Tenant Improvements

Building

Online Resource Center

NCN Webinar I Transitions
NCN Webinar I Better Build Outs: Managing Tenant Improvement


From the webinar “Better Build Outs: Managing Tenant Improvements,” October 26, 2011.

 

Broker Perspective – Anthony Shell
Listing Representation – works on behalf of landlords, leasing and marketing space on their behalf
Why hire a listing broker?
You have someone who will market the space to the entire market and puts a professional face on the building.

Hire a broker: If the building is Large, lots of vacancy, absentee landlord, or repositioning and rebranding the space.

 

Building Team

Architect – important that they are willing to learn what can or cannot be done with the building. Smaller, one-person firms are usually very economical and very valuable

General Contractor – very important from the cost side of this, and can help to reduce the tenant improvement costs for what they do

Project Manager – helps with the move-in/move out process. Time saver

 

REAL ESTATE ATTORNEY

  • Creates lease document with landlord for use with all tenants
  • Negotiates lease terms with tenants, tenant’s attorney
  • Important from liability standpoint for landlord

 

Tenant representation – works on behalf of tenants, surveying market, available options, touring, negotiating, proposals, and leasing

 

TENANT IMPROVEMENTS:
Work done on specific suite for tenant
Usually completed by landlord for tenant as part of lease transaction
Landlord benefits from controlling who does construction in building on behalf of tenant
Tenant is occasionally permitted to do construction, however with authorization from landlord on who does work/what work is to be done“

 

SOFT COSTS: Any non-construction items related to build out of space
Architectural drawings (space plans, construction drawings)
Permitting costs“

 

HARD COSTS:
Actual construction done in space
Includes items such as demo, framing, sheetrock, paint, carpet, etc.

 

“TURNKEY” TENANT IMPROVEMENTS: • Tenant improvement package done on behalf of tenant by landlord that includes everything related to work • Both hard & soft costs • Pros:Great selling point to prospective tenants, excellent if proposed tenant improvements are inexpensive for landlord • Cons:If landlord is not aware of total hard/soft costs, can leave landlord exposed • For smaller projects, turnkey is best solution

 

TENANT IMPROVEMENT ALLOWANCE:
Landlord provides a dollar allowance per sf for tenant to use as they want for the space
Landlords traditionally want to use building general contractor for work, even if tenant is deciding what to or not to build in space
Whether allowance includes hard & soft costs is part of deal negotiation

 

“WALKING THE SPACE” WITH YOUR GENERAL CONTRACTOR:
Important for landlord to understand/price likely tenant improvement requests from tenants
Walk all available spaces with general contractor
Determine tenant improvements for each individual space
Bid all work through general contractor to understand price ramifications of work
Factor likely work in to rent numbers
Full understanding of likely tenant improvements will allow landlords to push turnkey tenant improvement packages at higher rental rates

 

EXAMPLE OF FACTORING IN TENANT IMPROVEMENTS INTO RENT:

  • Suite:1,000 SF
  • Estimated improvements:Carpet, paint & some demo/touch up items.Est. = $10/SF
  • Total tenant improvement costs:$10,000
  • Proposed lease length:3 years
  • Interest rate:7%
  • Cost to tenant:$.31/SF
  • Proposed asking rent w/ no tenant improvements:$1.50/SF
  • Proposed asking rent w requested tenant improvements:$1.81/SFIn short, you will need to charge tenant $.31/SF/month extra on rent to complete tenant improvements.

 

DEALING WITH SPECIAL USES/REUSING SPACE IN THE FUTURE:
• Overall, space use should be in line with project “feel”
• For office buildings, lease to office tenants
• If retail building, lease to retail
• Willingness of project to handle tenant improvements on behalf of incoming tenant is based on overall deal terms, as well as ability to reuse new tenant improvements in future.

 

EXAMPLES OF SPECIAL USES/TENANT IMPROVEMENTS:
Generally, any build-out that is outside of traditional tenant improvement or office use should be paid for by tenant (either directly or through add on to rent).

