As the tenant engaging a commercial real estate lease, you already know you need to budget for the upcoming build out to get the property prepared for doing business successfully. Negotiating the lease to your advantage means a tenant improvement allowance or a turnkey buildout completion which includes needed improvements such as doors, walls, outlets, flooring, painting, etc. With a tenant improvement allowance, you, as the tenant will pay any overage above the allowance while in a turnkey buildout completion, the landlord takes on the cost overruns. Here’s what you need to know and some tips to help you negotiate the best deal for you and your business.
Tenant Improvement Allowances versus Turnkey Build Outs
Planning ahead and having an accurate estimate of the approximate costs to make the necessary improvements is important whether your lease negotiations include a tenant build out allowance or a turnkey build out.
Generally, tenant build out allowances are provided based on square footage of the rental property. Often landlords try to set low allowances to keep rent quotes low and attractive, which can create unexpected costs for tenants during the build out. If your needs are typical, this can work to your advantage, but should you need specialized construction and finishing, you may find the tenant improvement allowance falls short. Making sure to negotiate the needed tenant improvement allowance can be advantageous when your build out has special requirements to ensure your business success.
In some instances, a turnkey build out can provide you, as the tenant, with the advantage because it promises set costs. Keep in mind, the rent includes the cost of the build out, and in a turnkey build out, the landlord often adds a cushion to ensure they will not lose money on the buildout. As a result, turnkey buildouts can be lower quality than tenants expect.
When negotiating buildout costs, tenant improvement allowance or turnkey build out, it is crucial that landlords and tenants address and agree to each and every detail to be covered including electrical, plumbing, cabling, carpet, flooring, walls, and more.
Tenant Build Out Tips
By evaluating your build out requirements beforehand, you should be able to get the build out you need and save money on your rent. You can save money by negotiating the details. For example, high quality carpet is often required in high traffic areas like reception areas and hallways, but slightly lower quality (and costs savings) in offices. Side lights are nice, but also add additional costs. Doors also add costs, which means money can be saved by excluding doors where they aren’t likely to be needed (break rooms for example. Keep in mind, you can negotiate savings on the front end, avoiding unexpected costs on the back end.
As the tenant, you should also include a build out completion date into your lease, to avoid business down time. If the completion deadline is not met by the landlord, there should be consequences. The details of completion should also be included, for example, completion should be defined as all items in the plans are completed, not merely a certificate of occupancy by the locality. Building inspectors providing a certificate of occupancy that building codes are met aren’t looking at the details like whether the carpeting is what you selected, or the cabinetry has been installed. Another important point in your build out negotiation is the agreement by landlord and tenant on the quality of materials to be used.
Planning Your Ideal Build Out
Whether your lease features a turnkey build out or tenant improvement allowance, you can negotiate the details in your lease to achieve your ideal build out, saving money and assuring your requirements are met. With Perillo Construction, you can count on our knowledge and expertise to ensure your successful office build out.