Avoid Cost Overruns:
Improvements and Furniture

 

Watch out for the tenant improvement money pit. One of the biggest sources of cost overruns in tenant relocations are costs incurred due to change orders or additional work required by the tenant after they sign off on the initial architectural plans.

 

Real world stories on this subject could fill volumes, so we'll just try to limit ourselves to a few.

 

The TI Planning Process:

 

The first thing we recommend in order to save money on TI overruns is that you take a look at the process your landlord is taking you through during the negotiations. Did you read the article where we discussed the three parts to a deal negotiation? What we didn’t fully address there was hidden TI costs. Well, here's our chance, so follow carefully. These things really happen.

 

Say you finally narrow down your choices to the building of your dreams. It’s one of three buildings of your dreams. Your broker presents you with general deal points that appear to be both market value and acceptable terms. In most cases, it's the nine or ten deal points most brokers tend to limit their proposals to. Often, number four or five on the list will state something about a “tenant improvement allowance” or what specific improvements the landlord will make prior to commencement. With that, you sign the lease and wait patiently for the landlord to tell you it's time to move in.

 

Everything appears seems fine, but you forgot one thing. Do you know exactly what you're getting? Did you sign off on any written out plan? Do you have a list of specific improvements to be done and materials to be used? Having these things clarified will help you avoid questions like, "Oh, you want another electric plug where?” These sorts of questions will help you avoid additional costs.

 

Also, it is likely that, hidden somewhere in the work letter or possibly the base lease is a little statement that says the landlord or his management company receives a percentage of the TI costs as an administration fee. I've even seen an additional percentage tacked on to the cost of change orders too. Think about getting a great $25 PSF allowance on 10,000 usable square feet (not “rentable”—check your lease to state if the "load factor" is mentioned, because it affects your parking and TI's). $37,500 of that allowance may be paid to the management company for doing what?

 

Here's the deal. Don’t sign the lease until you know these things:

• What you are getting in the way of TIs.

• You are getting exactly what you need and expect.

• You negotiate down all the landlord’s extra fees related to TIs.

• You truly believe you don’t need anything else.

 

Be picky. It’s your money.