Renovation

In last week’s post we talked about Lease Commencement Costs.  One of those costs is renovation, and since it is often the largest single cost of moving into a new space, let’s take a closer look.

Lucky are the business owners who find a space to lease that fits their needs exactly.  Rare are the business owners who need a space completely customized to their operations.  Most fall somewhere in between, where a space with the help of some minor renovations and maybe some cosmetic touch ups will work perfectly well for a given use.   

Does The Space Require Renovation

The first question to ask yourself is, does this space require renovations to work for my business, followed closely by how much work is required?  This is often determined by how the landlord delivers the space to the tenant.

How Are Commercial Spaces Delivered To Tenants

The term Cold Dark Shell isn’t a type of topping at an ice cream shop, it refers to how the landlord will deliver a space.  It describes that the space will be turned over to the tenant almost completely raw and even down to the studs in some cases, the plumbing would be roughed in, but not finished and there would be no HVAC or lighting installed.  If your next question is, “who does the work to finish the unit and who pays the bill,” you’re starting to think like a seasoned tenant.  We’ll talk about that further down.

The next way a landlord could deliver the space is a Warm White Shell.  This describes that the unit has HVAC installed and maybe it’s even ducted, that there are lights, bathrooms, and there is sheetrock on the walls either primed and painted white, or ready for your own custom paint color.

The final way a space can be delivered for tenant occupancy is Broom Clean or As Is.  What this typically means is that what you see is what you get when it comes to the condition of the premises and the layout and the floor will be free of large items and refuse from the previous tenant.  It does not mean that the space was literally broom swept.

Who Pays for The Work

The lease proposal might outline who pays for what work and how, but ultimately it will be the Work Letter attached to the lease that dictates the details.  The dollar amount of landlord work is almost always negotiable.  Here’s how it works.  The incoming tenant may take the space as is and do their own work, on their own dime, or get a partial cost offset in the form of free months of rent. .  The landlord may take the tenant’s building plans, and do the work for them as an enticement to lease the space at the landlord’s expense. The landlord may provide a Tenant Improvement (TI) Allowance or amortize the cost of the work being performed by the landlord and charge it back to the tenant over time.

The Fine Print

It’s always a good idea to understand exactly who is doing the work and who is paying for it.  Needless to say the people you hire should be licenced, insured, and pull the proper permits for the job.

If you have any questions about this article or commercial real estate email [email protected] or let me know in the comments below.  Don’t forget to subscribe to our email blasts!

Next week we’ll talk more about Insurance. View the post here.