What Is a Tenant Improvement Work Letter?
The tenant improvement work letter is essentially a contract to complete construction work in a commercial space. It is generally an addendum to the lease agreement involving third parties, architects, and commercial general contractors. Unless a tenant occupies a space “as-is”, there will be a work letter defining the condition of a space when the tenant moves in. The work letter also explains how that condition will be achieved. A work letter specifies the design of a space and materials to be used. It clearly outlines who is responsible for carrying out the work as well as who will pay for it. It should specify who controls the design and construction. This can include an architect’s fees, insurance, permits, and other incidentals.
Building Standards Should Be Clearly Defined in the Work Letter
All building standard finishes and items should be clearly defined in the work letter. This ensures a buildout is sufficient to meet code requirements. All work must be completed in accordance with construction drawings, and the work must comply with all laws and ordinances. It is also wise to include a caveat that covers liability if a latent defect is discovered during the buildout process.
Tenant Improvement Allowances Are Negotiable
Generally speaking, a tenant improvement allowance for construction is based on the square footage of rentable space. Note that commercial contractors should be calculating material needs based on the usable square footage of the space – not the rentable size. Limits need to be clear and include a buffer for the punch list. A punch list is a list of items that a contractor will include in a project. The items listed may not necessarily be part of the outlined work but are necessary in order for him or her to complete it. This list can be loosely estimated early on but by its very nature won’t be well defined until near the end of the project. All things considered, it is important to be clear about the what’s, who’s, when’s, and how’s in a work letter. This helps everyone to plan and it protects all parties against potential misunderstandings and unexpected costs.
Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.
