Consider Three Common Options for Initial Buildouts

January 28, 2016
| Share | Print

When most tenants are looking at office spaces to lease, they usually do site visits with their architects and engineers. That is because most spaces will need to be modified to fit the tenant’s particular needs. If a tenant has many offices, then it has a very good idea of what it wants to build (or have the landlord build for it) and maybe even has an idea of how much the buildout is likely to cost. However, problems can arise if the tenant is new to construction and doesn’t have the expertise in-house to handle one of the most important parts of its lease. While the list of options to choose from in connection with the initial buildout can be reduced to three options, tenants should be aware of the various challenges and pitfalls of each—and be prepared to carefully negotiate. The three most common options for initial buildouts are:

•The tenant does the initial work and the landlord provides a tenant improvement allowance to cover a portion of the cost of such work; or

•The landlord does the construction up to an allowance cap, and costs in excess of the allowance cap are the tenant’s sole responsibility; or

•The landlord does a turn-key buildout (that is, the landlord pays for the entire cost of the buildout).

There are various factors to consider before deciding which of the options is ultimately the most appealing, among them, control of construction, risk of holdover at an existing location, quality of construction, size of the tenant, and familiarity with the market and the contractors. And be aware that you should also consider the strategies and analysis that must be undertaken before deciding whether the landlord or you will perform the initial construction of the tenant improvements. It’s crucial to work with your attorney to determine which lease terms will best protect your interests. For examples of typical landlord clauses in each of the three scenarios above and tips on how to effectively negotiate those sections to your benefit, see “Protect Your Interests in Initial Construction of Leased Space,” available to subscribers here