Unless a space is specifically offered "As-Is ", Landlords typically provide some sort of Tenant Improvement ( "TI ") Allowance - usually dollars/Rentable Square Foot ( "RSF") - as part of the Lease package offered to prospective Tenants. The TI Allowance provided varies and is often quoted as "negotiable" by the Landlord or its listing brokers.
Determining the TI Allowance The amount of TI Allowance that a Landlord is willing to offer a Tenant depends upon several factors including the length of the Lease term, the Tenant's credit strength, the vacancy rate in the building (which impacts a Landlord's level of motivation) and the type of building owner (institutional vs. private). Because the TI Allowance is a concession offered to Tenants, Landlords will offer a more generous TI Allowance in soft markets and less TI Allowance as the office markets strengthen.
Who Oversees Construction? In many cases where Landlord offers a TI Allowance, the Landlord will hire the architect, engineers and general contractor and will provide the construction management for the project, typically charging a fee of 3% - 5% of the construction costs. This method can be advantageous to a Tenant who does not have the time or expertise to effectively manage a TI Construction project. In addition, schedule delays (unless caused by the Tenant) become the Landlord's responsibility, and the Lease Commencement date will typically be the date that the Landlord has "substantially completed" the TI Construction and the Premises are available for occupancy.
When the Tenant Controls the Process In other cases, a Tenant may hire the architect, engineers and general contractor and assume the management responsibility for completing the project. The Tenant gains more control but wii also assume significantly more responsibility and risk for completing the required Tenant Improvements. Delays in the schedule may hurt the Tenant if the Lease is structured such that the Lease commences, for example, 90 days after Lease signature. If there are construction delays, the Tenant may be responsible to pay rent even though the Premises are not ready for occupancy.
Know the Costs Upfront Under either arrangement, the key issue for the Tenant is developing a detailed construction plan and securing accurate advance construction costs estimates so that the Tenant is confident that its TI Allowance will fully cover the construction costs or, if not, the Tenant knows in advance the additional amounts it must pay to complete the project.
Benefits of Using a Project Manager TI design and construction is time consuming and requires attention to detail. Numerous decisions are required ranging from office and conference room sizes and locations, to paint, carpet and counter surface selections, to details about electrical outlets and lighting. Changes made after construction has started can be expensive. Many Tenants engage outside Project Managers to help them successfully navigate the Tenant Improvement construction. Experienced Project Managers easily earn their fees by savings Tenants thousands of dollars in the design and implementation stages of a project.
- Guidance Corporate Realty Advisors
Nothing contained herein is to be considered legal advice. Always seek legal advice when evaluating any legal document
