A Fresh Take on CRE

Take the Cash Allowance or Move On?

In this market, most existing tenants are looking for any angle possible to save a few bucks on a new lease. For many, this means moving to a different part of town, or moving to a building "one step below" the one they are currently in. When it comes down to it, they're often faced with a choice. Do I go to "Building A" where the rent is higher and the landlord will build the space to suit my needs, or do I go to "Building B" where the rent is lower, and the landlord is offering a Tenant Improvement Cash Allowance.

This decision at its surface seems relatively simple. What many tenants think, is that the Landlord of "Building A" is just using the space "build-out" as a way to make more money, and if given the opportunity, they could do it themselves cheaper. But is that really true?

When negotiating these kinds of deals, it is critical that the tenant thoroughly compares the options and determines which one really makes the most sense financially, and which one provides lower risk.

The first step in this process, is acknowledging your background and abilities. Let's face it, most real estate decision makers are not experienced architects, project managers, or general contractors. With that in mind, it probably doesn't make sense for your average tenant to take on a construction project, regardless of the size . . . and no, a renovation of your house does not count (unless you had to deal with unions, freight elevator hours, building management, landlord approvals, permits, and fire suppression systems - I didn't think so).

Now, let's assume you thought it through, and even though you know you are probably not qualified to take on the project at "Building B" you still want to give it a go. In this case, you do have a good option, and that is to hire a Project Manager to oversee the project. A professional Project Manager will oversee all aspects of the project, and keep your budget in-tact. But before they can do that, you first need to determine if the project makes sense, and what your budget should be.

The next step is to do some comparative financial analysis. You'll need your Project Manager (PM) and Financial Analyst to sit down and crunch the numbers. The PM will develop a budget based on your hard costs, like demolition, framing, and electrical and your soft costs like the project manager, architect, mechanical engineer, general contractor, drawings, permits, permit expediter, etc. He or she will then meet with your Financial Analyst, and compare that budget to allowance you will receive from the landlord for Tenant Installation and ultimately determine which deal is more affordable.

Now, after all of this work, let's assume that "Building B" looks like the better choice. There is still one more factor that you have to account for, and that is time. The landlord in "Building A" probably uses the same people over and over again to do "build-outs" in the building, and can probably give you a reasonable guarantee of when the work will be done. If you go with "Building B," is the landlord giving you enough free rent to account for all of the time it will take to do the project? What if it takes longer than expected, who's responsible? Will you still have to pay rent and electricity costs even though you're not occupying the space? Have you or your broker negotiated this?

When it comes down to it, comparing these two deals is no simple matter. It is for this reason, that it is critical that you have a trusted advisor that will guide you through the process. Furthermore, you want to have someone represent you, that has all of the services backing them, to make this process as simple as possible. This includes, a Project Management group, a Financial Analysis group, and the resources of a team of real estate brokers that have negotiated thousands of deals and know how to avoid all of the potential pitfalls. With that infomercial, I hope I provided a little bit of insight into a tough decision that faces many tenants.

http://feeds.feedburner.com/Brokered-ThoughtsOnNycCommericalRealEstate