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Negotiating build out costs

When you move into a new space, the friendly new landlord will give you a number of concessions. You will almost certainly get a rent free period and the landlord will probably bear the costs of a build-out to customize the premises to your operation.

Obviously, there’s no free lunch and the landlord looks to recoup these investments through the rent. What often happens is that when the improvements are identified and they are recouped through the mechanism of an increase in the rent payable. 

The concept is that the landlord makes the expenditures and the tenant pays for them through the term, of the lease.  This is, on the face of it, an equitable arrangement and the landlord is entitled to recoup his expenses and possibly some interest in return for putting out the money. But you, the tenant, are paying to improve his building and there are some legitimate questions to be asked.

The most important thing is not to allow the cost of the build out to go into the lease as an increase in the base rent.  If this happens it means that the defined cost of improvements borne by the landlord becomes:

·          Subject to any automatic CPI increases that are factored into most leases and 

·          Part of the base rent in any future lease extensions.

Doing it this way, there is a very real danger that payments may be made in excess of the amount of the build out. Instead, think of it as a loan to be amortized. Agree the principal, interest (if any) and the repayment term and amount and then add that number to the monthly rent for the appropriate number of payments.

While the savings are not huge, it could add up to some real money over the term of the lease.