Comparing apples to apples; that is what you want to do when you are making a decision on the location of your new office or store.  To do this you need to make sure the services the landlords provide are all equally matched.  This includes items like electrical service; janitorial service and today’s topic…build out allowance & construction.

As is the case in most of lease s, there are  many different terms to consider.  Most popular are phrases like:  Cold dark box, warm box and plain vanilla shell.  While the last of these sounds like part of a nice dessert the differences can cost a tenant or landlord thousands of dollars.

Quick definitions:

Cold Dark Box-Usually reserved for new retail.  This would mean a tenant is moving into a space that has no lights or HVAC.  No restrooms.  Sometimes there is a store front (often not) and the floor is gravel.  It is the tenant’s responsibility for all construction to ready the space for occupancy.

Warm Box-Similar to cold dark box, only there is HVAC in place and power to the premises.  Usually a store front is already in place.

Plain Vanilla Box-Sheet-rocked walls (ready for paint), restrooms in place, and concrete slab ready for flooring. Drop ceiling with lights installed.

There are a hundred different variations of these conditions but these are the most popular.

While you have to compare the different conditions of the space you also have to compare the construction allowance that the landlord may, or may not, be providing.   This is where there is a lot of confusion. 

Every developer or landlord has a different formula for the way they provide their building and allowance.  These days for new (often called “first generation”) space Commercial & Investment Properties provides an allowance of $25psf.  So if you lease 10,000sft you get $250,000 for construction.  Some developers will provide allowances up to $35psf (more in larger markets).  But the difference is in what else the developer is providing.

In new office space, CIP provides all standard HVAC units, ducts, diffusers, mini blinds and turn down of sprinkler heads.   Total cost of these items is typically around $10-$12psf.   If another developer is giving a $35psf allowance but is providing only a cold, dark box the tenant will have added cost of purchasing HVAC units, providing engineers to make sure they are properly zone etc…These items can add up quickly so you have to make sure that you are truly comparing apples to apples when deciding on office space.  

Before the lease is signed you also need to determine who will handle construction.  Is it the complete responsibility of the tenant or will the building owner be involved?  In multi-tenant office buildings, many times the landlord will request the building contractor do the work.  This can save time and money since the GC is already familiar with the building.  In many retail leases the tenant is solely responsible for all aspects of construction.

Additional factors…

  • What if you spend more than your allowance?  Most office leases require the tenant to reimburse the landlord for any overages with in 30 days of construction completion.
  • What if the tenant can’t afford the overages?  Depending on the financial condition of the tenant and landlord, sometimes the landlord can agree to amortize the additional cost over the term of the lease.  There will be a higher interest rate but this is done very often.  This cost is added into the rent and paid back monthly.
  • What if construction is not completed on time?  This depends on who is handling the construction.  If it is the tenant’s responsibility, or the tenant has caused a delay, rent will typically start as it is stated in the lease.  If the delay is caused by the landlord rent can often (but not always) be abated until all the work is complete and the space ready for occupancy.  It all depends on the language in the lease.

As always, it is important that the section of the lease regarding construction be reviewed thoroughly prior to execution.

If you have any questions or need additional information please feel free to contact me at 865-584-3967 or jcazana@ciprop.com

 

Justin Cazana, CCIM