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Buildout Meaning in Commercial Real Estate

January 15, 2020 | by
Reviewed by real estate expert Jonathan Tootell

The buildout meaning, which is a term frequently used in commercial real estate, is not what you might assume at first glance. Buildout is not exactly the same as building. Instead, buildout refers to the rest of the construction process that occurs with a space that has already been built in its raw form.

Buildout meaning in commercial real estate

In commercial real estate, the space being leased is often essentially a blank slate. The walls and doors are there, but there is not much more character or detail to the space. The idea is that the office space will ultimately be completed to a tenant’s own specifications. That part of the construction process is known as the buildout.

Because it is roundly understood that the tenant will likely require additional construction on the office space, the lease agreement with the property’s landlord often addresses the issue of tenant improvements (TIs), providing a tenant improvement allowance so that the landlord gives the tenant money to cover – or help cover – the cost of the buildout. The TI allowance is usually offered as a set dollar amount per square foot.

Two types of buildout meaning

There are two basic versions of a buildout meaning. Usually either one can be negotiated with the property management, and each has its pros and cons:

  • Tenant Buildout – This buildout option puts the tenant in the driver’s seat. The tenant hires the contractor, designer, and architect, working with them to realize their vision for the office. In this scenario, the tenant is taking on a lot of responsibility, but also enjoys much more control over the process and the result.
  • Turnkey Buildout – If your company does not have the time or interest in micromanaging a construction project, this option may be preferred. (The landlord may also prefer this option if they want to maintain control over the contractor being hired and when/how the work is being done.) With the turnkey buildout, you agree with the landlord in advance what work needs to be done, and they take care of the construction to the agreed-upon specifications. When you get your key for the space, it will be move-in ready.

Who does the build-out?

An architect, a designer, and a contractor are all likely to be involved in the buildout process, but exactly which types of professionals are needed may vary depending upon how extensive the planned improvements are.

Going in, you may have some sense of what is needed in the buildout for your office. For instance, you may have ideas about where interior walls will be needed, preferences for light fixtures, and thoughts about what kind of flooring might be best. But it is your experts who will be critical in making the buildout a success.

The tenant should work with an architect and designer to look at the space and discuss the needs of the business, number of employees, and design preferences (that can include aspects ranging from paint colors to whether or not you want an open plan office). Together, you will come up with a good plan for layout and design.

The contractor, who will oversee the actual buildout, may also be very helpful in providing guidance on technical and building improvements that the rest of the team might not have considered (e.g. plumbing, air conditioning, etc.). The contractor will also be able to ensure that the work is in compliance with any relevant building codes or regulations.

A look at the tenant build-out process

Before getting to the build-out stage, a company first has to find the best possible office space available, taking into account factors like location and the overall size of the space. While you may have the amazing fortune of finding an office that already looks perfect, the reality is that even the best spaces will typically need some changes in construction in order to be suitable for your business’s needs.

It is at this point, when you have found a really promising office space, that you need to think about talking to the property management team about build-out terms. Along with important matters like leasing terms and rental rate, the buildout is something that you can often negotiate with the landlord. You will want to work with them to come to an agreement that will include a tenant improvement allowance that covers all or most of the construction and design necessary to get the space fitted to your standards.

Don’t think you can just “wing it” with this process. You will want to bring specialists like a designer and contractor into the space before you do the deal, so that they can provide you with quotes and a solid idea of how much the buildout is going to cost. (It is often possible to get professionals to provide this advice free, in the hopes that you will hire them for the job.)

Once you are armed with some real information about likely buildout cost for the space, you will be in a position to negotiate with the property owner. If they are not willing to provide the funds to cover what you anticipate will be the full cost of your desired buildout, you can decide if it’s worth it to pay the extra yourselves.

Bear in mind, though, that this is a cost that you will never be able to get back. If you end up having to re-locate your growing business to a new space in a couple years, you will have effectively “lost” that money you put into the buildout.

You can also see if the landlord will lower the rental rate or offer a shorter, more favorable lease term, to sweeten the deal. But if you are ultimately unhappy with the tenant improvement allowance or build-out terms being offered, you may want to move on to another office space and hope negotiations go better with the next landlord you speak to.

It’s okay to turn to turnkey options

Now that you know the buildout meaning in commercial real estate, you should be better prepared to confront this extremely important aspect of lease negotiations. If you are intimidated by the thought of having to deal with building construction in this way, bear in mind that many real estate brokers will be able to walk you through negotiations and help you get a good “turnkey” arrangement that will enable you to secure the type of office you need without having to hire designers and contractors yourself.

It really just comes down to how much control and responsibility you want for renovating your office space. If properly negotiated, a turnkey buildout can be just as satisfying with a lot less work on your part.

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