4. Address concealed conditions.
What happens if the lease says the tenant is accepting the space "as is, where is" but when the landlord starts to demolish the existing conditions from the prior tenant, he comes across asbestos ceiling tiles, significant discrepancies in the floor condition that materially increase the cost of carpet or tile installation or code violations that must be rectified? If this is not addressed in the lease, the landlord may argue that these costs are the responsibility of the tenant. To avoid this, tenants should make sure that their starting condition will not require any extraordinary costs by allocating to the landlord the responsibility for unknown or concealed conditions. These conditions can result in significant, unanticipated costs and also create significant delays in the project schedule.
5. Anticipate change orders.
Even if the lease requires that the landlord competitively bid the construction project to multiple bidders, there still may be risk to the tenant down the road. Once the bidder(s) have been selected, what happens four months later when the tenant wants to make some changes to the work? At this point in time, there is generally no bidding of the work-- the general contractor and subcontractors are already in place on the site and it’s unlikely that new contractors will be brought in for the additional work. If change orders are not addressed in the lease, the tenant may end up paying a premium if it wants to change anything. As a result, the lease should require that the percentage fees initially quoted by the general contractor and subcontractors for (x) overhead and profit and (y) general conditions when they were awarded the work will continue to apply for any change orders and will be applied to the actual cost of the work. Change orders should not create an opportunity for increasing profit percentages unless there are unique circumstances (i.e., increased timing risk or complicated work).
6. Normal business hour rates vs. overtime or non-business hour work.
Typically, when the tenant improvement work is assigned to the landlord, the tenant wants to put the timing risk on the landlord. If the landlord is promising to get the tenant into the new space by a certain date, the tenant should ensure that that promise is not coming at a premium cost. One way for the landlord to accelerate construction timetables is to use overtime or non-business hour shifts. However, these arrangements often come at a material cost. The tenant should ensure that its pricing will be based on normal work crews during normal business hours unless otherwise agreed by the tenant. The tenant should not have to pay for accelerated work or time recovery plans unless it has caused a delay or is otherwise responsible for the timing problem.
Turning the construction obligations over to the landlord does not make all the problems disappear. A lot of money can still be at risk if certain issues are not adequately addressed up front. By carefully crafting a Tenant Work Letter exhibit to the lease that anticipates key issues, tenants can ensure that they get the most out of their dollars and protect themselves against significant construction risks.
About the author
Glenn Blumenfeld is one of three principals of Tactix, a licensed commercial real estate brokerage firm committed exclusively to representing tenants and other end users of real estate. The sole objective of Tactix is to help companies reduce their real estate occupancy costs by fiercely advocating for their interests at the negotiating table. Since joining Tactix in 2003, Glenn has managed or co-managed many of the largest and most complex real estate transactions in Philadelphia and the Delaware Valley region. Glen can be contacted by email at firstname.lastname@example.org or by phone at (610) 688-0042.