Making your rental property attractive to prospects is all part of the landlord game. Investing in a tenant build-out can increase your options. Find out more.
While most residential tenants rely on their landlords to fix things in their building, the story is very different for commercial tenants. It’s standard to go through a tenant build-out period whenever you’re looking to fill a commercial space with tenants. You can even attract tenants with the changes that have been made in the past or the types of agreements that you’ve allowed from former tenants.
Here is everything you need to know about a tenant build out.
What a Tenant Build-Out Mean To Owners
If you’re a building owner, you know that looking for new tenants is a constant effort and that you’re always in competition with other owners. The best tenants are going to want to make a space their own and customize interiors to their needs and specifications. Whether you invest in these improvements or simply allow them to happen, any kind of support results in the ability to attract the best tenants.
The kinds of tenants who want to make improvements are the ones who have the money and the wherewithal to make changes. However, before you issue a blanket agreement to support build-out, you need to get things on paper.
The improvements that your tenant wants to make are usually negotiated up front between you and the tenant. If you’re writing out a commercial lease, it’s a standard part of the agreement usually.
You need to be aware that the improvements are going to cost you something so that must be clearly outlined. You should set a limit in a specific dollar amount of what you’ll pay to have a specific thing built. Depending on the past usage of the space, there could be considerable build-out just from the point of removing material.
You’ll be able to attract tenants and impress future tenants by agreeing to a build-out but you need to protect your own interests.
Understanding the Costs
Improvements and the amount of time that they require are going to depend on the condition of the space. If a new pizzeria wants to open in an old bakery or even another former pizzeria, the costs are going to be minimal. If you have a “shell” condition space with no previous build-out to speak of, then it won’t cost as much.
Costs depend on the area where you’re located, how much specialized construction staff there is in the area, and how long it takes to get licenses. It could take you a while to get the permits that you need to build. It could take a few months depending on where you’re located.
In a second generation space that’s been filled out and occupied in the past, it’s going to cot a lot less and not take quite as long. If the initial electrical work and plumbing have already been put into place, the space won’t cost a lot to work with.
If the tenant is planning on totally reshaping and reforming the space, it’ll take a lot of time and could cost you more. The costs could come in the shape of lost revenue for you if it’s disruptive and disturbing to your current tenants. For anyone who’s lived next to construction, they can tell you how disruptive constant construction can be to day-to-day living and working.
Know What’s in Store
One of the first elements in most any build-out is the process of demolition. Your tenant will be removing the existing walls and tearing out portions that could be sensitive because of electrical or plumbing lines. You may need to supervise part of this.
If they make the effort to build or construct new sheetrock walls, then there will be cutting, plastering, and lots of dust thrown around.
New flooring requires tearing up the old flooring. There will be epoxies, solvents, and lots of hammering against the floor, disrupting any tenants below. Expect things to be painted as well, adding to the aromatic ecosystem of your building, usually in a negative way.
Make sure that the construction does nothing to hinder and, if anything, adds to the existing accessibility of the building. You could be hit with fines and irritated messages from any current tenants or their clients who need access to wheelchair ramps or elevators that are blocked.
Talk about everything thoroughly and if you’re worried about something that the tenant hasn’t brought up in your talks, bring it up. If they haven’t addressed windows but you can already see problems, make sure you talk about them until you feel comfortable.
What You Don’t Have to Worry About
When you’re talking about a build-out, you’re talking about structural elements or changes that are non-removable and will belong to you after the tenant leaves. You’re not talking about any of their office furniture, their signage, or anything that helps to improve or impact their business positively.
This is all about number one, you.
If they go above and beyond standard upgrades, opting for marble columns when sheetrock would have done, then that’s not your fault. If there’s any data cabling that needs to be run throughout the building, that’s on their dime.
Most commercial spaces require some kind of tenant building, as it’s pretty rare that an existing space is going to meet the needs of a commercial tenant.
Make sure that you have an architect on hand who can make sure that the tenant build-outs don’t upset the integrity or status of the building. If you have a building that’s been landmarked, you might have more hoops to jump through.
Tenant Build-Out Can Help Attract Prospects
If you’ve allowed tenant build-out and have worked with tenants to create smart and attractive upgrades, you can find a better caliber of tenants. When people know they’re allowed to make changes and the landlord will help them, they’re more excited to rent.
If you’re having to redo your commercial roof, check out our guide for details on making it cost effective.