Selecting between Turnkey and Tenant Improvement Allowance Amount: Timing is Critical
By Brandon P. Wood on Nov 13, 2019
When you begin your office search, a few questions likely come to mind:
- What is my budget?
- Where will I be located?
- What kind of floor plan/layout works for my business?
For that third point, you might have a good idea of what will work for you. Perhaps you’re thinking “I know I need 10 offices, a break room, a receptionist area, and 10 cubes.” This is a good start and depending on the market, timing, location, and the space you select, it will help guide the next critical step you and your tenant rep must take.
Imagine you found the office you like – now comes the fun part! In a perfect world, you’ve allotted yourself plenty of time to negotiate the best office deal, which means negotiating your Tenant Improvement Allowance.
A Tenant Improvement Allowance can take the form of negotiating a fixed amount per square foot, which gives you the opportunity to have full visibility on where your allowance dollars are going. Or it could mean negotiating a turnkey build-out, which is a much more broad statement of the requirement that may be less headache for the Tenant but also offer less transparency on the cost of the build-out.
What is the Tenant Improvement Allowance Amount?
The Tenant Improvement (TI) Allowance amount is a key piece of any office lease negotiation. It’s money provided by the landlord to make the necessary changes to retrofit the office space for your specific business needs. When you negotiate a TI Allowance amount, you are gaining more control and the ability to track the expenses associated with building out the space.
What is a Turnkey Build-Out?
When you negotiate a deal based on the turnkey approach, you and the landlord agree on a plan for the space based on a negotiated price per SF rental rate. Depending on the amount of improvements required, this is done by either (i) provide some basic details about the TI work needed within the space (ie. add 3 more offices, new paint & carpet, and new cabinets in the breakroom) or (ii) have an architect put together an agreed upon space plan. Once the landlord has this information, they have a pretty good idea of what that cost will be and are able to get comfortable with a specific rental rate. This means that you will outline what you want the space to look like when you turn the key to enter your office space.
So, what’s the best approach?
It depends on what you want and how much time you have to negotiate.
Timing is critical. If you only have 2 months to conduct your search, you need to find a building that has the right “bones” in place. In this scenario, minimal improvements to the space would be required and timing is the more important factor. A turnkey solution might be the best option in that instance.
When you negotiate a TI Allowance, you have more ability to control the utilization of that allowance. Since you and your tenant rep play a key role in evaluating bids, you can adjust your plans based on including “alternates” in the construction drawings to keep costs in line with the negotiated TI Allowance. Once the bids have been reviewed and compared, you have the ability to select some alternate upgrades (solid surface countertops, nicer entry tile…) or remove built-ins, sidelights, etc. depending on the result of the bids. If the bids come in lower than the negotiated TI Allowance, rather than utilizing the difference to upgrades to the space, your tenant rep might be able to negotiate an amount that can be used to offset IT cabling installation or even abated base rent.
If you do a turnkey deal with the landlord, you are saying what you want done to the space — essentially, “here’s how I want it to look when I move in.” The contractor and the cost will be in the landlord’s control. The landlord is motivated to provide what you have requested but keep the costs as low as possible. After all, they are the only ones looking at the bids and writing the check for the work.
Why You Should Start Your Office Search as Early as Possible
Starting your office search and deciding your negotiation approach as early as possible will provide you the ability to make the decision of what makes the most sense for you. There isn’t a one-size-fits-all approach. Because every tenant’s needs are different, it might make more sense if you just need new paint and carpet to select a turnkey approach. However, if your needs are more complex and you have a large enough space with some term behind it, it could very well be worth your time to begin negotiations as early as possible and negotiate a TI Allowance.
Our office tenant rep team at CRA has over 25 years of experience helping companies negotiate their tenant improvement allowance. When you partner with our team, you’ll work directly with a senior broker who will make sure each item is negotiated thoroughly and other considerations are also being evaluated, including helping you price alternates and manage your project from start to finish.