Building the perfect space for your business is crucial for its success. Whether you’re starting from scratch in a new property or renovating an existing one, commercial build outs play a vital role in creating a functional and aesthetically pleasing environment. In this article, we’ll explore the importance of commercial build outs, different types of spaces that require renovation, the cost considerations, and the negotiation process involved.
The Need for Commercial Build Outs
Not every commercial space is ready to be occupied as soon as you sign the lease agreement. Many spaces require renovation and customization to meet the unique needs of your business. This is especially true for second-generation spaces, which are suites that were previously occupied and may need updating or a complete makeover.
A commercial build out refers to the renovations and modifications done to make a property suitable for your business. These renovations can range from simple upgrades such as new paint and carpet to more extensive changes that completely transform the space. The goal is to create a space that not only reflects your company’s brand and culture but also enhances its functionality.
Planning Ahead for Your Space
Before embarking on your search for a commercial space, it’s essential to have a clear understanding of your design requirements. Consider the number of offices, open spaces, additional rooms, and specific areas you need for your business operations. Think about whether you require a kitchen, a waiting room, closets, or storage areas. Having a comprehensive list of your team’s needs will help you evaluate potential spaces and determine the level of build out necessary.
Different Levels of Renovation
The extent of renovations required for a commercial space depends on the type of business and the condition of the space. If you’re looking for office space, you may find options that are already prepared for occupancy. However, if you’re opening a restaurant or a specialized establishment, renovations are often necessary to meet the specific requirements of your business.
Additionally, if you’re leasing a brand-new property, you may have the opportunity to start with an empty shell space, allowing you complete freedom in designing and customizing the layout.
Evaluating Cost and Benefits
When comparing different properties, it’s essential to consider the cost-benefit analysis of the build-out. While you may find an ideal location, the space may not be functional without renovations. In such cases, you’ll need to decide whether it’s financially viable to lease the space and invest in the build-out or explore other options.
Market conditions also play a significant role in finding the right space without incurring substantial build-out expenses. In a down market with abundant availability, you may have more options to find a suitable space that requires minimal renovations. However, in a hot market with high demand, you may have to compromise on your ideal space or make additional modifications to meet your needs.
Paying for the Build Out: Negotiation and Options
The negotiation stage is critical in determining who will bear the cost of the build-out. In commercial real estate, the catchphrase “everything is negotiable” applies to the build-out process as well. The parties involved, including the landlord and tenant, discuss and agree upon the modifications and renovations that will be part of the lease agreement.
There are different approaches to financing the build-out:
Turnkey Build Outs
Landlords understand that not every business can afford to pay for improvements in spaces they don’t own. To attract tenants, landlords may offer turnkey build-outs, where they cover the costs of all the necessary changes. While this option saves money and simplifies the process for tenants, it’s important to ensure that the quality of materials and workmanship meets your standards. Specify the level of quality or the general contractor to be used in the contract to avoid any potential issues.
Tenant-Controlled Build Outs
If you prefer to have full control over the construction process, you can choose to pay for the build-out yourself. In this scenario, you hire the architect or contractor and take responsibility for every aspect of the construction. This includes decisions regarding electrical outlets, wall construction, and other specific requirements for your business. To ease the financial burden, negotiate a tenant improvement (TI) allowance from the landlord, which can be used to cover a portion or all of the build-out costs.
Build Out with Tenant Improvement Allowances
Tenant improvement allowances (TIA) are a common part of lease negotiations. The allowance is typically calculated per square foot of the leased space. For instance, if your space is 2,000 square feet and the landlord offers a $20 per square foot TI allowance, you would have $40,000 ($20 x 2,000sf) to invest in the build-out. Keep track of all expenses, as any costs exceeding the original allowance will be your responsibility. The landlord typically reimburses the tenant for the TI allowance upon completion of the build-out and submission of all relevant documentation.
Sharing the Cost of Renovations
In some cases, the cost of renovations may be shared between the tenant and the landlord. For example, office buildings often offer basic improvements such as repainting and new carpeting as part of the leasing agreement. However, if the tenant desires custom finishes or upgrades beyond the standard offerings, they may be responsible for covering the additional costs. The level of customization in the build-out can vary depending on the tenant’s needs and the landlord’s willingness to accommodate them.
Creative Negotiation Strategies
In commercial real estate, negotiations offer opportunities for creative solutions. Depending on your circumstances, you may be able to negotiate alternatives to tenant improvements. For example, if time is of the essence, you might forgo certain improvements offered by the landlord, such as new paint and carpet, in exchange for a rent abatement equal to the cost of the build-out. This approach allows you to prioritize your business’s specific needs while still reaching an agreement that benefits both parties. Remember, in negotiations, everything is negotiable, so don’t be afraid to explore different options.
Commercial build outs are a crucial part of creating a functional and customized space for your business. Whether you’re starting from scratch or renovating an existing space, careful planning and negotiation are essential. Consider your design requirements, evaluate the level of renovation needed, and weigh the cost-benefit analysis. Explore different financing options, such as turnkey build-outs or tenant improvement allowances, and leverage negotiation strategies to find a solution that meets your needs while maintaining a mutually beneficial relationship with the landlord. With the right approach, a well-executed commercial build-out can set the stage for your business’s success.
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ABS Services provides comprehensive commercial construction services to Greater Cincinnati, Northern Kentucky, and Southeast Indiana. We have the experience, equipment, and the right team to get the job done!
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