Four negotiating options that can control costs of moving into new space or upgrading an existing facility.
Many CEOs assume that when they move into new space or upgrade existing facilities, they must accept whatever financial terms are dictated by the building owners to cover the cost of improvements. It needn't be so. According to Pamela Stamataky, an associate with Tanguay-Burke-Stratton, a Chicago commercial real estate brokerage, corporate tenants have at least four negotiating options when it comes to handling the costs of "buildouts," such as revamped wiring, new cabinetry, carpeting, and paint jobs:
1. A turnkey arrangement, one of the most common options but the least preferable from a tenant's standpoint, puts the building manager in charge of the buildout. "If you've negotiated an allowance of, say, $40 per square foot, and the owner chooses a $35 bid, you'll most likely never receive any savings."
2. A tenant improvement allowance gives the tenant control over the buildout and a set allowance to cover costs. Any savings go to the tenant, perhaps through rent discounts.
3. The use of the tenants' own cash puts tenants completely in charge. One drawback: they have to have enough cash flow, or they must have access to credit lines that cost less than the 10% interest that building owners typically charge.
4. Third-party financing from specialized buildout financiers gives tenants control, but the loan may cost as much as 20% to 40% extra. "Business owners use this when building managers can't or won't finance improvements and they themselves can't come up with the cash," explains Stamataky. If this is your only option, move to another building instead.