Alignment of Representation

Some Notes On Tenant Buildouts In New Shells

Arne Ericson, Principal – NOVO Construction

When we started NOVO Construction in 2000, we had a clear mission of representing tenants and building their tenant improvements.  What does that really mean?  In our view, it means that NOVO is not dependent or reliant on landlords or developers for any significant piece of our revenue stream. This is not because we view them as less important in any way; conversely, landlords are extremely important, and we must conduct ourselves in a way that makes us reliable partners to build for the tenants which occupy their spaces.  We are trusted specialist and maintain positive working relationships with all major landlords.

The heart of the matter is that NOVO’s mission is to build the tenant’s space and represent the tenant’s interests.  As our business evolved, it has become evident that there is a clear delineation between landlord contractors (or shell contractors) and tenant contractors.

During the recent economic boom, we have observed an ongoing trend where new developments or developers are enticing tenants with early occupancy and financial incentives if they utilize their base building contractors. This is worthy of examination. Is the tenant receiving real benefit and true representation? Who is acting as the tenant’s advocate throughout the design and construction phases?

The typical scenario begins with a tenant’s need to occupy on an urgent time line.  The lease is executed during construction of the new building. The landlord commits to “allowing” the tenant to start construction early if they utilize the base building contractor. Some questions to ponder:

• Why is the developer / landlord so intent on the tenant using the base building contractor?
  • The landlord will typically say that “it eases coordination and eliminates potential tension and issues throughout construction.”
  • Although it may be true that coordination may take less work on behalf of the landlord and their contractor, it doesn’t always equate to creating value for the tenant (versus creating value for the developer/landlord).

• How many weeks of an advantage is this creating?
  • It is our experience that landlords are suggesting that tenants can start 8-10 weeks early if they utilize the base building contractor. As a generalization, it would most likely be that the building shell is not completely watertight, and the landlord contractor could begin work on the interior core part of the tenant’s buildout.  In our experience, this is not an effective strategy and the tenant is not receiving a day for day advantage of starting early.
  • In addition, the tenant’s designs may naturally lag behind the base building progress, losing the perceived value of ‘starting early.’

• Are site logistics issues between landlord and tenant contractors actually a detriment to a successful project?
  • There are some logistical and convenience issues with allowing a tenant contractor to share the space with the landlord contractor, but it’s been proven they can be managed successfully. This is a common practice throughout the industry.
  • Some other gating factors might include final inspections, elevator inspections, etc. Again, these are all logistical events that can be planned and worked around professionally.
  • Access for manpower and material loading are logistical events that can be planned and coordinated. If you think about it, the manpower and material must access the space regardless of whether they are contracted by the landlord contractor or the tenant contractor.

• Other questions to ponder:
  • Is the perceived schedule benefit worth giving up control of the entire project?
  • Is the landlord contractor an equity partner in the development? Is their vested interest in the bottom line of the development versus purely representing the tenant?
  • If there are deficiencies in the shell construction versus the Work Letter, who will represent the tenant’s interest?
  • If there is a schedule delay on the shell delivery, will the landlord contractor give the tenant the real information on the delay?
  • Is the shell superintendent focused on finishing the shell project, or is the focus on the tenant? Same question for the project manager. Remember that their company’s first loyalty is to the developer.
    • Similar notion flows all the way down through the subcontractors. They have one relationship and that is with the general contractor who works for the developer primarily.
  • If there are cost overruns on the base building, how can tenant be assured that none of these costs are being absorbed by the tenant?

The notion of Tenant Advocacy is at the core of NOVO’s business, culture, and daily operations. As our clients continue to lease space in newly constructed buildings, NOVO has developed protocols where we can harmonize with the base building contractor. We understand we must collaboratively work in a way that allows the shell construction to conclude efficiently and safely.  Some typical protocol includes:

• Establishing a mutually agreeable logistics plan. Within this plan, we discuss items such as material storage, manpower access, trucking deliveries, elevator coordination, SAFETY, emergency ingress/egress, etc.
• Reviewing the Tenant Work Letter and comparing to actual as-built conditions. NOVO will inspect the landlord contractors work and make sure that it is per agreement.  If we find deficiencies or conflicts, NOVO will represent the tenant in finding a resolution.
• NOVO will coordinate all inspections with the landlord contractor, so that neither party hinders the other.
• NOVO will monitor the shell construction schedule and ensure that the delivery is per agreement. If the landlord contractor is behind for any reason, NOVO will apprise the client of the issue and protect their interest.  Concurrently, NOVO will work to mitigate the issues.

Hopefully this provides some clarity for our clients on the potential issues at hand when building in new shells. It is very clear to us that tenants should have an advocate contractor representing their interests. These are high dollar investments and advocacy is warranted.