You’ve found that perfect space for your company and now it’s time to negotiate your lease with the help of your broker. One term you will be focusing on is Tenant Improvements (TIs) also known as Tenant Improvement Allowances (TIAs). This is the amount that the landlord will give you to make changes to your office space. Get ready to negotiate.
If the space is not built out to your taste, where you partially cover the construction expenses, your goal should be to minimize your out-of-pocket expenses. Keep in mind that the property owner will be making significant outlays before you occupy the space, so they will try to keep the TI low.
If you are going to be making significant changes to the space, you should engage an interior architect – they will match design with function, keeping in mind your business’s philosophy and brand. Typically, the property owner can suggest an architect you can use, or you can ask your real estate advisor to make a recommendation.
How Much Does a Build out Cost?
Tenants frequently underestimate construction costs. Your architect can help here – although she may not know the total costs, she likely can give you a ballpark estimate and advise you on how you can lower them. But, you won’t know the precise number until the project goes out to bid.
Some small business owners have high expectations about the layout of their spaces. They don’t realize that costs can escalate quickly depending on the condition, size, and location of the space. For example, a space with few features costs less than a 2nd generation space because there’s demolition costs involved with the latter. Generally speaking, building offices in your space will cost more than an open setting. You should also know that costs for build outs for smaller spaces can vary widely especially if the property owner handles the construction. Indeed, the build out of a smaller space may exceed a build out of a larger space of similar design especially if it features high-end materials.
Keep in mind that property owners will not be generous with the TI if your lease term is short. They don’t want to have a space that may not be appealing to future tenants, so if you insist on a higher TI, she will find ways to recoup the outlay in the form of a larger security deposit or by raising the rent to cover her increased risk. This means you could have significant out-of-pocket expenses, which can be especially burdensome when amortized over a short lease term.
How Long Does a Build out Take?
The more detailed the build out, the longer it will take to be ready for your occupancy. The question is, how long do you want to wait until you move in? Trades in many cities are in great demand, and construction delays are common especially if your project does not represent significant revenue for a construction crew. Also, material costs are escalating quickly due to the amount of construction that has been happening in most markets. Again, construction on a 2nd generation space will generally take more time due to the demolition.
From lease execution, rough time estimates are 1-2 months for light modifications and 4-6 months for a full build out. There are ways you can shorten the build out time, but it is dependent on multiple factors.
Do TIs Cover All My Other Expenses?
Many small business owners think that TIs cover everything – they don’t. There are some items that are not typically covered, for example, security and access to your space, cabling, certain trade fixtures and equipment, and exterior signage. Some non-covered items can be negotiated separately, but if you are seeking a short-term lease, your negotiating power for these items is going to be limited.
What Do I Have to Do When I Move Out?
Property owners typically insist that you restore some space features back to the original condition. For example, if you have unique trade fixtures and equipment, you will have to restore the area once you remove them. This is spelled out in the “make good” clause in your lease – the property owner will try to recoup as much from you as she can when your lease expires: in a worst case scenario, you could be required to demolish everything you constructed along with anything a previous tenant built. If the property owner handles the demolition, she will also charge you an administrative fee on top of the demolition costs. Note that anything you construct in the space belongs to the property owner after the lease terminates.
Given how expensive construction can be before you occupy the space and after your lease expiration date, it behooves you to work closely with a broker who knows how to negotiate the best agreement for you. Keep in mind that your space should complement the way you conduct business.
Nicole and Austin are CRE industry veteran tenant rep brokers based in Chicago. Contact them at firstname.lastname@example.org and email@example.com for any and all questions about the Chicago office market and how to find your next office space.