Most new lease transactions contain some type of tenant improvement, or TI allowance, to be provided by the building owner. Mistakenly, many tenants assume this allowance will not only cover all the costs associated with their design, permitting and construction of the TI’s, but that it can be used to pay all the ancillary costs associated with relocation to a new facility. This is a very common and inaccurate assumption.
Landlords typically address the TI allowance, and their strict rules for its proper use, in an addendum to the lease called a Work Letter. This section of the lease spells out the terms and conditions associated with the TI allowance, including how much is going to be paid and by whom, what those funds can be applied towards, and how and when they will be distributed. Unfortunately, most TI allowances only cover three categories of expense: (i) design, engineering and project management fees, (ii) permit fees and (iii) actual construction costs. 
In addition to these costs, the following is a list of additional items that are not always covered by the TI allowance.
- Phone/Data Cabling
- Security
- Phone Systems
- Audio Visual Equipment and Systems
- Furniture, including Workstations
- Moving Cost
- Signage
Improvements Outside of the “Building Standard”
The cost of these items can vary significantly, easily exceeding $25 per square foot depending on the circumstance, the types of systems desired, and the quantity and quality of new furniture. Given this dramatic financial exposure for tenants, it is critical to have an experienced brokerage firm and project manager working together on your behalf. Having these firms on board during the initial property due diligence, lease and work letter negotiations, and project implementation can help ensure you have a clear understanding of total project cost from the outset. This team of experts can negotiate more tenant-friendly language in the work letter, and also prepare more accurate budgets for the full scope of the project, thereby avoiding negative surprises late in the game. With the cross-functional support of a tenant advisory team, you can accurately evaluate the true cost of designing, building, outfitting and moving into a new facility.
© 2011 Hughes Marino, Inc. All rights reserved.
Hughes Marino’s industry leading Construction Management team has unmatched expertise in every type of commercial building project from tenant improvements to ground-up build-to-suits. With decades of experience in California and beyond, our project managers, engineers and LEED APs offer practical insights for the construction management professional.
