There are several ways to protect your business when it comes to the improvement area in the lease. In some leases, the landlord won’t put together plans for the space and won’t cost them out until after the lease is signed. This isn’t the way we like to work, as it can leave a huge gap between what the landlord agrees to pay and what things will actually cost in the long run. If the landlord is responsible for doing the construction, they’ll be inclined to keep things under budget, as they’ll be under their own restrictions.
How should you deal with the improvements clause in your lease? Having spent 25 years in corporate real estate, we have a few ideas. We’ve always aimed to make sure the design and pricing were signed, sealed and delivered before the lease itself was signed, then make the lease a turnkey lease based upon the design. If the cost to complete the construction exceeds the landlord’s proposed allowance, you can always value engineer the floor plan. Any good agent can show you how to do this – all the more reason to have a tenant representative on your side.
Sometimes, however, it simply isn’t possible to cost out the design before signing a lease. Larger firms will generally have an idea of what their improvements will cost, so if their pricing from the landlord comes in higher than it should, they’ll know. If you don’t fall into this camp we’d recommend hiring your own person (outside of the landlord) to oversee the construction. This way, you’ve got someone in your corner when it comes to building out the space. This might cost you a bit of money but it will ensure that the costs you see are the true costs. Coming from a large corporation, I know firsthand that surprises in this area can really hurt an organization.
Sometimes one building can’t beat another building’s rate for rent, but they can give the tenant a lot of money towards improvements that if not used for construction can be applied against rent. We recently did a deal where this happened and we were able to get our client into a great building that they wouldn’t have considered otherwise.
Moral of the story: have people in your corner, do your homework and make sure you play hardball, or have an agent who will play hardball for you.