1. JANET KIMBLETON GRACE
3421 W School House Lane, Philadelphia, PA 19129
Phone (c) 267-718-7633
imjanetgrace@gmail.com * http://www.linkedin.com/profile/view?id=48765200&trk=hb_tab_pro_top*
Understanding Construction Risks in Your Lease
So you have decided to lease office space and, have settled on the Rent and Commencement date. But do you really
understand the construction risk in your lease? …..Just who is responsible for the tenant improvements and who is at
risk for cost over-runs? These are just some of the questions to consider before moving forward with a lease.
Sooner or later the tenant will pay for improvements, although this can be handled with many different types of lease
terms.
 At one extreme is the “turnkey” lease, where the landlord will deliver a fully designed and built space ready for
move-in, based on initial parameters agreed by the parties. The rent is set to compensate the landlord for this
work, and the landlord bears the risk of any overrun.
 At the other extreme is an “as-is” lease, where the tenant accepts the premises exactly as they are and is
responsible for providing any mechanical, electrical and plumbing required as well as the partitions and finishes.
Rent here is much lower, as the tenant bears all the expense and risk of any work.
 Between these two are leases with “tenant allowances” or “work letters” where the landlord agrees to provide
construction costing up to a certain amount or work up to a certain level and any additional work must be paid
for by the tenant. In this case, much of the risk of additional cost falls to the tenant as the allowance rarely
covers more than the basics, if that. The landlord has limited its risk by setting the rent to reflect the cost of the
tenant allowance.
How does construction affect the schedule in the lease?
Schedule risk is usually split, with each party handling the things they control: the tenant to make timely decisions and
design, the landlord to deliver on schedule. The remedies for failures can include rent adjustments, moving
commencement dates, and reimbursement of holdover penalties, among others. Of course, there are some things that
neither party can control, like an existing tenant who fails to vacate on schedule. The move-in date or commencement
date of your lease is typically determined based on Substantial Completion of tenant improvements – how is this
controlled?
The tenant should be aware of long lead items, such as HVAC equipment that may affect the move-in schedule. When
the tenant hires an architectural and engineering team for design and construction documents, they should make their
team aware of the move-in date at the start of the project. Long-lead items can then be planned for, planned around, or
avoided entirely, and if required, building permits can be expedited at a nominal cost, to save time during construction.
Our advice at AthenianRazak: Decide on your construction budget when you first start to negotiate your Lease, and be
aware of typical costs, on a per square foot basis, of spaces that are like the one you want. If you expect to amortize the
cost of improvements entirely through a tenant allowance, select potential landlords who can offer reasonable or
generous allowances and avoid hiring an overly zealous architect who sees your space as their own personal Taj Mahal.
Select an architect who specializes in Tenant Space Planning and Interior Fit-up, and ask the landlord if they have
“Building Standard Finishes” that are priced within their tenant allowance.