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The Commercial Lease Process Part 7 Office Build Outs – How to Get What you Bargained For

Choosing the Best Build Out for Your Use.

The build-out of your space is one of the most important and expensive aspects of your lease. The following is a brief summary of options to consider.

A. Leasing Space that is already built-out.

For tenants leasing 5,000 feet or less, it usually makes sense to lease space that has already been built out. This type of space would include new space that the landlord has built out on a spec basis or second generation space that was built out for a previous tenant. Depending on lease term and tenant credit, landlords will usually be amenable to making minor modifications to the space in order to make it suitable for tenant’s use.

Pro: If you are on a tight deadline, you will be able to move in quickly. You can save costs by using a previous tenant’s buildout with minor customization for your needs.

Con: If the space has not been designed for your needs you may incur unforeseen costs in modifying the space or be forced to live with space that isn’t a good fit.

B. Landlord Designs and Builds to Suit Tenant’s Specific Needs.

If you are leasing more than 5,000 feet it probably makes sense to have your space custom designed for your specific use. If you decide to have the landlord build out your space there are two ways to move forward.

  1. Using the “Building-Standard Work Letter”. A “building-standard work letter” describes in detail the type of build-out the landlord is willing to build for you. The work letter should include a written description that indicates all of the specifics, including the amount of building-standard lights, doors, electrical outlets, linear sheet rock, etc. that the landlord is providing. The landlord should also show you building standard materials including the type of carpet, tile, paint colors, and materials to be used in kitchens, conference rooms, etc.

Pro: The free rent period will start after the space is completed, so construction delays and cost overruns will become the landlord’s problem not yours.

Con: The look and feel of your space will be largely determined by the landlord. See additional cons relating to turn key buildouts described below paragraph C.

  1. Using the Building Work Letter with Modifications. An alternative to using the exact specifications in the building work letter is to make substitutions to the work letter in order to achieve a more unique look.

Pro: You have the benefit of the landlord assuming the construction risk and timing.

Con: It can be challenging to make sure everything is included in the building work letter, which might leave you responsible for excess costs. See additional cons relating to turn key buildouts described below in paragraph C below.

C. Landlord Builds According to Tenant’s Plans.

This type of buildout can offer the tenant the best of both worlds: a space completely customized to tenant’s needs and design criteria with the landlord assuming the obligation to build out the space.

Pro: Typically landlords have better purchasing power than tenants, because they often buy materials in bulk and have pre-existing relationships with contractors. Therefore, it may be less expensive for the landlord to build out space rather than for the tenant to do it. In addition, any cost overruns and delays are the landlord’s obligation not the tenant’s. Any free rent period will not begin to run until the space is delivered to the tenant.

Con: In order for the landlord to agree to the buildout, working drawings must be attached to the lease. Preparing the drawings takes time and money and it can delay lease negotiations. In addition, tenant may be at risk of paying for the drawings without knowing if they have a deal or not.

Each of the scenarios described so far involve “turn key” buildouts where the landlord pays for and delivers space according to previously agreed specifications. A major problem with a turnkey buildout is that the landlord is going to add a significant amount to the estimate to cover contingent costs in order to ensure that the landlord doesn’t end up paying more than the amount estimated. This contingency can amount to 25-30% of the entire bid!   The more efficiently the landlord manages the buildout the more it can save. This can encourage the landlord to cut corners. Also, with a turnkey buildout the tenant relinquishes control of the process. This can be alleviated somewhat by negotiating an extensive work letter detailing the materials and work to be done.

D. Tenant Builds Out the Space Using its Own Project Team.

With this alternative the tenant receives a “stated dollar amount” from the landlord and Tenant uses that amount to cover architectural, engineering and buildout costs.

Pro: Tenant is able to custom build its space. With a stated dollar contract the tenant maintains control over both the quality and timing of the process.

Con: the tenant is responsible for all project delays, which may eat up any free rent concession. Tenant will be responsible for cost overruns and does not generally have the same purchasing power as the landlord which could add costs to the buildout.

If the tenant chooses to take on the challenge of building out its own office space, the tenant must develop and adhere to a very specific project budget and schedule and must organize a team of architects, engineers and contractors.

How Long will it Take to Build Out the Space?

It takes approximately 12 to 16 weeks to build out 20,000 to 50,000 square feet of office space. You should plan for slightly less time for smaller space and slightly more time for larger spaces.

How Much Will it Cost to Build Out Office Space?

The following is chart shows average buildout costs for new, class A, B, and C spaces in the Tampa Bay market based on standard building finishes and higher end finishes. Keep in mind that costs vary from season to season based on various factors including shipping and fuel costs. In addition casts can also be higher or lower in different urban or suburban markets.

AVERAGE BUILD OUT COSTS PER SQUARE FOOT

Finish Quality New Building Class A/B+ Class B-/C
Standard Bldg.  $45.00       $30.00     $20.00
Above Standard  $60.00       $40.00     $25.00
High Finish     $75.00       $50.00     $30.00
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