Navigating the work letter portion of a commercial real estate lease can be a challenging process, especially if you aren’t familiar with the legal language and jargon included.
You should always have a project manager review your work letter and negotiate on your behalf. They know the common mistakes tenants make with work letters and can help you avoid issues with schedule, budget, and more. Additionally, uncommon stipulations can arise in work letters and it takes an expert to navigate the complexities involved.
What Is a Work Letter?
A work letter is a written agreement between a landlord and a tenant that governs the design and construction process within a commercial real estate lease. It specifies the scope of work and cost that the landlord will cover for any required alterations or improvements to the leased space prior to your company occupying it.
A work letter will also outline how much money the landlord will be providing. This is called a tenant improvement allowance (TI) and is an extremely important part of the lease negotiation process. Additionally, the work letter dictates the timeframe you are required to execute the project in, limitations on the contractors that can be used, and the process by which you will be reimbursed (via the TI).
What you can use a TI allowance for and when you will be reimbursed can vary greatly for each project. Some landlords will allow you to use the TI allowance during design and buildout. In this instance, you won’t have to pay out-of-pocket expenses until the full TI allowance is exhausted. But, a lot of times the landlord will make you pay for your improvements exclusively out of pocket prior to reimbursement. The work letter ultimately determines the scope of the landlord’s obligations to prepare the space for your use.
Workletters also play a crucial role in specifying whether an office build-out is tenant-driven or landlord-driven. In general, a tenant-driven build-out means that the tenant has control over the design and construction process, and the landlord is responsible for providing the space in a basic (or “as-is, where-as”) condition.
On the other hand, a landlord-driven build-out means that the landlord has control over the design and construction process, and the tenant is responsible for paying for any improvements beyond the agreed-upon delivery condition of the space. The work letter in a landlord-driven build-out will typically specify the standard finishes and construction materials provided by the landlord, any allowances for tenant improvements, and the process for approving and paying for any additional work. It is important to carefully review and negotiate the work letter to ensure that it accurately reflects your needs and expectations for the leased space.
Mistakes To Avoid
1. Ignoring the Timeline and Missing Deadlines
Reimbursement
The worst mistake you can make in the TI allowance reimbursement process is failing to request reimbursement by the deadline set in the work letter. In order to file for reimbursement, you also must have all the documentation of changes made and dollars spent ready for submission along with anything else required in the lease or work letter (this can be a lengthy list).
If you miss a TI reimbursement deadline, the consequences will depend on the specific terms of the lease agreement. Typically, leases require that tenants provide documentation of the improvements made and request reimbursement from the landlord within a specific timeframe, commonly within a year of occupancy.
If the tenant misses this deadline, the landlord may be entitled to deny the reimbursement request. In some cases, the lease may allow for extensions of the reimbursement deadline or provide other remedies for missed deadlines. It is important for you to review your lease agreement carefully and seek legal advice if you have questions or concerns about the terms of the TI reimbursement process.
Construction Plans
You also must submit construction plans for review to the landlord by the designated deadline. The landlord will then have a set timeframe to review and approve your plans. If the plans are not approved by the landlord, you will be required to make changes to the plans and resubmit them for review. This can potentially lengthen your project timeline and push delivery past your commencement date.
How a Project Manager Can Help
Do you have someone on your team with experience reading legal contracts? Do you have someone that can formulate a list of action items with responsibilities, manage the process from start to finish, and document everything according to the landlord’s requirements?
A project manager will act as your representative and take things off your plate, allowing you and your company to focus on what matters most – your business. They will review proposals, contracts, and change orders, and make sure all work is completed on time and within budget. By doing so, they can ensure that the tenant improvements are completed efficiently and effectively.
They will also ensure that all documentation, including permits, and contracts is properly executed and filed for future reference. This ensures that all parties involved in the tenant improvement project are aware of the progress and any changes that occur.
By tracking deadlines, organizing documentation, and paying attention to the fine print in your work letter, a project manager can save your company time and money during the build-out process and ensure that you are fully reimbursed for the TI allowance.
2. Failing to Negotiate Terms
One of the most common mistakes is failing to negotiate the terms of the work letter. Many tenants assume that the landlord’s initial offer is non-negotiable, but this is not always the case. It is important to carefully review the work letter and identify areas where changes or improvements can be made. It’s also essential to clarify any ambiguous language and ensure that all parties are on the same page.
