Count the Cost Before You Hang the Sign: TI, Landlord's Work, and What Buildout Really Costs

It's exciting to go into a new entrepreneurial venture. Whether it's a startup restaurant, a clothing store, an automotive shop, or a countertop business, there's a lot to do. But before you hang your sign and post your grand opening on Instagram, you need to count the cost.

I think of the parable Jesus told in Luke 14:28-30: "For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish it, all who see it begin to mock him, saying, 'This man began to build and was not able to finish.'"

Although it sounds like it was written about construction, it was actually written about the cost of following Him. But it can easily be applied to commercial leases.

What Nobody Shows You on the Tour

I once watched Dave's Hot Chicken convert an old T-Mobile store into a restaurant. Long before the neon signs and the graffiti, they had to put in a hood, a grease trap, maybe a whole new HVAC system, and more. None of that shows up in the concept photos.

Lots of times the ideal space is a second generation version of what you're doing. It makes the most sense when a place used as a restaurant becomes a restaurant, or a gym becomes a gym. That's awesome, and it's the highest and best use of the space. But even then, there are still many changes you'll make. Here are the factors that decide how much:

1. How long has it been vacant?
2. What improvements has the landlord done?
3. Is it stand alone or in a center?
4. What condition did the last tenant leave it in?
5. Can you use it as is, or does it need ADA bathrooms, a bigger hood, or walls torn down?

Where Great Ideas Miss the Mark

Here's where the best decorators with the best ideas and the most beautiful AI concept photos miss the mark. What is the buildout going to cost you?

That question is what actually decides whether the deal works. Pretty renderings and vision boards don't pay for a hood, a grease trap, or ADA bathrooms. The buildout number does.

Tenant Improvements and Landlord's Work

Two phrases you'll hear in every commercial lease negotiation are tenant improvements and landlord's work. They are not the same thing, and mixing them up costs people real money.

Tenant improvements, or TI, are the changes made to the space to fit your business. A TI allowance is money the landlord agrees to contribute toward those improvements, usually a dollar amount per square foot, paid after the work is completed and documented. Anything above that allowance comes out of your pocket.

Here's what I'm actually seeing in the market right now: TI isn't happening as often as it used to. In new construction, when a space is delivered as a shell (cold gray shell or warm vanilla shell), you will still see TI and hard money, because there's nothing finished there to work with yet. Everywhere else, landlords are more often putting value on the table as rent abatement or rent reduction rather than writing a TI check. It's the same help to your bottom line in a different line of the lease, and knowing which one you're asking for matters.

Landlord's work is what the landlord agrees to deliver before you take the space, spelled out in a work letter. It might be as basic as fresh paint and a working HVAC, or as involved as a new storefront, a demising wall, or an upgraded electrical service. The work letter also defines the condition of delivery: is the space handed over as-is, or in shell condition, or fully built out to your specifications?

Get those definitions clear before you sign. If the lease says as-is, then every dollar of code compliance, grease trap, and ADA upgrade is yours. If the landlord is doing work, get the scope, the timeline, and the remedy in writing when they are late.

The Client Who Did What I've Never Seen

I saw it recently with a client of mine. They literally did what NO ONE has ever done before. Because they own multiple construction companies and have a retail concept they are opening in Jacksonville Beach, they took photos and video during the showing and wrote up an entire cost estimate to upgrade the space and bring it up to code and usable condition.

We included it as an addendum to our LOI to explain the request for rent abatement and rent reduction. That document changed the conversation. Instead of asking the landlord to trust a number, we showed the number.

Not every new entrepreneur, or even an experienced franchisee, has construction experience. But it's important to surround yourself with trustworthy professionals who can give you good advice.

I was helping another client who asked if he could bring subcontractors back into the space before we submitted the LOI. I think that's brilliant. I rarely see it in the marketplace, and I wish I saw it every week.

The Bottom Line

The rent is the number everybody negotiates. The buildout is the number that decides whether you can actually open. Count it before you fall in love with the space, not after.

If you're evaluating a commercial space in Jacksonville and want to know what it will really take to open the doors, call me at 904-903-8755. I'll tell you what I'd do in your position.

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Melesia Ziller, Broker/Owner Clearpath Commercial, Jacksonville and Northeast Florida