The Tenant Improvement Process

   

Entering into a new lease on a commercial space can be simultaneously exciting and intimidating for a business owner doing so for the first time.  Remodeling that commercial space to meet your specific needs is even more so.  Ideally, start looking for space one year before you plan to move in, because if a remodel is necessary, the process takes a minimum of six months, and usually longer.  And while you want to identify and negotiate your lease early, you want to delay the start of rent payments until your move-in date, if possible. Most building owners will want rent payments to begin shortly after the lease execution, so a compromise may be necessary.  It is advisable to retain a real estate broker who can facilitate this negotiation on your behalf.  Nonetheless, retaining an architect that specializes in fast tracking tenant improvements will be in the best interest of all of the players involved.

Once one or more possible spaces have been identified, this is the time to consult with an architect or commercial interior designer.  First, we will develop a program, based on your ideal workflow, brand, and other requirements necessary to maximize functionality and profitability. We can help determine if any of the spaces identified require a remodel, and what level of remodel, as well as examine how to accomplish your goals in the most cost-effective way.  For example, flooring, paint, cabinets or countertops can be changed, and furniture partitions or screens can be added, without requiring a permit.  However, adding any new walls or changes in the electrical or mechanical infrastructure will require a permit.

Once a building permit is obtained, construction can commence.  Construction on a relatively small interior project (approximately 4,000 square feet) may take anywhere from one month to six months, depending on the scope of work.  If there is any exterior work involved, the design must be submitted to the Planning Department and/or Design Review Board for approval before the construction drawings for permit submittal can be started.  This process can take anywhere from a few weeks for a small change, to several months depending on the scope of the project and the city.  If the proposed exterior work is minor and the tenant can live through the construction, we might recommend that the exterior work be permitted separately and completed as a second phase, so that it does not delay occupancy of the interior space.

When permitting a project, the city will require that existing code violations be corrected.  This may add cost, indeed, even double the cost of your project if it’s in an older building.  The architect or designer will be able to estimate construction costs at the beginning of the project before you commit to a lease, another reason why it is important for the architect to be on board before the lease is finalized.  Once the design is partially complete, the architect may ask a general contractor to provide a more accurate cost estimate of the project, which most will do at no cost in the hopes of being hired for the project.  When the construction drawings are complete and submitted to the building department, the drawings are given to one or more general contractors to provide a hard bid, a process we, the architect, facilitate. Additional costs, called change orders, may arise, so it is recommended to add a 10% contingency or cushion to the original bid.

The good news is that you may not have to pay for 100% of the project’s cost.  Building owners often provide a tenant improvement (T.I.) allowance which can be applied to your remodel costs as an incentive to lease their space.  This allowance is actually more like a loan than a gift, as the money fronted is incorporated into the monthly rent.  It is not uncommon for building owners to offer an allowance anywhere from $10 to $25 per square foot for second generation space, or as much as $50 per square foot for shell space in which case much of the allowance will be utilized for mechanical and electrical infrastructure.  An allowance is more common when it is obvious a space requires a remodel, however, if a space is in “move-in” condition, then an allowance may not be offered.  A real estate broker can assist with your allowance negotiations as most interior commercial remodels will exceed an allowance, and minimizing your out-of-pocket cost will undoubtedly be your goal.  In the recent economy, many building owners are offering “turnkey” deals, meaning that they’ll pay for the entire upfront cost of your remodel.

Even if a remodel is not required, it is often worthwhile to make one or two minor improvements to the space, such as the addition of a focal point that will attract customers, or a small change which will make a major impact on productivity.  In summary, it is important to identify spaces early, determine what improvements are desired, and hire qualified professionals to assist you.