You also need to use any leverage you have in lease negotiations. If you are leasing a small space you may not have much leverage when it comes to your TI allowance, but larger tenants have more leverage in negotiating work letters (just like they do with leases). An expert tenant representation broker or project manager should be able to use this negotiating power to get you the best deal possible in the lease negotiation process.
The work letter should also specify the timeline for the completion of the work. It is important to ensure that the timeline is reasonable and feasible. You need to verify that you have sufficient time to prepare for your move-in.
How a Project Manager Can Help
In order to negotiate your work letter during the lease negotiation process, you need to already have an idea of what you want to spend on your build-out and how much time it will take to complete construction for move-in.
An expert project manager will have many construction projects under their belt and will know the time, budget, architects, engineers, third-party consultants, vendors, and contractors needed to achieve success for various types of projects.
For example, a project manager can ensure that the terms of the construction document review process are favorable to your team and negotiated in a way that holds the landlord accountable. Including terms specifying that plans are deemed approved by the landlord if they do not complete their review within the stipulated time frame is a great example of this.
This is an important part of the lease negotiation process because an unfeasible timeline can completely derail a project. We frequently see executed leases that will set unachievable deadlines for things like plans and permits. Having a project manager or tenant representation broker take the time to negotiate these terms is imperative so you don’t trigger tenant delays, potentially resulting in paying rent on a space before you are even moved in.
3. Not Reading Your Work Letter Carefully
Missing the details goes hand-in-hand with failing to negotiate terms. If you miss the details, you won’t know what you need to negotiate for.
Build-Out Requirements
Some landlords establish building-specific requirements, such as building standards, in the work letter. This means that certain parts of your build-out have to match the base building’s cohesive “look.” Landlords typically set this standard in order to ensure residual value for their property. This less-custom build-out makes it easier for them to lease the space in the future.
There are also some landlords who will let you do whatever you want with your build-out since they are assuming the next person who leases the space will rebuild it to fit their own needs.
Typically, you will also be required to use the MEP engineer that works on the base building. Landlords also usually prefer you use the base building architect but you may be able to negotiate this based on the amount of leverage you have.
Ultimately, the set requirements for your build-out will depend on the ownership of the building.
How You Can Use Your TI Allowance
Typically, TI allowances can only be used for the construction and build-out itself. This excludes items like furniture, fixtures, equipment, rent, IT, AV (audio/visual systems), and moving costs (things that a tenant would take with them when they move out).
Occasionally, a work letter may contain a clause that permits you to apply any remaining allowance toward furniture or rent. However, this option is typically limited to a small percentage and is not commonly offered. Landlords can also allow tenants to use a small percentage of the unutilized tenant improvement allowance (typically only up to 10%) on IT, AV, and moving costs. Nonetheless, these types of allowances don’t have residual value for the landlord so they are often restricted and seldom offered.
Even though these work letter additions are rare, it’s important that you know what to look for and take advantage of any extra TI allowance dollars.
How a Project Manager Can Help
Local project managers will know how certain landlords operate in your area and will know what to look out for in your work letter. Some landlords write generic work letters and some are very specific. They will know which landlords require building-standard items and which ones only require basic systems to align with the base building.
Your project manager will make sure the project is executed according to the work letter. Tenant representation brokers may not review the work letter as thoroughly as the rest of the lease so it is important to have someone keeping track of requirements and documentation.
A project manager will also know to look for unique language in your work letter. They can help you take advantage of leftover TI allowance dollars and ensure you are aware of unusual requirements. Language in the work letter about tenant delays is especially important to understand. This language protects the landlord, and you need a project manager on your side to protect your interests as well. This is why it is vital to include a project manager in the lease negotiation process.
Conclusion
Work letters are a crucial part of the lease negotiation and build-out process but they can also be overwhelming, especially for tenants who are not familiar with the terms used in these documents. That’s where a project manager comes in.
Hiring a project manager can provide numerous benefits. From attention to detail to communication skills and experience in negotiation, a project manager can ensure that you understand the terms of the lease fully. Additionally, having a project manager review your work letter can save you time and money while avoiding costly mistakes and legal issues.
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