By Wendy Whitson
Because the economic downturn and corresponding decrease in rental rates allowed tenants to “trade up” into higher class space with better amenities at low rents, much of the commercial space currently available is of class B and C quality. Rather than invest in upgrading vacant space to attract new tenants in a depressed rent environment, landlords have opted to offer available space “as-is.”
Thankfully, as the economy continues its slow but steady recovery, commercial leasing activity is beginning to increase and landlords can expect rents that are adequate to justify spending money on improving their existing spaces. This increasing wave of tenant-improvement projects provides a great opportunity for contractors who are eager to get back to work.
By understanding the challenges a Landlord faces in negotiating a new lease which includes substantial tenant improvements, contractors can not only greatly increase their chances of being awarded any specific project, they can also build long term relationships with property owners which will generate work in the future.
The cost of most major tenant improvement projects is usually amortized into the rental rate for the space. Accordingly, an as-is deal will usually have a lower rent than a custom build-out. For a landlord, accurately determining the cost of a tenant improvement project in advance of signing the lease is essential because the final rental rate depends on it. As a result, one of the most important partners the Landlord needs in the negotiation process is a knowledgeable — and accessible — contractor. To offer the best service in the lease negotiation process, the contractor should:
- Have a thorough understanding of the space/building to be leased. Contractors should review as-built drawings, tour the property, communicate with architects and engineers and get a building history from the owner and public agencies;
- Be available for preliminary discussions with prospective tenants and provide “ballpark” cost estimates to determine whether a deal makes sense from the big-picture perspective;
- Continue to engage with Landlord and Tenant regarding development of plans over the course of negotiations;
- Quickly prepare detailed bids (with line-item descriptions) based on architect’s space plans;
- Provide transparency regarding subcontractor costs and overhead/profit charges;
- Engage with Landlord and prospective tenants to plan a construction schedule which will coincide with lease terms and keep all parties informed as to scheduling issues;
- Be available to the landlord if post-completion issues arise.
A contractor who is willing to participate in the leasing process in this way is invaluable to a property owner and is likely to be the first person considered for future business and referrals.
Wendy Whitson is the managing director for Anderson, Zeigler, Disharoon, Gallagher & Gray, a full service law firm which has been providing support to developers, contractors and property owners for decades. Contact Don Black, Chris Mazzia or Lisa Yoshida at 707-545-4910 for assistance.
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