Expert: Jim Avancena, CPM - 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
Sumeet,
You should ALWAYS use a knowledgeable and responsible broker to help you acquire your commercial space.  Not all brokers & agents are good, in fact, many are a waste of your time.  The key is to get references and find a good one.  A good and experienced agent would have saved you from many mistakes you may have made with your lease -- especially the Tenant Improvements difficulties you are having now.  Depending upon your landlord or his contractors' reputation, an agent may have suggested that you get a "Turn Key" Build-out of your new premises.  

I do hope that you didn't also try to save money by not having a real estate attorney review your lease before you signed it.  If so, I will likely be hearing from you with other problems later in you lease term.

It is difficult to say if certain practices in your questions are "Typical" without having more details of all your lease terms. You ask if it is typical to pay "all these up front space planning, permits, and other fees?"  Depending on what part of the country you are in and the strength of the office market for office space where you are, various costs may or may not be typical.  

I can say that having the tenant pay these costs is fairly common, especially if the office space is in a strong landlords' market where there is a low to balanced vacancy in the office market.  I am in a office market currently that favors landlords because of the low vacancy in office space available and it is common for the tenant to pay for space planning, permits and a reasonable "CM Fee" (i.e. Construction Management Fee).  It appears that a fee of $3,500 on a aggregate total job cost of $89,000 is based on a cost of about four percent (4%)rate which is not unreasonable.

However, although it may be common for the tenant to pay a specific improvement cost, you may want to be sure that the rate or amount you were charged for each cost was reasonable.  Many landlords have their own construction company, or a preferred contractor they use to perform most of the tenant improvement work in their property(s) where they actually make a profit from the tenant improvement work by charging more than another contractor would charge for the same work.  You may wish to check the component job charges against what others in your area charge for the same work.  Keep in mind that a small job of 3,300rsf will not get the best rates compared to a tenant with 60,000rsf due to economies of scale.

Life Safety costs can be many different things aside from "sprinklers plumbing, electrical, ceiling, etc."  Again, it all depends of the specifics of what the Life Safety charge is for; Exit signs, alarms, fire extinguishers,....?  Ask the contractor to "break down the Life Safety line item component cost" for you. You definitely have a right to have the contractor answer your specific questions.

Different contractors charge different amounts for "General Conditions", "Contingency" and "Profit".  General conditions are costs for performing certain actions using resources that are difficult to subdivide and allocate accurately.  For example when you have your car repaired they charge you are small percentage fee for "shop supplies".  Shops know that car repairs require rags, grease, lift and air compressor repairs, etc. but it is difficult to charge each car owner for two table spoons of grease, or a share to the last time the lift was repaired, etc.

It is the same way with contract work.  There are certain general charges that contractors attempt to reimburse themselves for by charging certain percentage fees.  Blue print copies, the cost for having their permit specialist check out the application for your job, supplies, employee benefits, etc.   As I say, these percentage fees can vary widely depending upon who you use.

Contingency and Profit rates will vary between contractors.

Finally, some commercial properties are large enough that they will have a property manager that can perform many of the tasks that a construction management fee would cover on a project that is your size.  A decent property manager should be able to handle a 3,300 rsf construction job without much trouble.   

You may see if you can find a small contractor in your area that would be willing to advise you on the charges for a small fee.  Often other contractors are interested in seeing what their competition charges for the same type of charges they supply.

It is common for an experienced real estate agent to know who the better contractors are and to limit certain fees in advance of your signing a lease to limit unnecessary expense.  They usually will know which property owners have a tendency to overcharge for the tenant improvements.

Tenant Improvements is often a complicated discipline that requires an expertise that most tenants do not have so it is best to structure a lease so that you are not the one paying the bill the contractor is preparing.  Try to have the improvements be the responsibility of the landlord and you simply pay a rent that includes the cost of improvements.

Be watchful for problems that may develop over the rent commencement date of your lease if the tenant improvements are not completed on time.  This may be the next battle you have to fight.

Let me know if you have any further questions I can help you with.

Good luck.

-Jim