Part 9: A tenant’s first task in planning the build out of its premises is identifying its team.  This team can consist of one or a number of consultants, which include space planners, architects, engineers and contractors.  The first step the tenant should take in considering its team is determining what the Landlord has to offer, and/or requires, with respect to these professionals.

It is not uncommon when leasing space in a new building that the landlord will have one or more of these professionals available for use by the tenant if they participated in the original construction of the building and, if a good portion of the new space is still left to lease up, the landlord may make its space planner or architect available to a serious tenant at no charge.  Likewise, professional and institutional Landlords (or their property managers) who manage multi-tenant buildings that have ebbs and flows of tenant turnovers, may have developed relationships with such professionals, or are otherwise aware of such professionals that have performed work on their buildings, and can provide some recommendations to  a potential tenant.

Though a tenant may feel that it knows how it wants to set up its space to operate its business, a good space planner or architect can serve as a reality check to the tenant  as to what can be done, and for what “ballpark” cost.  For example, a change in the lighting fixtures in one portion of the space may require an upgrade of lighting throughout the space pursuant to local code and thereby create some unexpected costs.  It is important for a tenant to know what it will cost to locate its business into new premises, and having this knowledge, and an idea of what portion of this cost  should be reasonably passed on to the Landlord (e.g. bringing any systems up to code), will be helpful in negotiating with the Landlord for a fair tenant improvement allowance.  This is another reason why a tenant should go through its planning process before entering into a lease for the site, or at least have a right in the lease to terminate if the plans or costs do not work out.

Once the space planner or architect designs the layout of the premises for the efficient operation of the tenant’s business, this layout should be submitted to the Landlord, not only for approval, but also for any comments the Landlord may have based on its knowledge of the premises, including the location and capacities of the electrical, plumbing, sewer, and HVAC systems, and load factors, of the space.  Though such information should be indicated in the plans and specs for the premises that, in a perfect world, the Landlord should have and provide to the tenant before undertaking its space planning, more often than not, such is not the case, especially in older buildings with a long history of past owners.

Once the Landlord approves the space plan, the next job is to have an architect or engineer (or if the work is minor enough, a good contractor) prepare construction drawings sufficient to obtain local building permits for the work to be done.  An experienced engineer or contractor preparing the drawings will generally be able to give the tenant an even better estimate of what the cost of construction should be for the anticipated work.  Again, the Landlord will wish to approve these drawings before they are submitted with a building permit application.  The Landlord will be concerned with issues that involve any portion of the work that may affect the building’s structural integrity or require any penetrations of the roof or exterior walls of the building.  In these instances, the Landlord  may require that its contractor or roofer be involved in such work at tenant’s expense.  Also, the tenant should be aware that notwithstanding any approvals made by Landlord with respect to the drawings, the Landlord will always disavow any responsibility if such drawings are not consistent with local building codes and regulations and will require the tenant to make any necessary adjustments to the drawings to put them in compliance, at tenant’s expense.

Once Landlord approves the construction drawings, the next step will be either to submit the drawings for a building permit, or first put the drawings out to bid, which is dependent upon a few factors, the most important being who is going to do the work; a contractor selected by tenant, or a contractor selected by Landlord (preferably through a bidding process).  Though the tenant may want to get a quote for the work from the bidding process before deciding to go forward with the project, and spending money on the permit applications, there may be a time clock ticking on how long the tenant has to go through the planning, approval, permitting and construction processes, before the tenant may be obligated to pay rent, so the tenant may not have the luxury of going through a second bidding process if, through the course of obtaining the building permits, material changes are made to the plan by the local planning department that would affect the costs of construction.

To protect itself from surprises in the bidding and construction permit approval process, the tenant should negotiate with Landlord to establish an “Upset Cost” whereby if after obtaining the building permits, the construction bids put the cost of the project above a certain price (the “Upset Cost”), the tenant has the right to terminate its lease and cut its losses.  If a Landlord is insisting that its contractor be used in building out the space, the Landlord should be open to an Upset Cost provision.  If the Landlord agrees, it will likely want to use the Upset Cost provision as a basis for disapproving plans, or components thereof, that will cause the upset, and if an upset occurs, require the parties to negotiate in good faith for reasonable changes to the plans with the contractor in order to come within the Upset Cost.

In the next part of our series, we will review the last two parts of building out the premises, the construction stage and delivery stage, and the alternative process of a premises build-out, the design/build method.

By |2019-06-07T09:37:58-07:00May 22, 2019|Commercial Real Estate|

About the Author:

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Steve has more than 30 years of experience in greater Sacramento’s real estate community. He brings unrivaled depth and breadth of knowledge of real estate law to the negotiation table representing commercial developers of retail, office, industrial/warehousing and residential projects with the acquisition, land use, development, construction and leasing of their properties. He negotiates on behalf of sophisticated landlords as well as anchor and credit tenants and knows the critical issues of both sides. Steve represents financial institutions and developers in negotiating real estate secured loans and workouts. He also assists developers in forming entities to hold their real estate interests for tax purposes and investment strategies. Read more about Steve here. Contact Steve at [email protected]