It is not as easy as just packing your equipment and stock at the old place and moving it to your new location. Unlike many commercial real estate build-outs, like your standard office, even "typical" industrial facilities such as warehouses and distribution centers can be customized for one user.

The relocation process can feel like connecting a square peg to its circular counterpart. However, with the right strategy and preparation, you can change the shape of either the peg or the hole, so your new facility is not only able to accommodate your operation but also optimizes its performance.

It's not an easy task to transform an old industrial site into a modern high-performance workplace. However, it can be fun and exciting. This will allow you to tap your creativity and ultimately improve your business.

To do this job easy, there are a few key steps that industrial users need to follow. You should follow these steps when renovating an industrial property.

• Know your landlord.

• Plan your space.

• Create a budget.

• Solicit contractor bids.

• Use your tenant improvement allowance.

• Learn about tenant improvement amortization.

• Review your work letter.

• Obtain permits.

• Manage cost overruns.

Know your Landlord

There are many types of commercial real estate owners. However, they can generally be divided into two main categories: institutional landlords and private owners. REITs, equity funds, and other large, often publicly-owned entities are all examples of institutional landlords. Private owners can range from wealthy individuals who are interested in real estate investments to multigenerational family offices.

With the rise of eCommerce over the past 20 years, institutional entities have been increasingly interested in the industry sector. However, private investors still own many industrial properties. Moreover, some private owners operate their industrial properties in an outdated way. As a result, they expect to spend very little or no money on tenant improvements.

They are usually focused on reducing outgoing cash flow. They might be reluctant to provide a tenant improvements allowance. These owners are more open to creative and negotiation because they tend to view each property and transaction as an individual.

On the other hand, institutional landlords tend to have well-calculated operating budgets for tenant improvements allowances and are more open to negotiating different terms with tenants.

These differences make it essential to know the type of property owner you are dealing with and adjust your expectations. Next, create a budget to cover the total cost of your renovation before you can negotiate a tenant enhancement allowance.

Make a Space Plan

Many industrial tenants design spaces that are too expensive for them. It is essential to plan your space carefully and hire an architect for a good return on investment.

An architect can help you align your future space with financial and operational requirements. The landlord may pay for the services of an architect in order to find a lease solution. In other cases, the tenant is responsible for paying the fees of the architect. Both the landlord and tenant must have an understanding of who bears the cost in each case before the architect is hired.

After an architect has reviewed your requirements and designed a facility that meets them, they still need to be involved in the renovation. The next step is to work with your contractor to create a plan for your facility that meets your needs within your budget.

Create a budget

The budget is often referred to as a pricing plan in this context. It is the blueprint that an architect creates for the general contractor.

The pricing plan will outline the facility's components to be demolished and the size, shape, materials, and quantities. The architect will then offer upgrades and other alternatives that the contractor can bid separately. The architect will then help you mix and match options to achieve the best balance between form and function.

The landlord may already be planning to renovate the space to bring it up-to-code, update the base building systems, or remove any old improvements. It is important to be clear about the improvements that the landlord plans on making outside the space plan. These costs should not be taken out of your tenant improvement allowance.

Solicit Contractor Bids

Once you are satisfied with your pricing plan, schedule site tours (the job walk) and invite three general contractors to bid. You will be able to obtain optimal pricing by obtaining competing bids from multiple general contractors. However, it is not recommended that you engage more than three contractors, leading to antipathy.

A job walk allows prospective general contractors to inspect the space with the landlord, architect, tenant and project manager and compare the prices with the plan.

You should pay attention to outlier expenses when you review the bids of each general contractor. It is worth investigating if one contractor's line item exceeds the cost of the other providers. To understand how each contractor put together their bid, it can be useful to create a list of questions.

Use Your Tenant Improvement Allocation

After your landlord has provided a detailed price list for your proposed tenant improvements, the landlord will inform you how much money they intend to contribute. This is your tenant improvement allowance. The actual allocation of these funds depends on many factors including your preferences and the person responsible for managing the construction project.

The landlord will choose the general contractor and project manager for the build-out and pay the rent directly. This approach has the advantage that it saves you time and effort. In addition, the landlord might be able to offer a preferred pricing option, which could benefit you as well as their experience and expertise in managing such projects. On the other hand, the landlord may charge a fee for their services, reducing your tenant improvement allowance.

You can also manage the project yourself. You will need to hire your own contractor and pay for the construction. This approach will allow the landlord to provide a tenant improvement allowance as a form of rent-free.

The third option offers a compromise between the two previous options. This scenario would allow you to still manage the project and hire your own general contractors and construction crew, but the landlord will pay these workers directly. This approach typically involves the contractor collecting progress payments and a final payment once all contractor lien releases are received.

Each approach has its advantages and disadvantages. You should discuss your situation with your broker or real estate team.

Understanding Tenant Improvement Amortization

A tenant improvement allowance is not a gift. It is more like a loan. The landlord may expect that the funds will be repaid over time with interest if they are financing tenant improvements in order to improve your space. This is known as amortization. Most of the time, your payback period will be equal to the length of the lease. However, you might get a shorter payback period for longer leases.

Tenant improvement allowance interest rates vary widely across the industry. Small landlords may not charge any interest. This is because they are focused only on closing the transaction and do not seek to return their investment in the property. While most landlords will use the same lending benchmarks to determine the interest rate, you or your tenant representative must verify that they are appropriate for the particular situation.

Review Your Work Letter

The landlord and tenant have to agree on the terms of their respective construction obligations in the work letter. Both the landlord and tenant will be protected if they negotiate the terms in the work letter.

If the landlord is responsible to the construction process, the work letter will usually reflect a target completion date. There could be penalties if there are delays due to a variety of factors. If the delay is caused by weather or a government shutdown, no penalty will be applied.

It is best to have the lease start date coincide with when construction is nearly complete. If you delay, you could be responsible for rent in both the new and old locations.

A "last resort clause", which is typically included in the work letter, allows you to set a drop-dead deadline within 45-60 days of the expected completion date. This clause allows you to terminate your lease. However, this would not be a good situation for either of you.

Obtain Permits

The usual time frame for a city or other local municipality to check that all necessary documents have been received is usually 30 days after receipt of a construction request. However, the city can notify you if there are any missing documents or additional information, and wait for your response before resuming the 30-day period.

Many city planners and officials from the building department are available in person at city hall. To ensure everything goes smoothly, it is a good idea to send someone from your group to speak with city planners and building officials at the beginning of the process.

An experienced city architect can be a great resource as they may have connections with people in the planning, zoning, and building departments that can help you expedite your work. To manage the expeditor aspect of larger projects, it's a good idea to hire one.

Manage Cost Overruns

Unexpected costs are common in construction projects. You will need to plan ahead to address these unexpected costs. Contrary to popular belief cost overruns do not always result from a greedy contractor who is fond of changing orders. Instead, these occur due to changes made by tenants during construction or unforeseen circumstances at the property.

You are generally responsible for most cost overruns. A smart landlord will ask you to pay your share of any overages as soon as they become apparent. In the unlikely event that you are unable to pay your share of the construction costs, the landlord will not be left with an unfinished site.