BY JOHN COAKLEY
When evaluating a real estate decision, many tenants naturally gravitate toward focusing on the rental rate. This is important, but it is not everything. Tenants contemplating a move should consider the many buildout costs— and even potential financial pitfalls—associated with relocating.
While some commercial tenants lease new space as-is, the vast majority of spaces will require at least some improvements or buildout. But before setting up shop in a new space, it is important for tenants to review their current lease to understand what, if any, obligations they have to their current landlord. Upon vacating, installed systems, furniture, flooring and IT cabling might have to be removed from the space. This is called decommissioning, and it can be a considerable expense.
Then there are the costs associated with improvements in the new facility: There are hard construction costs (materials, labor etc.), soft costs (architectural, project management fees, etc.), and miscellaneous costs that landlords typically will not touch, such as cabling and security.
The landlord may provide the tenant funds to make some of these improvements in the form of a tenant improvement allowance (TIA). Agreement over the TIA should be a part of any preliminary negotiations between a landlord and a tenant, but to know how much of an allowance is required (or desired) requires an understanding of roughly how much the proposed improvements will cost. Tenants can get this estimate by engaging an architect and a contractor early in the process, all of which can be facilitated by a dedicated project manager, who will provide oversight of the whole process. The landlord will sometimes make this connection, but having your own objective resources tenant can spend its TIA. A landlord may allow a small portion of the TIA to go toward soft costs but will want most of those funds spent on hard improvements.
Tenants should also consider furniture, which can be an expensive line item, in their relocation budget.
Should I Stay or Should I Go?
Of course, before an organization begins evaluating relocation strategy, it must first weigh the options of maintaining its present space vs. finding new space. Extending or restructuring your present lease as well as upgrading your space will likely be much less costly and disruptive than a move.
In any event, it is a good idea to let your landlord know you are in the market. It is much easier for landlords to retain their current assets rather than find new tenants. As a tenant of good standing, you can use this as leverage in your negotiations, regardless of market conditions.
In short, relocating tenants need to consider:
- The full scope of the project (hard costs, soft costs, furniture, relocation costs etc.)
- How much TIA the landlord will provide (and how it can be spent)
- What leverage their real estate service provider can provide
Companies are advised to consider objective commercial real estate advisory firms where brokers and project managers work together to represent the tenant’s best interests while not being beholden to the landlord. These accountable real estate advocates can help tenants navigate the sometimes tricky waters while negotiating with the landlord to achieve the most favorable agreement and keep moving costs as low as possible.
There is a lot at stake. So count the costs, and make sure you can count on your service provider.
John Coakley, a Vice President at Cresa Boston, specializes in the Cambridge and inner-city markets. John can be reached at email@example.com. Cresa LLC, based in Boston, is North America’s largest tenant-only commercial real estate firm. In representing tenants exclusively — no landlords, no developers — Cresa provides unbiased, conflict-free advice.