Expert: John Smiley - 2/11/2008

Question
We're looking at making our first move into commercial real estate space from executive office suites - 3300 RSF.  Not using a tenant broker, b/c thought it would be straightforward, and we could save the 3% tenant commission and reduce the rent.  Seems to have worked, but I just got the TI list, and I can't figure out what a lot of these charges are, and if they are standard or just the landlord taking advantage of a newbie.... here they are - we're allocated $25 in TI. - their first estimate is $89k, or about $27.38 in TI, but includes about $15k in up front soft costs, including space plans, construction docs, and a "CM Fee" of $3500.  Is it typical for the Tenant to pay all of these up front space planning, permits, and other fees?  And what about the CM Fee?  Then, in addition to the plumbing, HVAC, etc., there is almost $10k for Life Safety, even though there are separate line items for sprinklers, plumbing, electrical, ceiling, etc.  Is that right?  Finally, on top of this, which totals $74k, there is $15k in General Conditions ($4k), "Fee" (???) which is $5k (perhaps the profit for the GC?), and then a Contingency charge of $6,500....is all of this standard?  Sorry for the long winded question.

Answer
Hello Sumeet,

The problem you're facing is one of the "costs" of proceeding without professional representation.  Of course, I am in the industry, and can be considered biased.  The real issue is this.....there is no "standard" deal in commercial real estate.  Everything is negotiable.

It certainly is common for a tenant to pay for most costs of development.  However, some costs are often (though by no means always) borne by the landlord.  For example, when moving into a brand new (unaltered) space, I generally aim for having the landlord provide some or all HVAC distribution and provide both plumbing and electrical within the space (at a specified location, but often without distribution within the space).  That's not always necessary, or achieved, however.

Now, in the interest of full disclosure, I'm not extremely experienced in handling build-outs, as a partner (who is away on vacation right now, otherwise I'd get his input) normally handles that.  But, I would say that the list you included does seem awfully loaded in with "fees" which I generally would not tend to agree to (at least, not without first doing a great deal of questioning of that landlord exactly what all these are for.

Depending upon where you are at in your present negotiations, you may be stuck paying all of these costs.  However, I would recommend you at least have a (very polite) conversation with the landlord about what these costs are and how they are allocated.

Again, I do recommend that you seek professional representation from a reputable firm in the future.  They can often save you far more than they cost.

To be clear, when I have negotiated a per-square-foot allowance for tenant improvements, the Landlord's work does not get deducted from this amount.  For example, if the landlord is responsible for installing sprinklers, then that amount is paid out of their pocket, and not out of my client's allowance.  A Tenant Improvement Allowance, in my opinion, is just that...a fund for use BY THE TENANT to conduct their own improvements to the space.

I hope this information helps to shed a little light.

All the best,
John Smiley