Build-out options: Turnkey and Tenant Improvement

The name says it all: in a turnkey build-out, all the tenant has to do is turn the key and waltz into brand new, customized office space. Turnkey build-outs are funded and carried out entirely by the landlord, based on the tenant’s specifications, which are mutually agreed upon during lease negotiations.

With a turnkey build-out, the tenant brings a design plan to the lease negotiations table, and tenant and landlord give and take until they arrive at a build-out that is acceptable to both. Turnkey allowances usually include walls, light fixtures, electrical outlets, phone jacks, closets, and other reasonable requests. Carpet and paint colors and styles are selected by tenant.

Turnkey build-outs seem very tenant friendly, but there are drawbacks. As all of the capital to fund construction will come from the landlord, there is a powerful incentive for him or her to complete the space on the cheap. Rather than getting a good quality carpet, the landlord may select the cheapest on the market to save money. Instead of shopping around for the contractor with the best track record for quality work, the landlord may choose the least expensive contractor, which could result in slipshod installment.

With tenant improvement build-outs, on the other hand, the tenant is driving the bus, and can select an architect, hire the best contractor and purchase quality finishes, all while carefully watching his or her budget. The tenant improvement budget is determined in lease negotiations, where both parties come to an agreement on a dollar amount per square foot which the landlord is willing to allow and the tenant is willing to accept. Tenants should therefore enter negotiations with an accurate cost projection for their desired improvements.

A turnkey build-out is a good option for companies leasing less than 10,000 square feet of office space, as economies of scale benefit larger spaces. Turnkey is also beneficial for tenants with short-term leases, since they have no leverage to negotiate for a healthy tenant improvement allowance. For everyone else, tenant improvement build-outs will almost always be the better choice.

Costs

“How much does it cost?” is the million dollar question, if you will indulge the pun. There is no easy answer to this inquiry, as costs vary widely in different markets. New buildings in shell condition will be more expensive than second generation buildings, where things like doors, some finishes, ceilings, etc. can be re-used for the build-out. Higher quality finishes add dollars per square foot as well. Union labor can double cost, and some buildings require that union labor be used. Specialty build-outs, like medical offices or lab space, will be much pricier than everyday office space.

That said, here are some figures to put you in the ballpark. Ziegler Cooper Architects (based in Houston, Texas) estimated in 2011 that for a new building in slab condition, costs start at $43.20 per square foot for building standard finishes (paint, carpet, standard ceiling grid and tile, standard 2×4 lighting, coffee bar, copy room laminate millwork). Moderately above standard finishes (reuse of door frames and hardware, 2 coffee bars, 2 copy room millworks, some glass and hard ceiling surfaces, direct glue fabric wall covering at reception and main conference room) averaged $54.40 per square foot. High but not extravagant finish (same as moderately above standard plus new wood veneer doors, sidelights at offices, upgraded carpet, custom veneer and stone reception desk, 2 veneer built-in credenzas in coffee room) came in at $70.00 per square foot. A lavish finish for a law office could run more than $100.00 per square foot.

This matrix included numbers for 2nd Generation buildings (previously occupied with reusable finishes, doors, hardware, etc.) of Class A or B+ rating, at $30.80 per square foot for building standard, $40.20 per square foot for moderately above standard, and $56.40 per square foot at high finish. Second Generation buildings with Class B- or C ratings would be $25.40, $33.20, and $48.00 per square foot respectively, for the three finishes.

Figures for Manhattan real estate were similar, with non-union build-outs costing $40 to $60 per square foot for a “plain vanilla” finish, but jumping to between $75 and $100 per square foot if union labor is used. Choosing a finish flavor other than vanilla can also greatly increase cost. Other municipalities (St. Louis, Alberta, North Carolina), weighed in in the $40 to $60 dollar range for building standard to moderately above standard finishes.

These broad cost figures can be helpful to business owners at early stages, but before heading into lease negotiations, it is essential to consult an architect and/or a contractor to fine tune cost estimates to region and specific plan requirements.

The Process

Once the tenant finds office space that requires a build-out, the design phase begins. Business executives lay out space requirements, and architects and engineers translate them into usable blueprints. At this point a clear estimate of costs can be made. Armed with these projected figures, the tenant may enter negotiations with the landlord for a tenant improvement allowance.

Once negotiations are complete and the tenant has a per square foot budget for the build-out, it is time to seek bids from contractors. A good contractor will take the time to understand the culture and goals of the company so that he or she can tailor work to these ends. Contractor bids should include detailed itemization of projected costs.

When construction starts, a project manager designated by the tenant should oversee the construction work, requesting reports weekly that can be cross-checked with the project schedule. These reports should include building department inspection results, pictures of progress, and schedule updates.

Finally, timing is critical. Tenants have firm move-out dates, and often run into great inconvenience and expense when there are project delays. An early start for the build-out process reduces the chance that delays will push them into a holdover period in their current space. Four months is adequate time for the design process, one month is sufficient to seek bids from contractors, and the build-out itself will require at least four more months to be completed.

With a tenant improvement build-out, the tenant has overseen the project from beginning to end, kept costs to budget, and shopped carefully for both materials and contractors. In the new customized, high-identity office space, the company can reach its highest potential.

Average Build-Out Costs per Square Foot

	New Building	2nd Generation A/B+	2nd Generation B-/C
Building Std.	$43.20	$30.80	$25.40
Moderately Above Std.	$54.40	$40.20	$33.20
High Finish	$70.00	$56.40	$48.00

Keep in mind that costs vacillate from season to season based on several factors, including shipping and fuel costs. These costs can also be higher or lower in different urban or suburban markets. It can however give you a ballpark range of numbers to consider as you begin the process of negotiating and conducting a build-out.