How To Avoid Problems With Commercial Leasehold Improvements

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When you lease commercial real estate in most cases you will need to do some sort of leasehold improvements. If it’s a brand new space in shell condition then obviously it will require a lot more planning and work. If it’s 2nd generation space that has been leased before it may not require as much work (only carpet and paint in many cases) unless you need to remove or add a bunch of walls.

Regardless of what tenant improvements are needed the end result can determine your satisfaction. Below is the definition of leasehold improvements, a few common problems that you may encounter, and suggestions on how to avoid them

What are Commercial Leasehold Improvements?

The definition of leasehold improvements -Improvements done to commercial spaces that tenants rent out such as office, retail, or warehouse space. Examples are building or demoing walls and ceilings, new flooring, plumbing and electrical, cabinetry, building offices and conference rooms, etc. 

Leasehold improvements generally convey with the landlord upon the termination of a commercial real estate lease and the tenant moves out. The cost of the improvements is typically negotiated between the tenant and landlord. Depending on the landlord, your credit, market you are in, scope of work, total deal terms such as lease term length, lease rate, rent concessions such as free rent, etc you can generally negotiate to get them to pay for a portion or all of the improvements. The longer lease you sign the more money you can generally negotiate for commercial leasehold improvements.

Common Problems with Tenant Leasehold Improvements

1. Over Budget – You expect to do the leasehold improvements at or below the tenant improvement allowance you pre-negotiated and you still go over budget. Every dollar above the allowance comes out of your pocket.
2. Behind Schedule – Time = money. Delays in construction time could mean that you are in holdover in your existing space or have to delay the date you open for business. Or you could end up without a place of business until the space is completed.
3. Disagreements – Arguments and disagreements over the scope of work and timing can diminish the excitement of your project. 
4. Not meeting expectations – leasehold improvements done incorrectly that have to be redone cost time and money

Ways to Avoid Commercial Leasehold Improvement Issues

1. Constant Communication – Make sure everyone is on the same page with the scope of work, budget, and timing. Consider having weekly conference calls or onsite meetings to review progress and obstacles. Don’t be afraid to clearly communicate the bad news either. If the tenants needs a contingency plan it would be nice to know sooner than later.
2. Realistic Budget – Be realistic with the budget. Better to overestimate than underestimate. Don’t cut any corners and establish a worst case scenario.
3. Create a Schedule – Be sure to estimate a timeline from Beginning to completion and provide enough time for each task. Make sure to build into the budget some contingencies and establish worst case scenario in case there are delays and problems.
4. Know Your Limits – Don’t commit to more than you can handle. Be realistic with the scope of the project, the pricing, and the timeline. As long as you hire competent contractors you will increase the success of your commercial tenant leasehold improvements.

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