What Is a Commercial Build Out and Who Pays for It?
Not every space will be a perfect fit.
It’s very common for commercial spaces to require some renovation work before they’re ready for occupancy by a new tenant.
Some spaces may be fully renovated, but others will require you to implement your own design and renovations to bring them up to your company’s standards.
Second-generation spaces, which are suites that were previously occupied, usually require updating at the very least or a total makeover in the worst of cases.
That’s where you’ll need a commercial build out.
Commercial Build Outs
The build-out is the work that will be done to make the property ready for your business to move in.
These renovations can be as big and impressive as you like and the changes can add personality, as well as functionality, to your business.
On the other hand, a build-out may not be necessary if the space is laid out efficiently.
You may take more of a utilitarian approach and simply freshen up the space with new paint and carpet.
Planning Ahead for Your Space
‘As you view potential spaces, it’s a good idea to know your design requirements in as much detail as possible in order to judge how much build-out is necessary.
Think about the number of offices you need and what kind of open space should be included.
Decide on additional rooms or areas that you must have.
Will there be a kitchen?
A waiting room?
Do you need closets or storage areas?
It would be wise to have an idea in mind of what you and your team will need prior to starting your site search.
Different Types of Spaces Require Different Levels of Renovation
Of course, if you’re looking for office space, chances are good that you’ll be able to find a space that’s already prepared for your occupancy.
If, on the other hand, you’re opening a restaurant, you’ll likely need to plan for renovations.
Keep in mind, too, that if you’re planning on occupying the newest property on the block, you’ll likely be starting from scratch with your space’s design since you’ll likely be looking at empty shell space.
Are Commercial Build Outs Worth The Trouble?
As you compare properties, the build-out will also be part of your cost-benefit analysis.
For example, you may find the perfect location, but that new space might not be functional.
You’ll have to decide if it makes sense to lease in that area and spend the money and time on the build-out, or if it’s wiser to go somewhere else.
Market conditions will also play a big role in whether or not you can find exactly what you need without the expense of a build-out.
If there’s a lot of product available in a down market, you may strike property gold without too much trouble.
However, when demand is high, the best spaces are leased very quickly and what you need may not be available.
In a hot market, you may have to modify the space or settle for a property that’s not ideal.
Paying for the Build Out
The catchphrase of the negotiation stage in all of commercial real estate can be applied to the build-out as well: everything is negotiable.
All modifications to the property will be discussed and become a part of the lease before any changes are made.
The landlord may agree to cover the cost, the tenant might take on the responsibility, or the cost of the build-out may be shared - it simply comes down to how the deal is negotiated between the parties.
Turnkey Build Outs
Landlords know that their property will not work for every business, and they understand that tenants don’t necessarily want to pay for improvements to spaces they don’t own.
For these reasons, the landlord may be willing to cover the costs of all of the changes with a turnkey build-out.
Although it saves money and is an easy way to get the space ready for move-in, the turnkey build-out can have drawbacks.
The landlord may be tempted to use cheaper materials or hire cheaper labor that results in shoddy work.
If this is a concern, address it in the negotiations and include it in your contract by specifying the level of quality, or the general contractor that must be used.
Generally, this isn’t a big concern because the alterations are reflections on the property, and the landlord will not want to decrease the value of his investment.
Tenant-Controlled Build Out
If you’d rather have control over the process, you might choose to pay for the build-out yourself.
Even in this case, the alterations to the space will need to be mutually agreed upon.
The difference in this scenario is that you’re completely in charge of the construction: you hire the architect or contractor and you are responsible for everything from the placement of electrical outlets to construction of the walls.
In this instance, you’ll likely be negotiating for a tenant improvement (TI) allowance from the landlord to help cover all or some of the costs of the build- out.
Build Out with Tenant Improvement Allowances
TI is often referred to in dollars per square foot.
For example, if your space is 2,000 square feet and your landlord has offered to give you $20 per square foot for a TI allowance, that is $40,000 (2,000sf x $20) that may be applied toward the construction of your space.
It’s important to keep track of all of your expenses because you will need to pay for any build-out costs above and beyond that original amount.
Landlords will typically reimburse the TI allowance to the tenant following the completion of the build-out upon receipt of all lien waivers and construction bills.
Sharing the Cost of the Renovations
The build-out negotiations may result in the cost being shared between the parties.
For example, office buildings typically offer new paint and carpet when a tenant moves in. The choices may be limited to building standard finishes, or the tenant may be given a specific budget and he can choose anything within the amount provided.
The tenant may decide they want custom finishes and would pay for those upgrades.
The build-out can be as elaborate or as subtle as a tenant finds necessary.
Creative Uses for Build Out Negotiation
Weigh your options and figure out what makes the most sense for you and your business.
That may mean forgoing any tenant improvements.
For example, if you’re under a huge time crunch, you may be willing to waive the new paint and carpet offered by the landlord because it would delay your move.
Instead, you could negotiate a rent abatement equivalent to the cost of the build-out that the landlord was originally willing to cover.
You could also use this tactic if your build out is very specific to your business or industry, in which case the landlord may not be as willing to help you financially on the build-out since they’ll likely have to fully renovate the space for the following tenant.
Compromises like this are commonplace in commercial real estate when you simply ask and remember that everything is negotiable.
About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
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