Published June 1996 in BLACK'S GUIDE
The Economic Benefits of Test Fitting
by Warren Kieding
THERE ARE REALLY ONLY TWO CONSTANTS to consider when leasing commercial office space: Each building is different from the last, and change costs money. Everything else is negotiable.Blacks2
When you are seeking new space, you must first determine if you will fit, if your personnel and resources can operate efficiently in the available square footage. There is no standard method for addressing your company's projected adaptability to any given space. Unfortunately, you cannot move in for a month to see how it works. You also cannot assume that your tenant improvement budget will be consistent or even similar, from one space to another. Therefore, you must determine what level of improvement is required and how flexible the landlord is in accommodating your requests. This is where things can get fuzzy and dozens of factors can influence your final decision on where to settle. Consider the unknowns involved, the next best alternative to a trial run is the test fit. Simply put, the test fit is a comparison of available building layouts that can help you determine which lease option is most adaptable to your company's particular needs.
Without getting mired in numbers, the point is that amortizing heavier tenant improvements can raise your lease costs dramatically, often by as much as two dollars per square foot each year for example, new carpet and paint, which are considered the bare minimum improvements, will cost about six dollars per square foot. After that, even the most basic remodeling costs can jump as high as fifteen, eighteen or more dollars per square foot. These additional costs are usually added to the lease at an interest rate of ten to twelve percent per year, amortized over three to five years. Of course, these figures can vary dramatically depending on both the type of tenant and the motivation of the landlord. A large highly-visible tenant with excellent credit will most probably be offered more lease flexibility than the smaller, less prominent tenant. In addition, the deal could be affected by the building's vacancy rate, another factor is assessing lease leverage. Toss in the fact that every building is different in character and construction, and it is not difficult to become lost in the language of what is best for you.
Test fits are a good way to overcome much of the confusion of leasing space and to understand the essentials behind achieving the best possible value. The process itself begins with the facilities program, a detailed analysis of how the tenant's operation works, the number and size of offices or workstations needed, which personnel or departments need to be in close proximity to one another, the use of open space and the anticipation of organizational growth. The facilities program enables the user to evaluate the compatibility of any given space alternative and to eliminate quickly those spaces that do not adhere to the program's specific requirements. Remaining alternatives are then evaluated for reuse by assessing the adaptability to the tenant's needs, the amount of wasted space and the construction economy of each option.
As you can see, the extensive reuse of a previous tenant's improvements can be as speculative and confusing as navigating the lease negotiation. However, knowing how to reuse existing assets creatively and effectively in order to adapt them to one's own operational needs can dramatically affect both lease rates and overall operating efficiency. In quantifiable terms, the Lou Harris/Steelcase surveys of American companies attributed only ten percent of the cost of doing business to office facilities. What that means is that any measurable compromise of operational efficiency can quickly negate the purpose of reusing existing improvements. Again, the key is to find the balance between maximizing efficiency and minimizing lease costs by communicating your exact needs to all those involved in the leasing and improvement process.
Leasing space is a tough journey at best, and the numbers will not always add up. As a tenant, your goal is to obtain the most efficient space as economically as possible. With this in mind, trying to lease space in today's marketplace without the benefit of comparative test fits is like investing without a prospectus, it is not smart business. Change costs money, and by test fitting two or more spaces, you increase your chances of leasing what you need with the smallest possible improvement budget. The less you do, the less you pay. It is just that simple.