Finding the ideal location, price, and size for your new office is a challenge that takes patience and diligence. However, once the space is located, there is almost always some level of construction necessary to really make the space fit your business. So, who is going to pay for that work?
There are many factors that can influence this answer however, the vast majority of the time and the industry norm is that the landlord construction contribution is based on the “amortization rate” of your lease.
It is important to recognize, that although the space may work perfectly for your business over the next several years, there may be no residual value of the layout for the next tenant. As a result, landlords don’t often view a specific office’s construction as a capital improvement to the building but rather it is viewed as the “cost of doing business”, similar to taxes. Therefore, the cost of the construction is amortized over the length of the lease.
First the total cost of the project is divided over the length of the lease. Afterwards the landlord can determine what the net annual rent will be. Clearly the longer the amortization, the higher profit to landlord and more likely they are to agree to the work.
Since this amortization method is used industry wide, tenants can expect to receive much larger construction contributions on 10 year leases and can expect minimal work on shorter term three year leases. A break down outline of average of work by length of lease is below.
Three-year lease – Paint and carpet/refinish floors. Space is delivered relatively as-is but cleaned and freshened up.
Five-year lease – Paint and carpet/refinish floors. Demolish or build new offices. Space can be delivered cleaned up with minor rearrangements of layout.
Seven-year lease – Paint and carpet/refinish floors. Demolish or build new offices. Possibly install a kitchenette/sink if not present. Some higher end finishes such as wood floors and glass offices. Space can be delivered cleaned up with significant rearrangements of layout.
Ten year leases – Paint and carpet/refinish floors. Demolish or build new offices. Install a kitchenette/sink if not present. Some higher end finished such as wood floors and glass offices. Space is delivered cleaned up with significant rearrangements of layout. If space is raw, landlord will build to tenant’s specifications.
Important note: These averages are industry trends and individual landlords may choose to contribute more or in some case less towards a construction project. Just like all of the other terms in leases, construction is negotiated and it is beneficial to have an outline (like the one provided above) to guide a you through the process.
David Goldberg – Managing Director