Why Your Company Should Consider a Reimbursement Letter Before Signing a Lease

By on Jun 19, 2018

Once you have selected your new office or warehouse space and negotiated the business terms, it is a good idea to consider entering into a reimbursement letter with your prospective new landlord prior to signing the lease.

From the moment we tell the landlord “We have a deal,” it can take 60 days (or more) of back-and-forth negotiations before the lease is signed. With an advance reimbursement letter in hand, we can use that time to take the space plan for your new office or warehouse and begin preparing construction drawings.

By entering into a Reimbursement Letter, you initiate the architect’s work to finalize the construction drawings, send the drawings out to engineers to complete the Mechanical, Electrical and Plumbing plans (MEPs), and soon (usually in 30-45 days), you will have a full set of construction drawings that can be given to the contractors for final construction bids.

This process is about 60 days from start to finish, but during that time, you were negotiating the lease.  As a result, you have essentially accelerated the process because construction drawings are never initiated until a lease is signed.

With a reimbursement letter, you know exactly what it will cost to go into your selected building before you sign the lease. If you had signed the lease prior to entering into a Reimbursement Letter and the cost of construction exceeded your Tenant Improvement Allowance by $300,000.00, you would have to write a check for the entire construction cost over-run.

However, by being proactive and signing a Reimbursement Letter with your prospective landlord, you know the final cost of construction before the lease is signed. This puts you in a much stronger negotiating position, because you now have three options:

  1.   Sign the lease and pay the construction overage
  2.   Require the landlord to pay some or all the construction overage
  3.   Pay the landlord the cost of preparing the construction drawings and terminate the   lease negotiations.

With a Reimbursement Letter: 

Your company has essentially purchased an “insurance policy” against significant construction cost over-runs.

Negotiating Timeline with a Reimbursement Letter

Negotiating Timeline without a Reimbursement Letter

By entering into a Reimbursement Letter with your prospective landlord, you purchased an insurance policy against construction cost over-runs (which are common due to environmental issues, compliance issues and other unanticipated costs). While you may have delayed signing the lease, you acceleratedthe commencement of construction and the overall project.  Therefore, signing a Reimbursement Letter is a very efficient and useful practice that saves your company time and money.

Topics: Lease Negotiations

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