  • Huge private offices (“ego offices”)
  • Dense office or conference room build out
  • Pony walls (half height wall with a built in cubical) or built-in cubes
  • Extra plumbing

 

HOW DO SMALL PROJECTS HANDLE BUILD OUTS/TENANT IMPROVEMENT COSTS:
• For smaller projects, “As-is” leasing can be utilized
• Important to get spaces in clean, ready condition
• Paint touch-up, carpet shampoo are alternatives to new carpet & pain
• Explanation to tenants is any tenant improvements will be at their cost & expense

 

HOW DO SMALL PROJECTS HANDLE LEASING EFFORTS WITHOUT BROKER:

  • Market property in local paper, craigslist, social media (facebook/LinkedIn/Twitter)•
  • If procuring broker brings tenant to project, explain that commissions are paid by tenants at project
  • Still important to put together marketing flyer for building

 

HOW DO SMALL PROJECTS HANDLE LEASING /MARKETING EFFORTS WITHOUT ARCHITECT

  • Following points above, get spaces into market-ready condition and have space plan done for each space
  • Include space plan for lease or sublease exhibit
  • No new space plans for tenants who do tenant improvements on space themselves/Space planning is at tenant’s cost, as is build-out

 

MAINTAINING CONTROL OF TI PROCESS:
If tenant improvements are to be done, landlord’s contractor is one doing it
Work that is done is per the lease negotiations, nothing more
If tenant improvement allowance situation, landlord’s contractor still does work
Any contractor working in building on behalf of tenant is approved by landlord

TIMING & PENALTIES FOR NON-DELIVERY:
•Lease and sublease documents will have sections outlining how and who will handle the build-out
•One of main issues in section is what happens if delivery of possession is delayed
•If work is delayed, offer free rent as landlord penalty
•Traditional penalty timeframe is 30-90 days past when space was supposed to be delivered to tenant
•Landlord should push for 90, tenant will push for 30

 

Lease Exhibits
Delivery of Possession
Turnkey Tenants Improvements
Tenant Improvement Allowance

 

Project Management Perspective – Kim Frentz Edmonds
Project Management – comprehensive from financing, pre-construction, construction, and tenant move in.

Project Management is planning everything possible ahead of time, and then it’s all keeping things on track.

Tools:
What is your schedule? What are the activities that have to go into it?
Time is money
-Lease payments and interest
-Tenants have to give notice in their existing space, so you don’t want to leave too much delay
-Lost rent if the tenant could’ve been move in.

 

Who is the project manager?

  • If you have a large enough organization and center, where you have in house staff with construction experience and can have dedicated time for the project, then do it in house
  • If it is really small, the architect can be the project manager. You still need a liaison from the landlord. to make sure the timing and financing is working.
  • Bring on a third party project manager for large, complex projects, especially if you don’t have staff with construction expertise.

 

The Work Letter
This is a lease exhibit that identifies who is doing what, landlord vs. tenant.
-Submission requirements and Landlord review: Schedule, Budget, Plans, Permits, Insurance, Subcontractors
-Schedule for completion and delivery of space
-Define terms
-Landlord needs oversight of the work if the tenant is doing the work

 

Common Terms
-“Core and Shell” -Core and shell covers base building elements such as structure, envelope, common areas, elevators and the HVAC system.
-“TI” –Tenant Improvements includes the components of the space not included in Core and Shell.
-“TI Allowance” -Tenant Improvement Allowance is funds provided by Landlord for use in construction of Tenant Improvements.
-“Approved Plans” –Plans reviewed and approved by Landlord and then approved and permitted by relevant agencies.
-“Specifications” –Detailed descriptions of components, fixtures and equipment included in construction scope.
-“Substantial Completion” –When construction is sufficiently complete so the owner can occupy or utilize the work for the use for which it is intended.

  • WHO MANAGES THE BUILD-OUT? Tenant-Sophisticated tenants with construction management capacity -Limited scope improvements with specialized knowledge requirements Landlord-Projects that involve work with complex or major building systems -Projects that are time sensitive and cause potential disruption for other tenants
  • HOW TO MANAGE THE FINANCES? Tenant Disbursements -Evidence of Tenant funds -Typically must be made before Landlord funds invested -Track disbursements and require lien waivers from contractors Landlord Disbursements -Two party to contractor/Tenant -Reimbursement to Tenant -Directly to contractor with Tenant review and approval
  • HOW TO MANAGE THE LOGISTICS? -COMMUNICATION with all tenants -Specifics of scheduling –hours of work, hours for deliveries, hours for noise, utility disruptions -Specifics of deliveries –paths of travel and storing materials -Use of elevators and other common areas -Planning ahead to mitigate unforeseen problems . Triggering alarm systems . Damage to building systems . Other
    Must have continuity from the beginning to the end of the project, making sure that all of the specifics are documented, as well as milestones which may trigger legal requirements.

