Stop me if this sounds familiar – you’ve started a home renovation project and have a good idea of how long it will take and how much it will cost; fast forward several weeks and you’re abysmally behind schedule and substantially over budget.
This is the Murphy’s Law of renovations: the project will always take more time and cost more money than first anticipated. The same holds true for renovating or building-out office space.
This blog takes a look at what typically goes wrong in office build-outs and what tenants can do to keep both the length and cost of their project down.
According to industry guidelines, the general length of an office build-out from start to finish is approximately 17-21 weeks. The process is divided into the following five phases:
Typically, timing issues for building-out new office space will arise for one of the following reasons:
- The landlord did not provide a long enough fixturing period or the tenant’s agent neglected to negotiate a long enough fixturing period
- The tenant’s agent did not properly set timeline expectations or lacked the experience to adequately judge how long the process would take
- The tenant encountered issues obtaining a building permit
Based on my experience, trouble at the beginning will affect the entire process; much like dominos, if the first one takes too long to drop, it slows down the whole line. As each phase is highly reliant on the others, it becomes extremely difficult to make up lost time.
The time to start planning for your build-out is during the lease negotiations. When drafting and negotiating the offer to lease, tenants should always discuss the amount of time they will need to complete the build-out, adding in 2-3 weeks in case “speed bumps” are encountered.
One of the biggest and costliest mistakes an inexperienced or ineffectual agent can make is not negotiating an adequate fixturing period for their client. If the fixturing period runs out before the tenant is finished construction, they will end up having to pay rent while completing their build-out – and they won’t be happy about it.
However, negotiating the appropriate fixturing period is not as easy as it seems; landlords’ refusal to provide adequate fixturing periods is a common issue during lease negotiations. Based on the phasing chart, you can easily see how a tenant could very well need a fixturing period of up to 6 months, however landlords are already loath to offer tenants the required 2-3 months.
While negotiating with stingy landlords can be a hassle, by far the most headaches are caused by getting a building permit. In my opinion, issuing permits to complete an office build-out amounts to nothing more than a money-grab from city hall; however, unless a politician changes this rule, it is something we must deal with. Make sure you allow for the four weeks it will take to get the permit when negotiating the offer to lease.
The take-away for tenants and inexperienced agents: Always be conservative when estimating the time needed to complete the build-out and negotiate hard for an adequate fixturing period.
Much like everything else, the cost to build-out office space is exponentially higher today than it was in the past. What could be done for $50,000 ten years ago will cost $100,000 today.
As part of the lease negotiation, tenants will typically receive a Tenant Improvement Allowance of anywhere from $15.00 – $35.00 psf (the amount of this allowance depends on many factors that I will address in a future blog); however, what tenants are sometimes not aware of is that the allowance may not cover the total cost of the build-out. Tenants who don’t take the extra time to work with their agent and a qualified space planner to determine the total cost of the build-out, often find themselves covering costs out of pocket.
When leasing or purchasing office space, there is always a good chance some sort of construction or build-out will be needed. Without the proper advice from someone experienced in the build-out process, things can go very wrong, very fast.
To make the process as seamless as possible and not incur excessive costs, look for an agent with experience in lease negotiations and build-outs who can guide you smoothly through the process. Remember, much like the line of dominos, the smoother your project starts off, the smoother it is likely to finish.