I guarantee you, if you are touring office space sooner or later, a landlord or their broker will offer to ‘turnkey the space for you’.
As the name suggests, a ‘turnkey’ is when a landlord constructs commercial space based on your design so that you simply ‘turn-the-key’, open the door, and occupy the space.
Why a Turnkey Build May May be Right for You
Cashflow
Whether you are self-financing the construction of your office space or you’re receiving a leasehold improvement allowance, you’re typically paying for the construction of your space before the commencement of your Lease.
As a result, in addition to paying rent at the space you currently occupy, the deposit on your new space, and relocation costs, you need to have the money to finance construction. This can be a significant hit in your cashflow.
If a landlord is turnkeying your space, they’re paying the construction costs directly. So, if you are cash sensitive, a turnkey can be an excellent option for you.
Time and Money
Many landlords that offer turnkey office space either have a construction component to their business or have strong relationships in the construction industry.
They can often leverage their expertise and relationships to construct space in a very time and cost-effective manner.
How Your Turnkey Build Can Go Very Wrong
Quality Miscues
Many variables contribute to the cost of construction (see my post on leasehold improvement costs). There can be a significant difference between what the Landlord has priced in your turnkey and the level of construction and quality of finishes that you expect.
For example, has the landlord priced broadloom carpet or carpet tile? Will there be any glass partitions? What will the kitchen look like? Will the HVAC be re-distributed based on the design?
You and the Landlord should have a general understanding of how the office space will be designed, and what the finishes are going to look like before finalizing the terms of a lease.
Cost Overruns
Landlords minimize their cost overrun exposure on a turnkey build by capping the total dollar amount that they’ll absorb for the construction of a space.
For example, let’s say a landlord has agreed to turnkey office space for you to a maximum cost of $50.00 per sq. ft. If the construction costs $70.00 per sq. ft. you are going to pay the additional $20.00 per sq. ft. to build the space or make changes to the design to reduce costs.
Turnkey Build Best Practices
If you’re going to opt for a landlord turnkey I highly recommend the following:
- Use a design professional with commercial experience to design the space before negotiating business terms.
- Make an Offer/Lease conditional on a review of construction quality and finishes that the Landlord has included in their pricing.
- Ensure that the Lease clearly defines what the Landlord is providing as part of the turnkey build.
If you have questions email me at jeff.daniels@royallepagecommercial.com