Distinctions

In other cases, a corporate real estate tenant may negotiate, as one of its key Lease terms, that a Landlord provide the Tenant with a "Turnkey" Build-Out of the Tenant's desired interior layout.  With this type of agreement, the Landlord pays the full costs of the architectural and engineering services, construction, construction management and any required permits or fees.  The costs of the TI construction are incorporated into the agreed Lease rate and the Tenant has no direct costs for this construction.  The Landlord assumes the management responsibility for the project and, except for Tenant caused delays, assumes the schedule risk for the project.  The Tenant is essentially handed the keys to its new space when the construction is complete.

The Process

With a Turnkey Build-Out, the process often begins with an interior architect working with the Landlord and Tenant to create a Pricing Plan.  A Pricing Plan will show the Tenant's required build-out (walls, doors, millwork, etc.) and will contain keyed notes providing details about finishes (paint, carpet, counter surfaces), electrical issues (lighting, outlets, dedicated circuits), notes on the plumbing required for break rooms or coffee bars, and numerous miscellaneous notes required for the proposed construction.  If the Landlord approves the Pricing Plan, it is provided to several general contractors experienced with office TI construction to obtain preliminary pricing for the proposed TI Construction.

If the preliminary prices are acceptable, things can move forward.  However, if the preliminary prices are too high, the Landlord may refuse to cover the full costs.  At this point, the Tenant may: continue to negotiate or walk away from the deal; modify its plans to lower the costs; or agree to pay some portion of the costs, either as a cash payment of through higher rent payments.  If an agreement is reached, the Landlord will authorize the architect to prepare detailed Construction Drawings.

Ensuring Good Results

The key for both the Landlord and Tenant is developing plans that clearly identify what will be built and delivered to the Tenant.  Misunderstandings over this process are usually avoided with detailed plans, good communication between all parties involved in the negotiation and design process and strong oversight of the general contractor by the Landlord.