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Office Space Construction: Costs and Considerations

Thursday, May 10, 2007   (0 Comments)
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A Member article submitted by Coalition Exchange Member Lawrence FitzGerald, Senior Vice President, Grubb & Ellis Company

Prospective tenants must deal with a myriad of factors, including location, access, visibility, quality of the property, and costs, when choosing an office space. For many companies, it is not unusual for office rents to be one of the largest components of a company’s overhead (labor costs being the other). One factor often-time overlooked is the cost and length of time involved in a build-out or renovation of office space.

In a typical lease scenario a landlord provides a tenant upfront money with which to design and construct renovations to its space. This money is often referred to as a “tenant improvement allowance” or simply the “allowance”. It is customary that the allowance is quoted as a dollar per square foot figure, (i.e. $10/psf). This “allowance” will usually vary depending on the condition of the space (shell space versus existing offices), the length of lease term (longer terms yield higher allowances), and the underlying credit history of the tenant.

With construction costs for key building materials increasing by 25% over the last 36 months, the allowance provided oftentimes does not cover the entire scope of work required. This can create a situation where a tenant must fund the shortfall, either by coming out-of-pocket with the difference or by the landlord’s amortization of the overage into the lease cost. Typically, the landlord or a contractor of the landlord handles the build-out for the tenant; in this case, it is not unusual for a tenant to request multiple bids for the work. If the landlord does not perform the work, a tenant will typically employ its own contractors.

Further, depending on the jurisdiction in which the building is located, the design and construction time frame may take anywhere from three to six months after the execution of a lease. A larger space with a more complicated design can extend the build-out process. Many tenants, especially those in the medical profession or government contractors with security issues, are often shocked when learning the real costs and timeframe involved in the process.

With today’s office rents continuing to creep up, the costs and time associated with a typical build-out can make a significant impact on tenants’ choice of space. The wise tenant plans well ahead and seeks the guidance of experienced professionals to aid in the process.



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