the Landlord has an in-house architect. An outside consultant can make sure that the language of the work letter is clear - and that nothing falls through the cracks. Just like in the TI Allowance process, use the cost per square foot estimates to ask for additional concessions, such as a reduced rental rate or a few months of free rent. If the Turnkey project is only going to cost $15/sf, but the Landlord promised the value to be roughly $20/sf, make sure to recoup the extra funds during negotiations.
Things to watch out for:
Not consulting an expert to make sure all aspects of the turnkey are properly addressed
Leaving money on the table that could have been applied to the rental rate
A work letter that doesn’t provide enough detail to keep the project on track
Regardless of the direction the Landlord takes for the build out process, the best thing you can do is to stay involved and educated throughout the process. Rightsize is committed to being a resource for you. We will even offer two hours of design services free of charge throughout the preliminary process - each and every time.
Need help? Contact Rightsize.