MacRo LTD Blog

Field Notes: Understanding Tenant Improvement Cost

Posted by Ashleigh Kiggans on December 14, 2017 Leave a comment

Useful tips for navigating your new office buildout process.

Untitled design (18).pngYou’ve found the perfect location. Narrowed down the office size to one that will fit your company’s needs. There’s just one minor issue, the property needs work… a lot of work.  By this time, you’ve had the opportunity to sit down and meet with the landlord to discuss your company’s buildout requirements.

Where to Begin?

First things first: Make sure you are completely satisfied with moving forward the with the property. This is a vital step in the process. The importance of this step is to introduce you, the buyer/seller, to the buildout. Many people don’t realize that there is a cost that is involved to prepare the space plans. The architect, usually hired directly by the landlord, has a separate fee for each level of support provided. These initial costs tend to be covered by the landlord as part of the sales process. This is helpful since cost can run from $2,000-5,000 for preliminary drawings. And this is just the start of the fees….

Filling in the Drawings

The average office buildout for shell (no walls, no lights, no ceiling) could start at $30,000 plus for regular office spaces. Medical and lab spaces could be $100,000 plus. If there is additional plumbing involved, then that would push those prices up significantly.

Once you get through this part, it all comes down to the important, but difficult question, who is going to pay for the this?

Well, that question can be answered by looking at the two buildout payment options, Tenant Improvement and Financing:

Tenant Improvement Allowance (TIA)

The landlord will offer TIA within the asking price for the space. For example, an asking rate of $15.00/NNN could include a TIA amount of $25/per square foot. This money is essentially “free cash” given to the tenant to put towards the buildout. Occasionally, there will be money leftover that the landlord will allow a tenant to use for other various office items, such as equipment, furniture, and more.

Remember, this is NOT a part of every deal.

Financing: Amortization and Bank Loans

There are two times when financing can come into play for a buildout. First, the owner does not include any Tenant Improvement Allowance. Occasionally, there will be owners that choose to not provide any TIA. They will offer a reduced rent or free rent for the tenants to provide the money for the buildout. Or, they will give you the money upfront for the buildout expenses and spread out the repayment over the term of the lease. This repayment spread out is call amortization. To get an idea of the additional monthly amortized payments would be for a loan, check out this Amortization Calculator.

The other option when the tenant is asked to pay for their buildout expenses is to seek assistance from their bank. New and small businesses will have the option to explore SBA Loans. These loans can be very useful. One thing to remember when working with SBA loans is that your numbers need to be accurate! Giving your bank only estimates, could land you paying a large amount out of your own pockets.

Are We Ready to Move-in Yet?

Buildouts can be stressful for owners and tenants. One way to help relieve some of that upfront stress is to know your capabilities going into the situation. Don’t hesitate to have your real estate professional ask the tough questions about the buildout and who’s paying for what!

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Ashleigh Kiggans is a Senior Associate and has been a key part of the MacRo team since 2015. She plays a key role within the organization, assisting the leadership team across a wide range of initiatives, including market research, data analysis, client communications and marketing while also leading the sales and leasing transactional process.

Thoughts? Comments? We’d love to hear from you.

Topics: Commercial and Industrial Real Estate Ashleigh's Fields Notes