 

Landlord – Paula Mayo, The Interchurch Center
The Interchurch Center

  • Located on the Upper West Side of New York City
  • Houses offices and agencies of various religions, and of ecumenical and interreligious organizations
  • All organizations housed in the building are 501(c)(3) not-for-profit corporations
  • Construction was completed on this 19 story office building in 1960
  • This steel and masonry building with a facade of limestone and granite, occupies one city block. It includes mechanical spaces, parking and a cafeteria in the sub levels, meeting rooms on the first level, Medical Offices and a research library on the 2nd floor, and office space on the 2ndthrough 19thfloors
  • This building is occupied and operational seven days a week
  • Has its own zip code
  • Has a chapel

 

Tenant Work Policy

  • Tenants accept space as-is
  • Tenants are responsible for building out their space, in accordance with their lease agreement with the policies of The Interchurch Center (TIC)
  • Work in the building must be done with union labor

 

The Lease

Building Standards are outlined in the lease documents:

  • Design and construction standards include wall construction, ceiling tiles specifications and other finishes
  • Building rules and regulations are also outlined in the lease
  • Rent commences with possession of the space not occupancy (when they sign the lease)

 

Pre-Construction: Construction Document Review
Documents are reviewed from various angles:

  • Building management reviews for compliance with building standards
  • Building engineer staff reviews for coordination with existing systems, and to avoid possible interruption to other tenants’ services
  • Engineer of record (usually an outside entity) reviews for compliance with state and local codes
  • Tenants must file all work with the proper authorities once landlord has reviewed and approved work

 

Pre-Construction: Contractor Selection
Contractors are selected by the tenant but must be approved by The Interchurch Center:

  • TIC provides a list of preferred building contractors for reference
  • Tenant must provide references for contractors new to the building
  • Contractor must have performed work similar in scale to the current project

 

Pre-Construction: Filing

  • All work must be filed with the NYC DOB and other local authorities:
  • A pre-construction inspection must be done to ensure there is no disruption of positive materials(i.e. asbestos) (if present), and proper paperwork must be filed depending on the work required
  • Work cannot be performed until permits are in hand and displayed
  • All forms are signed by the President & Executive Director of TIC

 

Construction

  • The tenant is responsible for the construction financially and from a management perspective (and they require financial statements)
  • Weekly job meetings are held and include the tenant PM, their contractor, the building manager and building engineer
  • During construction building management ensures access to all building systems is maintained
  • During construction building management coordinates with the tenant’s contractor to ensure work disruptive to other tenants (i.e. core drilling) is coordinated and does not interrupt their operations. Demolition is to be scheduled after normal business hours, Monday –Friday or weekends.
  • Staging of all materials must be done within the tenant’s space

 

During construction building management coordinates with the contractor on items such as:

  • Deliveries
  • Removals
  • Tie-in’s to building systems
  • Bringing systems offline
  • Sprinkler drain downs

 

All overtime for building personnel is billed to the Tenant. Some work the tenant performs must be done by base building vendors such as:

  • Mechanical controls
  • Fire alarm work
  • Keying of door hardware
  • Voice/Data cabling

 

FFE
Delivery of furniture is coordinated with the building
Installation of internet connection is provided by the in-house building team
Installation of phones is done by in-house building team
Tenant is responsible with setting up computers and other equipment

 

Completion of Build Out and Move In

  • Any punch list work is managed by the tenant
  • Move in is coordinated with building management for freight availability
  • Weekend move ins are preferred
  • TIC can provide porter services at a cost to the tenant
  • Building management prepares an abstract of tenant’s lease terms for distribution to ownership and The Interchurch center accounting department for billing purposes once lase has been executed by tenant and landlord.

 

Do you charge the same rate of rent during build out as occupancy? Yes. The lease is the lease. You are incentivizing the tenant to complete their work on time. Some generous landlords provide free rent for a f reasonable period of time.

 

What about groups that want to do TI through volunteers. ? TIC couldn’t allow this because of insurance complications. That’s a very dangerous area to get into.

 

Furniture Standards: TIC has base furniture standers for cubicles and similar resources, but the rest is open to interpretation. Colors on the wall and ceiling tiles are standard as well.

 

When would you bring a broker in?
Depends on the amount of available spaces
10 little suites or one large one
that determines the amount

 

IS there a standard broker commissions – varies by market . In NYC the rents are high and the brokerage commission is usally a percentage. On the west coast it’s usally a dollar amount per square footage over a period of years.


Last updated byLeena Waite