Lease Negotiating Factors, Part 2: Tenant Costs

The cost of tenant improvements assumed by the landlord, as well as the level of customization, determine the amount a landlord will amortize over the lease term. Thus, for any lease shorter than five years tenant alterations can inordinately burden the rental rate.

The cost to ‘completely’ remodel a space, or to build out raw space, has a wide range and can run from $50-to-$80 per square foot. Typically, a landlord must invest this much to secure a market deal. The amount of tenant improvement dollars is related to the rent and free rent. As a side note, the quantity of free rent can also be dependent on the amount of security deposit required for a company with less than stellar credit.

If the cost to the landlord hovers around $10 per square foot, which would cover slightly more than new carpeting and paint, a tenant should try to translate the landlord’s savings into a larger quantity of free rent. However, you must differentiate between the cost to remodel the space in a generic way versus the cost to remodel specifically for your occupancy.

Tenants should also try to pay for actual electric consumption via a sub-meter, rather than a flat rate to the landlord. Savings of using a meter can reach as high as $2.00 per square foot. This figure will depend on the tenant’s hours of operation, use of computers and any provisions regarding after-hours HVAC.