How Lease Negotiations Can Impact Design and Construction During Delivery of Government Tenant Improvements
Often Project Managers are tasked with arguing Tenant Improvement Cost Summary (TICS) Table Allocations on behalf of an ownership long after the lease has been negotiated and fully executed by the Landlord (LL) and Government Lease Contracting Officer (LCO). Some of the common aspects of a lease that are either overlooked by an ownership or at least not realized as opportunities to position the upcoming design & construction work include things like the Architect / Engineer (AE) Fee %, Landlord Administration Fee, “Shell” designations that can be applied throughout the lease, and many other aspects. In this post I’ll be highlighting some of the most common oversights made during lease negotiations which can severely hamper the LL’s ability to control costs, deliver a successful project, and ultimately have a satisfied tenant agency once the space is turned over.
The most commonly missed opportunity I’ve encountered is the negotiation of the AE Fee %. The reason I will never reference AE Fee as a $/sf rate is because I’ve never seen an appropriately scoped project by the Government. It’s not that they don’t want to provide a detailed SOW, but often the decision makers at the tenant agency level are rarely involved in the lease negotiations as those are handled by the GSA. For a LL to accept the risk associated with an AE Fee as a $/sf rate, both the LL and Government would need to agree on an explicitly written SOW with clear Shell & TI designations. In terms of AE Fee %, there are several considerations that need to be looked at. Is the space generally going to be a rinse and repeat of design efforts? Are there any special designated spaces such as SCIF / SAP / Laboratory / Armory / Evidence Storage / etc? Has the Tenant Agency provided a POR / Room Matrix / other standards document? Is the space being renovated large or small? How much engineering effort will be expended to update the MEP systems from their current configuration to what the expected tenant agency needs will be? The answer to each of these questions could add or remove a percentage point and each point would need to be argued individually to help justify an appropriate AE Fee %. Designing an open office floor plan for the Social Security Administration is completely different than designing a majority SCIF certified or laboratory facility.
The next most common mistake I encounter is the Facility Security Level (FSL) attachment to the lease not being updated beyond the standard template document which includes language stating each component of security in the FSL as being the obligation of the Government (TI) and Landlord (Shell). There is a drastic cost difference if the LL has the obligation to provide the Video Surveillance System, Intrusion Detection System, and/or a Duress Alarm. These systems, depending on their complexity, can run in the hundreds of thousands of dollars. While this one is typically easily negotiated away based on other documents like the RLP, Lessor RLP Response, etc, it has been a point of serious contention on a handful of projects I’ve been on.
Lastly, I often run into conflicts in negotiations when dealing with the special requirements section or non-standard statements which are not abundantly clear and leave the door open for interpretation. Some of the most common issues arise in regards to “as is” or “accepting of existing Tenant Improvements.” Typically these statements are found in the beginning of the lease with generalized statements like “unless otherwise noted in the lease.” The issue here is that the GSA standard lease sections are typically not updated to reflect what the spirit of negations intended it to be. A perfect example of this is a lease which stated “Unless otherwise noted, the Government accepts the Premises and tenant improvements in their existing condition, except where specifications or standards are contained elsewhere in this lease” and there were standard sections in the lease which the GSA Project Manager tried to construe as the intended carve out noted above. Luckily I was successful in negotiating the spirit of the negotiations was that the existing TI’s were accepted as is, except for a very few, extremely specific noted items found in Section 7: Additional Terms and Conditions of the lease. The initial position of the Government was that the TI portion of the project was $4.2M and the SHELL portion of the project was $2.5M. Ultimately the Government agreed with my interpretation of the lease and the final TI/SHELL split ended up at $6.0M/$700K. Unfortunately, because of the back and forth of negotiations we lost several months of time, thus delaying the start of construction and rent roll of the Landlord. Had the language above just stated “…except as detailed in section 7.02 of the lease” in lieu of the open ended “…except where specifications or standards are contained elsewhere in this lease”, many months of back and forth could have been avoided.
There are a lot of other small nuanced aspects to the lease which can cause major impacts to design and construction activities and affect the ownerships ability to control their portion of the costs. Because each building, tenant agency mission, and lease create a truly one of a kind situation, each lease should be reviewed and negotiated individually. Getting buy in from the broker, property manager, lease administrator, and project manager may cause a slight delay in lease negotiations but could save an untold amount of time and money during the term of the lease, especially during the design and construction of the Shell and TI work.
