August 5, 1998 in the COLORADO
REAL ESTATE JOURNAL
Take the Sting Out of "Sticker Shock"
by Warren Kieding
TOO BAD YOUR NEW OFFICE lease space doesn’t come with a window sticker like your new car did. You’d have all those esoteric fees like tax, title and dealer prep spelled out for you in neat, line-item detail. You’d know what’s included and what you’d have to pay extra for. And you’d know it upfront, before making any decisions you might later regret.
Unfortunately, leases for space don’t ever work that way. Like a new car, today’s office leases have many, many moving parts that define the bottom line. And with shrinking improvement allowances, and escalating rents and construction costs, the tenant can often end up more confused than enlightened by the terms of the lease.
First and foremost, prospective tenants need to grasp what costs are necessary to make a space work for their particular business. They must know what the space offers, what the add-ons are and what they can control to affect savings. They must also know the difference between what a landlord will provide in allowances, and what their new space will actually cost.
Second, they should start early. The process usually takes longer than expected. The tenant should enlist the assistance of an expert consultation team, including a tenant representative broker, an interior architect, and a contractor or construction cost expert, to sort out what the costs are and what overall options are available.
THE BASICS OF THE
Minimally, a relocating company needs fully operational office space inwhich to conduct its day-to-day business. Fully operational space consists of:
• Real property improvements, remodel or new construction work and any architectural and engineering costs associated with that work.
• Cabling for telecommunications wiring, and associated installation costs.
• Furniture and equipment, and associated moving costs.
The ideal lease situation, of course, is to find space with all the required improvements in place and looking good. That would leave only moving costs and possibly some minor telecommunications cabling. Believe it or not, the odds of this happening are actually better than winning the lottery if you know what to look for in the marketplace. Law office space, for example, with lots of private offices and large filing requirements is generally compatible with the needs of energy firms and vice-versa. Advanced technology open space users are largely compatible spatially with insurance companies and other open space users, like call centers.
If you’re fortunate enough
to find compatible space and you need only to carpet
and paint without changing walls around, you can count
on construction costs of at least $6.00 per rentable
square foot. The big variable here is the number of
rooms and offices that need refinishing as opposed to
having available an acre of open work area already in
If the most compatible space to lease and refurbish is the one you’re in now, the cost of refinishing may go up another $2.00 or so to allow for overtime, after-hours work (non-disruptive) and the cost of moving furniture around for carpet installation.
• Remodeled existing office space.
• New suburban "big box" office buildings.
Tenant improvement allowances for remodeled existing office space in recent years have generally averaged about $15 per square foot. That same $15 today will buy paint and drywall, a little glass and still less millwork. And even that’s ambitious. Today’s more practical range tends to swing from $17 to $22 per square foot and up, for real property construction improvements. Don’t forget to tack on engineering and architectural fees at $1.25-$1.50, telecommunications cabling at $1.50 to $2.00 per square foot and moving costs at approximately $1.00 more per square foot.
bottom line tenant cost here looks like $21.00 to $26.50
per square foot before you can even open the doors and
answer your first phone call.
After analyzing the numbers on several recent projects, we found that roughly half the total construction costs went toward mechanical, electrical, HVAC and general costs. Keep in mind that these costs are virtually non-discretionary. That is, without them the office won’t work. Not much flexibility there.
The remaining costs were discretionary and went to demolition, walls, doors, millwork and finishes. In the end, these additions represented the only real options the tenants had in controlling the budget. The typical allowance for tenant improvements in this type of scheme is usually $2.00 or less per square foot per year over the term of the lease. A five year lease then would allow $10.00 or so per square foot for construction remodel. If the existing space is in decent shape, the construction cost may be as low as $6.00 per square foot.
Conversely, if the space requires demolition, the tenant may get $15 per square foot over the same period. Whatever the allowance turns out to be, the tenant pays for any differences either out of pocket or by amortizing the amount over the lease period at typical interest rates of ten percent or more.
The new suburban "big box" office buildings are similar to the remodeled office spaces just mentioned, except that these don’t have existing tenant finish assets available for reuse. They don’t usually have ceilings either. Or light fixtures, ductwork distribution, or even window coverings in some cases. Consequently, the tenant can generally count on paying $5.00 to $7.00 more per square foot to make this raw new space operational.
Tack on basic construction with large open work areas, engineering and architectural fees, cabling and moving costs, and you’re looking at about $28.00 per square foot, inclusive. Take into account that the typical landlord tenant improvement allowance for big box office space is $20.00 per square foot, and the tenant again is faced with funding the difference of $8.00 or more per square foot.
Whichever type of space you choose, significant costs will follow, many of which won’t show up early in discussions. In fact, you may not discover the bottom-line costs until you are far along on the decision-making path. It pays to space plan your requirements in detail to determine overall costs. It also pays to know what you want so you know what to look for. Whatever you do, do it early. It’ll help take that sting out of sticker shock later.