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Tenant Improvement Representation – DIY is not always the best option

Tenant Improvement Representation – DIY is not always the best option

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Company owners, business decision makers and investors often find themselves pondering the same question when looking for new space:  “How will the space we choose impact our business?”  Often there is a fairly good idea of how much and what type of space is needed and what area or location would work best.  Usually there is a notion of what the deal terms can be achieved.   Your commercial real estate agent should advise the client on not only on how to negotiate the best rate, but also how much Tenant Improvements Allowance or what level of turnkey Tenant Improvements (TI’s) can be procured from Landlord.   The TI’s are very important as it will make the new space functional for use.  Unfortunately, businesses without the in-house skills often attempt to manage the improvement of their space on their own.   “Do It Yourself” (DIY) is risky and can result in poor build-outs and significant cost overruns to be borne by the tenant.  In all cases, the tenant should have expert representation.

Turnkey Tenant Improvements

Typically landlords prefer giving the Tenant a TI Allowance to provide a turnkey approach to TI’s.  Turnkey solutions provide what the Landlord considers a move-in ready new space.  A conscientious landlord will listen closely to the tenant to understand the functions and requirements.  A functional space increases the efficiency of operations and employee productivity.  This provides a benefit to the Landlord as well as the tenant that may have promise of future renewal, e.g. sustainable revenue for the Landlord.

Turnkey solutions leave little wiggle room for the Tenant.  The architect, contractors and budget are controlled by the landlord or property manager.  The tenant, although involved in the process, may not have the resources or expertise to create the proper expectations from the Landlord and their construction team.  Adding to the problem is the fact that the construction budget is typically controlled and managed by the landlord.  For example if a tenant has a TI allowance of $30 per square foot, you can bet that a property owner will maximize the use of this allowance to improve the space and add value to their asset which could potentially help them lease that same space to other future tenants.  A Landlord would therefore have it in their best interest to overspend on the space beyond the tenants needs, when in fact it can occur that a tenant may receive rent credit for under spending the TI Allowance.  Another example would be when a Landlord push the tenant to improve a space beyond their needs “on their nickel” or force upgrades to the space which Landlord would be compelled to do anyway under the applicable zoning code.

By way of example a tenant construction project project may only equate to $22 per square foot.  However, a landlord explains the need to improve the common areas of the facility as part of a larger property initiative, costing the tenant a nominal $7 per square foot.  Here’s how the cost shakes out in the example above on a 5000 square foot space.

Shared Cost Tenant Improvements

When the cost to improve your space exceeds the negotiated TI allowance, the tenant has more control.  Why?  The Tenant is obligated to invest capital up front to ensure project delivery.  The silver lining is that in this case the Tenant has more ownership in the design, bid selection, budget and management of the project.  The downside is smaller businesses do not have building and construction experts on the payroll.

Tenant Improvement Representation

The Tenant’s representative during the relocation process, the property search and transaction is usually the broker or agent contracted by the Tenant.  Many broker’s roles are limited to the site selection, negotiation and lease transaction expertise.  However, many brokers have a property management or a construction management background as well.  This skill usually leads the broker to the Landlord’s side of the equation.  So who is the tenant’s advocate between the signing of the lease and acceptance of a newly “built out” space?  Who protects the Tenant’s interests during the tenant improvement and move in phase?

Most any tenants would be wise to protect their investment and contract with a representative who will advocate for their interest in all phases of the process.  This representative (Squak Creek) becomes an extension of the Tenant’s executive team.   Squak Creek expects you to do careful research prior to contracting a tenant representative for the improvement project, develop expectations, and inquire within your network of trusted network and ask your broker.  Expectations are necessary because they will be used to interview prospective representatives, and Squak Creek likewise expects you will find us to be helpful and a prudent choice of service provider.

Responsibilities of the TI Tenant Rep

When you consider hiring Squak Creek as your TI Tenant Representative we will be your advocate in selecting an architect to moving the company into the new space Our overall responsibilities would include:

Space Planning

  • Evaluate and advise with respect to the project’s costs, budget and schedule. Evaluate and advise with respect to code issues relating to the project.
  • Review designs during their development and provide recommendations on feasibility of construction methods and actions related to cost.
  • Review space plans with Tenant for approval.
  • Supervise preparation of project budget (hard and soft costs) to be presented to Tenant for approval.

Working Drawings

  • Consult with the project’s architects and engineers regarding drawings and specifications as they are being prepared.
  • Perform general review of working drawings
  • Submit working drawings to property manager for review.

Project Bids

  • Recommend/select contractors for bid.
  • Supervise bidding process.
  • Tabulate and analyze bids when received and make recommendation to property manager on contractor selection.  Insurance requirements will be thoroughly checked.
  • Award contract and process appropriate contracts.
  • Assemble Construction team.

Oversight

  • Review and monitor project’s construction schedules and budgets.
  • Assist in resolving any field or scheduling issues that arise during construction; consult with project’s architect if contractor requests interpretation of the meaning and intent of drawings and specifications.
  • Advise division VP, property manager, and tenant of schedule during construction; update this information as necessary.
  • Coordinate contractor activities with property manager as necessary.
  • Schedule and attend construction progress meetings with contractor, architect, and tenant, as necessary, to discuss procedures, progress, problems, scheduling.
  • Monitor and observe general construction progress and procedures.

Close Out and Move In

  • Coordinate punch list review with the Construction Team and Property Manager.
  • Final Inspection and sign off of the job site after final cleaning.
  • Tabulate and analyze bids from moving company.
  • Coordinate technology cut over with Tenant’s IT department.
  • Schedule move in.
  • Support cut over, move in of the tenant into the new space.

Cost / Benefit

What does a Tenant Representative cost to manage the Tenant Improvement construction?  What benefit is gained by hiring a tenant representative? [Move this line up above where it belongs…]  The price point is fairly common but depends on the regional market and expertise required if the project has unique characteristics.  Expect to budget a minimum 4-5% of the total job for a tenant representative.  We also suggest a percentage of the savings of the unspent TI allowance as a form of compensation.  The benefit is your assurance that as your service provider we are maximally motivated to save the tenant money but deliver a quality space.

Poor quality means no future business, an angry tenant and an angry landlord or property manager.  Consequently, high quality, attention to detail and budget awareness is very important. The example below makes the process look easy.  It is not that cut and dry.  Always be aware that hiring a tenant representative is protecting one of your organizations larger investments.  Doing it yourself is just another way of getting into a hole that may difficult to get out of.  Frankly, the cost is nominal.

Please see the following article for the reasons it is smart to have Tenant Representation:

“The Many Hats of the Tenant Rep Broker” Coy Davidson, SVP Colliers International – Houston

http://www.coydavidson.com/2010/05/18/the-many-hats-of-the-tenant-rep-broker/

Protect Your Investment

Squak Creek Consultants brings together the resources you need to protect your Tenant Improvement project.  We will save your company money and help you realize the very best for your organizations facility based on your needs.  Contact Squak Creek Consultants to protect your capital investment.

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