Upon the completion of the tenant interiors construction
estimate, it is usually necessary to Value Engineer ("VE"), the process of
reviewing costs and combing through the quantitative and qualitative aspects
seeking means of lowering cost. In plain English this means lowering cost. Not
surprising to the experienced landlords, agents or tenants, but frequently very
surprising to less experienced tenants who do this infrequently, the
construction cost estimate, based on their inputs, frequently comes in at a much
larger amount than expected. It is good
advice (and good mental health) to erase all expectation of full coverage of
construction cost by the Tenant Improvement Allowance and expect to utilize the
Value Engineering feature to re-address all items and costs in relationship to
the needs versus wants.
Because the construction costs are unknowable during the
specifications period, having expectations usually is not useful. Unless the
design and specifications are for improvements well below their anticipated TIA
as provided by the landlord, most construction cost estimates will require some
form of Value Engineering.
In order for this VE process to be successful, there must be
a detailed, line-item construction cost estimate including the number of units
(e.g. electrical outlets, doors, etc) AND the unit costs (e.g. $650 per installed
door) in order to make informed quantative and qualitative decisions…and have
immediate results based on new decisions (e.g. changing the carpet quality from
$50.00 to $30.00 per yard) without wasting days and weeks of re-bidding
each aspect among numerous sub-contractors.
This can come in the form of a simple review for approval,
or cherry-picking out quantities and qualities to drop cost. This process of VE
includes meeting with the general contractor, the architect or space planner
and talking through each line item of the bid.
Avoid the circumstance where the decision to lease is
expected to be made under duress of rushing through the VE process. Start the
process early enough (usually four to five months before scheduled move in). In
some cases, to reileve pressure, it may be best to just "hold over" at the present
location – providing the comfort of additional time – to make decisions on cost
in the peace of objectivity.
The landlord wants your lease and is very interested in the
return on investment earned by leasing. The landlord no more wants the lease
negotiations to break down than the tenant does and the landlord will work with
the tenant to structure a lease – blended with additional TIA contributed at no
cost to the tenant and amortization of costs
- to make the lease happen. If not, a financially weak landlord is
frequently identified during this process and is a component for the tenant to
consider in making the final leasing decision.
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