Getting the Most from Your Tenant Improvement Allowance

Getting the Most from Your Tenant Improvement Allowance

You have found the ideal property for your business, your lease is signed, and now you have your Tenant Improvement Allowance for the landlord’s build-out. You can breathe a sigh of relief, but there are a few things you need to address before you turn over the construction of your new space solely to your landlord. After all, you want to get the most for your money along with the best possible space for your business and these tips can show you how.

All the Work to be Completed Should be Competitively Bid

The only way to be certain you get the most for your money on workmanship and materials is by seeking competitive bids from multiple well-respected contractors and vendors. If you allow your landlord to simply hand over the project without bids, you will probably overpay for the build-out even if your landlord has an ongoing relationship with a few selected contractors. As the lessee, you should insist on the right to choose one of the contractors who will be bidding on your build-out project. In addition, you should attend the bid meetings to have your questions or concerns addressed.

Control your Landlord’s Management Fee

If in your lease, understand that this is a service fee charged by your landlord to manage the tenant improvement construction during your build-out, that in most cases is pure profit for landlords. These fees are typically not part of the building cash flow, residing outside of the arrangement between the landlord and investors. Consider this, general contractors usually have a profit margin from one to three percent, which includes the project’s work, as well as the schedule and pricing risk. In turn, landlords may charge three to five percent to oversee the project for you, the tenant, while transferring time and cost risk to the contractor, effectively reducing your Tenant Improvement Allowance. When seeking to control this Landlord Management Fee, ask about the amount being charged as well as what the fee will be applied to and ensure it does not include any cost outside of your construction project.

Keep Tenant Work Apart from Base Building Work (New Construction)

If your lease is not new construction, and you accept the space “AS IS, WHERE IS” you are responsible for all build-out costs subject to your Tenant Improvement Allowance. In the instance of a new or newly renovated building this may not be the case. In this case, a large sum of money is at stake, meaning you need to specifically define where your tenant improvement work begins, and the landlord’s base building work ends especially in areas like HVAC, sprinkler systems, air flow, etc. By ensuring this division of project work and responsibility, you can be sure you are getting the most for your money.

Be Certain You Account for Unknown or Hidden Building Conditions

In your lease, especially when you have accepted the space “AS IS, WHERE IS” you should be certain to include a special clause. The section should state that during construction should any unknown or hidden conditions which would require exceptional cost to you (the discovery of asbestos, code violations, significant floor damage, etc. during construction) will be responsibility of the landlord. Otherwise, your landlord will argue these unexpected unknown costs will be yours and significantly impact your project, budget, and timeline.

Understand Change Orders Will Happen

As the build-out progresses, you may see the need for changes in the original plan. Because you, the landlord, and the contractor are well into the project, change orders need to be addressed in the lease, so you will not incur extraordinary costs to change anything. Remember, change orders should not create an opportunity for profit margins to be increased, rather initial percentage fees should continue to apply to the actual cost of the change order work.

At Perillo Construction, Inc. our goal is to work with you and your landlord with the promise of attention to detail, provision of quality materials and outstanding craftsmanship, and delivery of exceptional results for your build-out project, always on time and within budget.