When signing a commercial lease most people will be focused on the cost of rent. How many square feet you are getting, how much you are having to pay each month and what is included such as parking. You may do a quick walk through and think ‘yes this will work’.
However, when you get there on move in day, you find your ceiling is stripped out, the bathroom is not up to code and the layout is not suited to your design studio but a dentists! This is why it is important to have a tenant improvement contractors involved. Ideally before you sign your lease. A tenant improvement (TI) is any modifications made to your rental space to suit your business. This can be adding walls, rewiring the electrics, changing the floor, lights, HVAC etc. It seems simple but every part of this will involve a permit, code or needing approval from the landlord. Most of the time the space you see will not be the space you are actually running your business in. Knowing this beforehand will save you a lot of headache.
Tenant Improvement Allowance
Some landlords will offer a tenant improvement allowance. This will usually be a sum of money per square foot to help you fit out your space. Whilst this sounds generous it rarely covers all the costs and often comes with conditions. This may be that you have to spend it within a certain timeframe, or only get paid once the work has been completed and inspected. Some landlords will pay your contractor directly whilst others will pay you back at a later date. An experienced tenant improvement contractor will quickly be able to tell you if this is a genuine allowance. I have seen tenants assume that a $50 per square foot allowance will cover their whole build out for their restaurant. It didn’t. Knowing what your allowance is and what it actually covers will help avoid this.
Your Lease
A lease will dictate how your build goes. You must know who owns the improvements once you leave, whether you need to return everything to how it was and how long the landlord have to approve or disapprove your designs. Having a tenant improvement contractor involved during your lease negotiations means they will identify issues that your lawyer may not. Whilst your lawyer will know what to look for in a contract, your contractor will know what to look for in a building. They will know that your lease states ‘standard electrics’ but your equipment will require much more. Or that you have no access to the roof. Talking to your contractor beforehand will save you a huge argument later on when you’re paying rent for a space you can’t use.
Permits
Permits can be a boring part of the process but will cause delays. Each city has their own process and a commercial space will usually involve fire codes, accessibility requirements, occupancy requirements and sometimes zoning. If you miss out on any of these you will be stopped by the inspector. An experienced tenant improvement contractor will know which departments will take ages and which inspectors will be fussy. This is local knowledge you can’t find online. They will also know if your design will not pass due to the plans looking good on paper. For example, your hallway may be 2 inches too narrow for accessibility requirements. This will cost 10x more to fix once your walls are up.
Timeframe
Everyone wants to get their space up and running as soon as possible. However, things will happen that will delay your build. Materials may be late, inspections may be rescheduled and the electrician may find something you weren’t expecting behind your walls. A good contractor will build in extra time and will be honest with you that you may not get your ideal timeframe. If someone is promising you they can complete your build in 6 weeks when it usually takes 12 weeks, run! Having a realistic timeframe will help you negotiate rent abatement. This is when you get free or discounted rent during your build. Landlords often agree to this but you need to have a realistic timeframe to prove you can complete your build. Having your tenant improvement contractors write this down will give you leverage.
Landlords Contractor
This is an issue I see often. Some landlords require you to use their approved list of contractors or even use their own. Whilst this makes sense to protect the building and ensure it is completed to their standard, it can lead to higher costs. If you can choose your own contractor this is great. However, make sure you know if the landlord still need to approve them. Always get multiple quotes. Make sure you compare what is included in the quote. Two quotes can be completely different. One quote may include permits and clean up whilst another does not. Find out who is managing the sub-contractors. The company you hire may not be doing all the work. Ask for references from similar projects. Just because they are great at remodelling a home doesn’t mean they are great at commercial build outs.
Common Mistakes
Not checking what the building can offer. This includes power, plumbing, ceiling height and structural walls. People often fall in love with their design and then realise the wall they want to knock down is supporting the floor above. Not allowing for a contingency. Things will always come up. 10-15% extra isn’t being negative, it’s just knowing from experience. Change orders. During your build you may decide to add extra outlet banks or change your counter tops. This will all add extra costs and time. Having a contractor that will clearly document any changes will help you not lose track. Don’t pay too much upfront. Always have milestone payments. Read the warranty. Some warranties only cover materials.
Conclusion
A lease is a starting point for your build whether you planned for it or not. Having the right tenant contractors will help keep your budget in check, keep your timeframe realistic and help you identify any issues whilst they are still cheap. They will look at the space and lease differently to you. Involve them early on and ask them direct questions. Get everything in writing. You don’t need to be an expert in construction, just having someone on your side who is. This will make your next lease feel less like a gamble.
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