T his article focus es on is s ues that te nant allo wance mo s - PDF document

realestatemanagement Issues to Consider in Building Out Tenant Improvements By Susanna S. Fodor, Esq., MCR Editor’s note: The following is an by factors s uch as the des irability of the other hand, prefer to have the update of an award-winning artic le the te nant fro m the s tandpoint of tenant allowance us able for s oft that first appe are d in the forme r name re co gnitio n, building le gitimiza- cos ts as well, s uch as arc hite c tural NACORE magazine , the Co rpo rate tion, and the like. and engineering des ign fees , legal Re al Es tate Exe cutive . fees , expediting fees , cons ulting Te rms and conditions re lating to the fees , and the like. T his article focus es on is s ues that te nant allo wance mo s t o fte n ne go ti- often s urface in co nne ctio n with ate d are whe the r the allo wance may Landlords will want the tenant tho s e le as ing trans actio ns whe re the be us ed for anything other than hard allowance to be paid in a lump sum s truc ture co nte mplate d by the co s ts , ho w is the allo wance to be at final completion of the tenant parties is to have the landlord build funded, whether the landlord has to improvements , while tenants will out all or a portion of the tenant’ s po s t a le tte r o f cre dit o r o the r s e curi- want the allowance to be paid to propos ed improvements ; when the ty to give co mfo rt to the te nant that them up front. The compromise usual- landlord co ntribute s to the co s ts o f the te nant improvements in the form o f a te nant allo wance ; whe n the landlord als o agrees to obtain financing on behalf of the tenant to cover the balance of the cos ts of the te nant improvements ; and when the parties contemplate to s peed up the co ns tructio n time by agre e ing to work s ide by s ide. Altho ugh many advantage s flo w from s uch a cooperative undertaking, the re are als o dis advantages . The primary dis advantage is that mo re often than not, if the landlord builds out the tenant’ s s pace, the tenant’ s bargaining po s itio n with its land- lo rd/ co ntracto r be co me s dilute d, and is we ake r than the re co urs e it wo uld have if it we re to c o ntrac t with a co ns tructio n co mpany that cus tomarily as s umes 1 0 0 perc e nt pro ce e ds o f the allo wance will ly reached is to have the landlord re s po ns ibility fo r co ns tructio n ris ks . indeed be available, and if the land- advance portions of the tenant lo rd defaults in its funding obliga- allowance as work pro gresses, on a The following is s ues are mos t often tions , whether the lender pro viding pari-passu basis with the tenant. This debated in thes e trans actions . financing for the building can be issue need not be addressed in trans- required to as s ume the landlord’s actions where the landlord is also the What Are Permitted Uses for payme nt o bligatio ns . tenant’ s contractor, and has no incen- the Tenant Allowance? tive to withhold payment until com- The s ize of the tenant allowance, Landlords generally prefer to have pletion of cons truction. The reason and its availability, are marke t driv- the tenant allowance be us ed only for the lack of incentive is becaus e it en. In a tenant’ s market landlords for hard cos ts , and then only for is making pro gress payments to ge ne rally o ffe r s uch a financial pack- thos e hard co s ts that invo lve itself, as distinguished from ris king age. In a landlord’ s market, on the improvements that the tenant does making payments to a non-performing o the r hand, the availability o f the no t have the right to re mo ve at the independent third-party co ntracto r continued te nant allo wance is large ly dic tate d end of the leas e term. T enants , on hired by the tenant. 34 / S E P T E M B E R 2 0 0 3 C O R P O R A T E R E A L E S T A T E L E A D E R

realestatemanagement (c o nt.) Issues to Consider in Building Out Tenant Improvements On the is s ue of letters of cre dit o r co mme nce me nt date and the re nt- dite d dis pute re s o lutio n me chanis m other s ecurity to as s ure that funds co mme nce me nt date in mo s t le as e s wo uld be in place to re s o lve it. will be available , my e xpe rie nce has whe re the s pace is no t re ady fo r Ano the r impo rtant is s ue to address been that although it is impo rtant fo r o c c upanc y o n the le as e e xe c utio n is that if the te nant’ s cas e pre- a tenant to rais e it, it is jus t as date . The pe rio d o f time that laps e s vaile d, but while the dis pute was important fo r the te