Congratulations! Your business is on the move, and a new commercial space is on the horizon. But when that ‘new’ space is a pre-existing facility, perhaps just barebones concrete or still outfitted with the previous tenant’s materials, then there’s work to do before your move. It’s time for a tenant build-out.
A tenant build-out transforms an existing commercial space into something better suited to the needs of the new tenant.
Common work completed during these renovations includes:
- Framing and drywalling
- Flooring and ceiling changes
- New or improved HVAC
- New or improved plumbing
- Electrical and data infrastructure upgrades
- Interior finishes and branding
Different industries have come up with their own terms for this process, including tenant improvement (TI), commercial tenant build-out, fit-out, and leasehold improvement. Just know that they all refer to the same general process of updating a new tenant’s rented space to suit that tenant’s needs and specifications.
In this blog, we’ll explain the tenant improvement construction process from start to finish. We’ll discuss factors that can impact the length and complexity of the work, as well as who’s responsible for paying for it. By the end, you’ll have an excellent understanding of how to undertake a successful tenant build-out for your own business.
Understanding Your Starting Point: Shell Conditions
One of the biggest determining factors for how long a tenant build-out will take and how much it will cost is the starting state of the space. These starting conditions are referred to as ‘shell conditions’ or the ‘shell state’. There are three main types of shell conditions seen in commercial properties:
- Gray Shell (Cold Shell) refers to a raw, unfinished space. Gray concrete floors, exposed studs, un-ducted HVAC, and capped plumbing. This is the most expensive state to build out from.
- Vanilla Shell (Warm Shell / White Box) refers to a semi-finished space. Typically, it includes basic drywall, finished ceilings, functioning HVAC, and basic lighting/electrical. This shell state is usually less expensive to build out than gray shell, but more expensive than a second-generation space
- Second-Generation refers to a space that was previously occupied by another business and features some remnants of that business’ occupancy. Often, these spaces feature lower upfront costs, but require some amount of demolition or remodeling.
What's Included in a Commercial Tenant Build-Out?
Just about every tenant build-out construction project will require some amount of work in these areas:
- Structural and layout work
- Framing
- Metal stud walls
- Drywall
- Interior layouts
- Mechanical, Electrical, Plumbing (MEP)
- HVAC reconfiguration
- Electrical upgrades
- Data/technology cabling
- Specialized plumbing (i.e. breakrooms, restrooms, medical lines).
- Finishes and aesthetics
- Flooring (i.e. carpet, tile, polished concrete)
- Ceilings
- Custom millwork/cabinetry
- Countertops
- Paint
- Exterior signage
What varies most between projects is the scale of the work required in each of these categories. Different commercial sectors have very different requirements for their spaces. Think commercial kitchens vs. office spaces, or brick-and-mortar retail vs. medical clinics. Each of these sectors has unique plumbing, electrical, and HVAC demands, not to mention very distinct aesthetics.
So, to secure a more refined estimate of what your tenant build-out project will need, it’s best to enlist the help of a professional with experience managing tenant build-outs for your particular industry.
The Commercial Build-Out Process (Step-by-Step)
The process of completing a tenant build-out generally follows five steps. The time required for each step will vary, and sometimes steps can be worked on concurrently to speed things along.
- Initial Consultation & Goal Alignment - This is the phase where your project is assessed by your contractor, the shell conditions are identified, and the projected budget and timeline are determined.
- Design & Architectural Planning - During this step, you and your contractor will enlist the help of architects and/or engineers to create the blueprints for your build-out.
- Permitting & Code Approvals - This step can be unpredictable in its duration, since it often depends on the availability of the relevant municipal officials. Fortunately, a good contractor can often plan things out so this step can happen concurrently with the initial phases of demolition/construction.
- Demolition & Construction - This is the phase where the actual renovation takes place. Unwanted elements may be torn down, new framing is installed, MEP systems are finished, and drywall is put up.
- Fixtures, Finishes, & Punch List - This is the final step, where the space’s aesthetic design is realized and the client signs off on the work once they’re satisfied it has been completed to specifications.
Financials & Responsibility: Who Pays for the Build-Out?
In the world of commercial tenant build-outs, typically a Work Letter from the Landlord lays out the specifics of what will be done, who’s responsible for it, and the quality of materials that are required. It also lays out the amount of money available for the work and which costs are eligible for coverage.
As for who’s responsible for paying out, there are a few different funding structures that are popularly used for tenant build-outs.
- With a Tenant Improvement Allowance (TIA), the landlord provides a set dollar amount for the work. The tenant gets to select their contractors and is responsible for overseeing the work. This grants a high degree of flexibility, but can also leave tenants with unexpected costs if work runs over budget, since the tenant is responsible for anything that goes over the predetermined dollar amount. Since the costs are almost always amortized into the rent over time, longer leases usually equal higher TIAs.
- With a Turnkey Build-Out (AKA Landlord-Funded) structure, the landlord handles and pays for the entire build-out prior to the tenant moving in, based on a set of agreed-upon specifications. This structure gives tenants less control over how the work is completed, but also protects tenants from unexpected costs. Much like a TIA, the costs for the work are usually amortized into the rent over time.
- With a Tenant-Funded / Shared Responsibility structure, costs are either covered entirely by the tenant or split between the tenant and the landlord. This structure is most common when the build-out will be highly brand-specific, resulting in upgrades that don’t add much ongoing value for the landlord after the lease ends.
Compliance, Timelines, & Pitfalls
It's important to note that a tenant build-out, while extremely flexible and customizable, also has some limitations that need to be kept in mind. For starters, It’s critical to follow all relevant municipal building and occupancy codes. ADA compliance is also mandatory for all renovations. That means your build-out must include adequate:
- Door clearances
- Turning radiuses
- Counter heights
- Accessible paths of travel
Finally, the more lofty your build-out goals are, the longer the project will take to complete. Timelines vary a lot, but here are some realistic ranges to start from:
- 4-10 weeks for a basic office or retail build-out
- 12-20+ weeks for a complex restaurant or medical facility build-out
When to Call in the Pros
A successful tenant build-out requires excellent collaboration between the tenant, landlord, and the parties responsible for getting the work done.
At a minimum, an architect or an engineer and an experienced general contractor are essential for getting good results. Fortunately, with Diversified Construction as your contractor, you can access every kind of seasoned expert and professional service your project might require.
Discover why countless businesses have already turned to our team for their tenant build-out projects. Contact Diversified Construction today to ensure your commercial space is built out right, on time and on budget.
