FRAZIER BAKER and WILL BARDEN
So it’s time to locate new office space for the changing needs of your business. That may mean adding more space to accommodate growth, downsizing to support a reduction in employees or even rightsizing – as many companies are these days – to reduce space per employee and cut operating expenses.
Whatever your reason for seeking new space, you are likely to be shown a variety of options by your tenant rep broker that will get you in the ballpark of what you need. But it is highly unlikely that you’ll find a space already configured exactly as you need it.
“Location, location, location” may be the most frequently used phrase in real estate, but “tenant improvements” would certainly rate in the top five. As a tenant, you don’t want to come out of pocket for renovations to your new space. That’s why it is important to understand your options when it comes to negotiating with a landlord to improve the space you choose to accommodate your needs. In fact, your decision about which space to choose could come down to the cost of tenant improvements.
There are generally two ways that the cost of tenant improvements can be handled. The first is to have the landlord provide a “turnkey” improvement allowance. The second is to have the landlord state the dollar amount to be provided in the lease document. Let’s compare the two:
While the turnkey method sounds good, it prevents the tenant from capturing the benefit if there’s some saving when the improvements are competitively bid. Let’s say the landlord estimates that the turnkey improvements are going to run about $20 per square foot. Let’s say further that upon obtaining competitive bids, the actual cost of the job turns out to be $15 per square foot. In this case, the tenant doesn’t benefit from the cost savings that could have been applied to further improve the space. Of course should things go the other way, with bids coming in higher, the turnkey approach would be preferable.
The cost-per-square-foot method provides more tenant control but also requires further detail as to what improvements are required. If work is required beyond simple items such as moving a wall or two, paint and/or carpet, construction drawings should be developed by an architect that take into account the entire scope of work, from A to Z. Construction drawings can be competitively bid and the allowance negotiated on a per-square-foot basis based on that number.
Improvement allowances are an important component of the office lease and should treat both tenant and landlord fairly. Every industry has its own set of unique needs when it comes to office layout and configuration and even within an industry, every situation is different. Matching your situation with the best available space options in the market, identifying the optimal tenant improvement methodology, and negotiating a solid lease contract, will ensure a cost effective and satisfying outcome.
Frazier Baker, vice president of office services, and Will Barden, vice president of office services, provide office tenant representation services for Colliers International Memphis