When considering a new office lease, it is important to understand the typical protocol of landlord construction management when building out lease space for tenants. As a prospective tenant, you may feel that a Tenant Improvement (TI) allowance of “X” dollars PSF is more than adequate to cover your required alterations to your future office. However, remember that most landlords employ a third party construction management (CM) company to oversee the process of the tenant buildout. Their job is to ensure the buildout is completed to code, per the plans and on time. However, being within the allocated budget is not a primary goal. To the contrary, the typical CM is dealing with multiple tenant finishes, move-outs, walk-thrus, repairs, etc. and does not have the time to concentrate on getting your buildout costs down to the best price possible. Nobody is as concerned about your buildout costs as you. Therefore, pay attention and get involved.
CM’s charge a management fee, which is deducted from your buildout allowance, typically 5%. Also, they may insist on using their architect for plans (even when they may not be necessary). On smaller buildouts with no structural modifications to ceilings, walls, electrical, etc. you may not need a permit…or formal plans. Sometimes they also charge for rekeying the space and adding your nameplate to the door…all possible negotiable items if handled up front.
Lastly, CM’s refer a substantial amount of construction work out to general contractors. And if you think there are not incentives which are OFTEN “kicked back” to the construction manager, you are mistaken.
Four (4) tips when leasing office space and using the landlord’s CM:
- Use an experienced commercial real estate broker when securing office lease space and to help with the entire transaction. They can help you avoid getting taken advantage of by the landlord and its CM.
- Always confirm what improvements the Landlord will allow to be covered by the buildout allowance.
- Ask about the construction manager’s fees which will be passed along to you as the tenant.
- Ask if you can have your own contractor either handle the buildout or at least bid on the work. If they won’t allow your contractor to do the work , at least get your contact to provide a “check bid” so you know if you are being ripped off.