Tenant and property owner relations can be a bit tricky at times. There are so many aspects of a lease for both parties to acknowledge and understanding your lease details isn't always easy.

One section typically included in leases but seldom fully understood by tenants before entering lease negotiations is the tenant improvement construction process.

The Certified Commercial Investment Member (CCIM) Institute defines “Tenant Improvements” -- also known as “Leasehold Improvements” -- as “the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. These include changes to walls, floors, ceilings, and lighting, among others.”

In short, tenant improvement construction is done to configure a space to better suit the tenants’ needs. But it is important to understand the tenant improvement construction process and what to look for within the confines of your lease. Kenwood is here to deliver some insight into the tenant improvement construction process:

5 Steps of the Tenant Improvement Process

The Negotiation

When it comes to leasing commercial space, discussing tenant improvement construction is generally part of the lease negotiation. This is done so that the lease agreement can outline details such as the extent of the landlord’s contributions to the project.

When negotiating tenant improvement construction in your next lease for a commercial property, be sure to go over the following details:

  1. The Turn-Key Build Out – Turn-key build out provisions are the most tenant-friendly form of tenant improvement construction. This typically means that all improvements are explicitly listed within the lease and the landlord takes care of the permitting, construction, and pays for it all.
  2. Rentable vs. Usable – The cost of tenant improvements can vary greatly depending on if the lease specifies between work done to “rentable” versus “usable” space. If the lease says the tenant can make improvements to rentable space, work can be done to common areas of the building. Usable space agreements mean a project allowance is given based on the actual usable square footage of the building.
  3. Scope of Work – Does the lease specify what type of tenant improvement construction can be done? Examples include: repainting walls and floors, replacing floors, upgrading HVAC systems, electrical work, ceiling replacement, demolition or installation of walls, and more.
  4. Substantial Completion – A lease with tenant improvement construction provisions should include a substantial completion date. Major projects can take time and it is important to account for this time. It is a best practice to align the substantial completion date with the beginning of rental payments by the tenant.
  5. Additional Costs – Tenant improvement construction involves a lot of variables. This can lead to cost overruns and inflated budgets. Your lease should have an agreed-upon contingency plan in place for these instances. Make sure it answers whether or not overrun expenses are capped and who is responsible for those costs.

Construction Planning

The planning for tenant improvement construction can be broken down into three parts:

  • Design
  • Planning
  • Construction cost estimation

If possible, work with an experienced architect to design and plan the project. They will be able to guide you through the process and ensure that you’re satisfying building codes and ADA requirements. When choosing an architect or contractor be sure to ask the following questions:

  • Is the contractor licensed and insured?
  • Can they give you references/examples of similar tenant improvement projects they've completed in the past?
  • How much experience?

The architect or contractor you’re working with can help you estimate the cost of your project. However, when it comes to estimating construction cost, a completely accurate and final estimate may not be able to be completed until the final plans for the project are submitted to the city/municipality for approval.

Management of Construction in Progress

The construction of your project should be evaluated regularly. Ask to receive weekly reports to make sure milestones are being met and everything is aligned with the original project schedule. Reports should include inspection results, pictures of project progress, and any schedule updates or notifications of potential delays.

It’s also important to make sure utilities are all set up and ready for construction to begin to avoid delays.

Make sure you hire an experienced, licensed team that is familiar with building codes and regulations in the area where you are working to manage your construction.

Payment

The way contractors receive payment can vary; Generally, they are paid once the work is completed. There can be exceptions to this depending on the project requirements and contract terms. It’s important to make sure that these terms are clear and agreed upon upfront before any work is done to avoid any misunderstandings.

Certificate of Occupancy

After the project is finished and all inspections have been completed, you should receive a certificate of occupancy. This certificate shows that the work you’ve done to the property has been inspected and approved by all necessary local authorities and the structure is, in fact, livable and safe. Once you receive a certificate of occupancy, your space is officially ready to use for your business.

Learn how to create real estate success by downloading our guide: “Secrets to Your Commercial Real Estate Investment Success!”

At Kenwood, we are always happy to discuss tenant improvement construction with our prospective tenants. If you're interested in more information, contact Kenwood here:

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