nant no t to ins is t be twe e n the two , is us ually the pe ri- pe nding the te nant had to pay re nt o n it. What the te nant can ins is t od affo rde d the te nant to build o ut (whic h is us ually the c as e ), the n upon in re turn, however, is to require its s pace and o pe n fo r o ccupancy. the landlo rd s hould be re quire d to that the o bligatio n to make s uch re bate s uch re nt, with inte re s t. payment be binding on anyone s uc- In le as e s whe re the landlo rd is no t ce e ding to the landlo rd’ s inte re s t in the te nant’ s c o ntrac to r, the is s ue of Ofte n the wo rk to be pe rfo rme d by the building. re nt co mme nce me nt is no t de bate d the landlo rd o n the te nant’ s be half at le ngth be caus e the te nant’ s fail- do e s no t co ve r all the s pe cialty Who Owns the Tenant ure to caus e its inde pe nde nt third- impro ve me nts ne e de d fo r the fin- Improvements Funded party c o ntrac to r to c o mple te by a is he d s pace . The te nant, thro ugh Through the Tenant c e rtain date is no t the landlo rd’s inde pe nde nt third-party c o ntrac to rs Allowance? pro ble m, and rightfully s ho uld no t unre late d to the landlo rd, us ually This is an impo rtant is s ue be caus e have an adve rs e e co no mic impact pe rfo rms the s e . Landlo rds us ually it affe c ts what the te nant may o n the landlo rd. In s uch le as e s , the take the po s itio n that re nt s ho uld re mo ve at the e nd o f the le as e te nant us ually ge ts the be ne fit o f a s tart whe n the landlo rd has finis hed te rm. It als o impacts many o the r fixe d re nt abate me nt pe rio d, which all its wo rk, e ve n if the te nant is is s ues in the leas e, s uch as ins ur- e xte nds to the landlo rd the co mfo rt unable to o ccupy the s pace fo r its ance , ro utine re pair o bligatio ns , and o f a fixe d re nt co mme nce me nt date . inte nde d us e s . T e nants , o n the re pair o bligatio ns afte r a cas ualty. o the r hand, us ually maintain that The ide al way to re s o lve this is s ue In le as e s whe re the landlo rd is als o re nt s ho uld no t s tart, until all te n- is to have the partie s agre e that to the te nant’ s c o ntrac to r, the is s ue of ant impro ve me nts are co mple te d the e xte nt that the te nant re nt co mme nce me nt is addres s ed at and the e ntire s pace is re ady fo r allo wance is us e d to fund the co s ts le ngth in the c o nte xt o f many o c c upanc y. o f te nant impro ve me nts that are no t is s ue s , o ne o f which is who de te r- re mo vable by the te nant afte r the mine s whe n the s pace is available The re are no hard and fas t rules on le as e te rm, the n s uch no n-re mo v- fo r o c c upanc y. Landlo rds us ually this is s ue . It is re as o nable , ho we v- able te nant impro ve me nts s ho uld be ins is t o n having the landlo rd’ s arc hi- e r, fo r a te nant to ins is t upo n s ho rt- co ns ide re d landlo rd’ s property, te c t make the de te rminatio n, while e ning the do wntime by ge tting pe r- s hould be ins ured under landlord’s te nants atte mpt to inje c t impartiali- mis s io n to wo rk s ide by s ide with pro pe rty ins urance and the landlo rd ty by re quiring a jo int de te rminatio n. its landlo rd. This re que s t is us ually s ho uld as s ume the o bligatio n fo r grante d, but whe n it is , it rais e s a bo th ro utine repairs and repairs Whe the r the initial de te rminatio n is ho s t o f ne w is s ue s that have to be afte r a c as ualty. jo int o r no t, o ne impo rtant is s ue to ne go tiate d, s uch as who s e wo rk addre s s is to make s ure that s uch a take s prio rity (landlo rds us ually pre- When Is Rent to Commence? de te rminatio n is no t final, and if vail o n this is s ue ), inde mnificatio n The re is a dis tinctio n be twe e n the the re we re to be a dis pute , an e xpe- fo r pe rs o nal injury and pro pe rty damage (whic h us ually is a win-win s ituatio n fro m the pe rs pe ctive o f bo th partie s be caus e the s e are ins urable ris ks ), the te nant having the right to the us e o f ho is ts , lo ad- ing do c ks , e le vato rs , e le c tric ity, and he at ne ce s s ary fo r the pe rfo rm- ance o f its co ns tructio n, and, in e xchange , pay te nant’ s e quitable s hare of landlord’ s s o -calle d ge ne ral c o nditio ns c o s ts (whic h s ho uld ge t re s o lve d s imply o n the bas is o f actual co s t pas s -thro ughs ), and de lays in co mple tio n o f landlo rd’s wo rk and te nant’ s wo rk dis cus s e d continued be lo w. 36 / S E P T E M B E R 2 0 0 3 C O R P O R A T E R E A L E S T A T E L E A D E R