Understanding Tenant Build-out

The term tenant buildout is very common in the commercial real estate sector. However, most people don’t understand what it means. In fact, they confuse the term buildout with building. But, it’s important to understand that the term buildout means the remaining construction process, which takes place in an area that’s already been built.

Most properties in commercial real estate are empty when being leased. Yes, the building has doors, windows, and walls. However, there are no additional details or features in this space. Mostly, this is done intentionally.

Generally, the idea is that the tenant will complete the space, according to their specifications. Now, this is what we refer to tenant buildout. Generally, it is expected that the tenant will need some extra adjustments or construction on the current space. Thus, the landlord will address the issue or tenant buildout or tenant improvement on the lease agreement.

In such scenarios, the landlord is supposed to provide a tenant buildout allowance, which allows them to give you the money you need to cover or to help cover the expenses of the buildout. Generally, the landlord will provide the tenant buildout allowance based on $x per square foot.

Types of buildout

There are two types of buildout. Each of these has room for negotiation with the landlord or property manager, as well as its benefits and drawbacks. These include:

• Tenant buildout – in this option, the tenant is in control of everything. That means, the tenant is responsible for hiring the designer, architect, and contractor, and then working with them to achieve the results that they desire. Tenant buildout gives the tenant most of the responsibility, which allows them to control the entire buildout process, as well as the result.
• Turnkey buildout – at times, you will realize that you don’t have the interest or time to micromanage the construction project. In this case, you should opt for a turnkey buildout. Also, some landlords or property managers prefer turnkey buildout if they want to be in control of the entire project. For a turnkey buildout, the tenant is supposed to agree with the landlord/property manager early in advance on the work that they need to be done. The landlord will then manage the construction/redesigning of the tenant’s desired specifications. By the time the tenant moves into the building, it will be ready for tenancy.

Make sure you have a strategy when negotiating with the property manager

Tenant build-out contractors from Orlando, AFS General Contracting, advise tenants to allow property managers/landlords to manage buildout projects. First, this will save you from the hassle of searching for contractors. Moreover, the landlord/property manager understand the following:

• The requirements of the local building codes
• How to reduce disruptions to the existing tenants
• The location of the building’s utilities
• The location of the weight-bearing walls

Therefore, you should always negotiate for the best deals for turnkey build outs, and ensure that there is clear working order. Moreover, you should let the landlord handle the budding process. Once all the bids are submitted, allow the landlord/property manager to open them in your presence. This will give you a good idea of the estimated cost.

Attention to detail is key

If you want to complete a tenant buildout or tenant improvement successfully, you must ensure that the details of the current space are in line with your proposed plan. Moreover, space must have all the features that you want. Then, you need to have a fully detailed set of plans, specifications, drawings, as well as schedules in place.

The following are some of the details that you should include in the plans during a tenant buildout project:

• Demolition plans
• Code summaries
• New construction plans
• Mechanical plans
• Electrical and power plans
• Reflected ceiling plans
• Schedules – when the project is expected to complete
• Elevations
• Details

Come up with a budget

We all have been in a situation where we’ve gone shopping and ended up spending more than we expected. This doesn’t have many financial implications for simple grocery shopping. However, you should never attempt this with a construction project. A buildout project can cost you a significant amount of money—meaning you need to have a proper budget.

Today, we are seeing most people are willing to spend more money on their buildout projects compared to the previous years. Therefore, having a budget will ensure that you can repay any outstanding loans, and also ensure that you have enough funds for the entire project.

Running out funds can have negative implications, including the failure of your business. Proper planning will allow you to understand where your money will go, and also organize all the expenses into different categories. Moreover, proper planning will give you a clear picture of where your funds are going.

When budgeting for a tenant building, you should consider factoring in the following areas:

• Loan and financing costs
• Hard costs – these include labor, equipment, and material costs
• Soft costs – these include architectural, financing, engineering, as well as legal fees
• Project management fees
• Contingencies

Project managers

Having a professional project management team is very important during a client buildout project. The construction team also plays a big role in the success of a buildout project. Therefore, when choosing a project management team, look for a team that will not have a challenge in blending with your business. This is a team that should always endeavor to represent the interests of your business first.

It’s important to understand that the project management company that you hire will be managing different aspects of the buildout project. Some of these aspects include choosing vendors, directing and responding to daily communications, managing installations, as well as completing various administrative tasks. This shows the importance of choosing a project management team that’s in sync with your business goals.

Contracts and accountability are critical

Always double check any contract before agreeing to its terms. Most property managers will charge for permits and admin fees when you let them manage your buildout project. Moreover, you might be responsible for other fees like architect, lawyer, or engineering fees in case the changes are significant.

Also, you need to understand that accountability clauses are very common in both tenant build outs and turnkey build outs. In such cases, the tenant is responsible for any damages in case the project is not completed on time. If your buildout takes too long, then you are causing disruptions to other tenants. As a result, your landlord might ask you to pay a certain fee for any extra day past your deadline.

Similarly, there are fines for budget overruns. You will sign an agreement on what you are supposed to do in case the landlord has tenant buildout funds remaining after the improvements are completed. At times, the landlord will give the tenant the extra funds. But, the landlord can keep the extra money if the agreement states so.

Always make sure that you file and keep all the lease agreement documents securely. Besides, you will need either a paper or digital copies—the local government needs these. The tenant or landlord can claim any depreciation on tenant build outs, but this will also depend on the property lease agreement.

In case your landlord accepts to compensate you for the improvements using the flow-through plan, then you are not entitled to any fixed-asset. The property manager/landlord can also decide to pay you in cash. In this case, ensure that you claim the payments as lease incentives on your tax returns.