Commercial Construction Negotiation & Financing Basics
Many Emerald clients are building their first location and therefore venturing into new waters when it comes to construction and real estate. In this post we cover some of the basics relating to commercial build outs, commercial leases, and working with landlords to take a vacant shell to a finished one that meets the needs of a business.
The landlord offers free or discounted rent for a certain time period, and the tenant uses the savings to pay for construction and oversees the work.
The landlord offers a “menu” of specific improvement package to all tenants, and tenants select the best option for them. The landlord oversees the work and the tenant must pay for any improvements not included in the standard package they selected.
The turnkey option means everything needed for the tenant to start conducting business is already in place, although they may need to pay for minor costs like furniture. The landlord may have some control over the final finish of the space and pays for all improvements. Landlord and tenants agree on the specifics of the build-out during lease negotiations. However, the tenant must provide specific plans, cost estimates, and timelines. The pricing plan should be detailed, showing walls, doors, millwork, electrical outlets, finishes, and any plumbing required for break rooms or coffee. Ultimately, tenants should consider how the cost of a landlord-provided build-out will be reflected in their lease rate. The pricing plan may be negotiated if the proposed costs are too high, and both parties retain the right to walk away from the deal. After approval of the pricing plan, the landlord typically gets several bids before making the final general contractor(GC) selection and then commissions the construction drawings. Since tenants with short-term leases have no leverage to negotiate for a larger TI allowance, a turnkey build-out is especially beneficial for them.
Tenant Improvement Buildout (TI)
A TI allowance is the most common way that landlords pay for improvements. Landlords may discount rent to offset improvement costs. Tenants typically oversee the work in a TI build-out, select the architect and GC, and are responsible for costs that exceed the allowance. The TI allowance is usually an amount per square foot the landlord will contribute to cover labor, construction, materials, but doesn’t include costs for move-in, data/telephone cabling, decorations, equipment, furniture, or fixtures. It may include costs for space design, space planning, or legal fees if the tenant negotiates them into the allowance. A TI work letter addendum, that spells out construction details and limits change orders, should be added to the lease. The letter also specifies the budget and how the tenant will pay for costs over the allowance, and GC/landlord warranties. The tenant may be able to negotiate a higher TI allowance with a longer lease term or a larger amount of space being leased. Tenants typically pay for the build-out up front and then the costs are reimbursed after the space is complete. Tenants need landlord permission to make improvements.
In the end, both tenants and landlords can benefit from tenant improvement when detailed construction plans clearly identify what will be built. Whether you are starting a new business with its first brick and mortar location, or an experienced company that is expanding its operations by adding a new site, Emerald can facilitate the process by working with landlords, commercial real estate agents/brokers, and property management companies– email us today, call us at 480-832-9808, or fill out this form to get a free consultation and bid on your next project.