At last corporate occupancy costs can be contained at more acceptable levels for the medium and long term – provided there are no long uneconomic legacy lease tails from the exuberance of the last cycle high. But new premises will need to be fitted out to suit business and workplace practices at a time when financial management loathe committing any capital expenditure to non-core corporate activities. How will the fitout be funded? It would be a pity not to make use of the current market to relocate. But a holistic and practical approach across the whole relocation and fitout design and financing process is needed to deliver corporate value in these uncertain times.
Control Initial Specification And Cost Budgets
Start at the beginning with the budget. Some fitout designers and contractors are notorious for pushing the limit in terms of fitout specifications and cost budgets to ‘make a new statement’ in design. These designs always look great on glossy brochures. So be disciplined in setting the budget for the new fitout – and beware of the benchmark budget commencing at the top luxury end. From experience, reasonable to ‘very good’ fitouts can be achieved in a range between $1000 and $1500 per square metre. Budget practical fitout can be achieved at even lower price levels. And make sure that this is an all-inclusive budget rate, so there are no later unexpected addons of fees, overheads and other cost imposts.
Focus On Generic And Flexible Robust Fitout
For future flexibility purposes, as well as keeping a cap on costs, avoid any specialist fitout designs. Strive for more generic layouts with minimal workstation variations. Well-designed, robust local furniture systems can be as effective as the latest ‘Italian design’ trends.
Beware Specialist Design Features That Impact The Base Building
Before allowing your designer to go for features such as dropped or flush ceilings, expensive feature walls in breakout areas and the ubiquitous internal staircases, do your homework! These specialist features can have significant costs attached that inflate the fitout budget. Are these features going to add to the productivity and project the image to the extent that the additional costs are justified? The cost is not only related to the initial construction – the make-good at the end of the lease is the sting in the tail. In this market as part of the initial lease negotiations, it may be possible to have the developer include some specialist features such as enhanced entrance foyers, upgraded fire stairs and bicycle racks in the basement, as part of the base building.
Consider An Integrated Fitout
The commercial office market development process that has evolved over many years has separated the base building contracts from the fitout contract. There are certain practical considerations for this, but it can nevertheless be a wasteful and time consuming process. Integrated fitouts can save money and time. The market norm is having the developer complete the base building services and finishes such as lights, ceilings, AC outlets and sprinklers, to a standard grid.
After completion the tenant’s fitout contractors move in and remove some of these elements (such as ceiling tiles and light fittings – this can cause damage and additional cost), adjust other elements such as sprinkler heads (this requires draining of the sprinkler grid and is expensive), introduce re-ducting for some AC outlets to suit the layout and more. Besides costing more, this process takes time. An integrated fi tout is not without problems and risks, but can represent a saving of 10 to 15 percent of the fitout, as well as save time.
Be Realistic In The Fitout ‘Green’ Statement
Based on experience the premium cost for a five-star fitout has been in the order of 10 to 15 percent. This benchmark can be managed down, however, as technologies and ‘green’ fitout experience grows. The key message here is to use the experience of others and manage expectations – there is no need to be a pioneer.
Use Components Of Existing Fitout
In this age of sustainability awareness, it makes sense to reuse components of an existing fitout in the new design. This may be refurbished chairs, expensive boardroom and meeting room tables, credenzas and drawer units; filing cabinets and compactus units, etc.
Use Your Incentive To Finance The Fitout
In this market many tenants are relying on their incentive to fund their fitout. Leasing deals are now being struck with incentives ranging between 10 and 30 percent of total rental for the initial period of the lease. On longer lease terms – 10 to 15 years – this can substantially fund fitout costs, provided the developer can provide the incentive as a cash contribution. In the tight financial market, however, developers may (unbelievably) not be able to finance the incentive. Rent-free periods may be the only incentive option. But make it clear upfront in the negotiation that the intention is to fund the fitout with cash incentive from the developer – do not wait until the deal is done and there is no negotiating leverage left.
Negotiate To ‘Rentalise’ The Fitout On An After-Tax Basis
Subject to the availability of developer finance, fitout costs may be able to be rentalised. Current depreciation legislation provides an attractive option for the building owner to own and write off the fixed components of the fitout over the lease period. With this approach the cost of fitout not covered by the incentive is rentalised and paid off over the duration of the initial term of the lease – but beware of the imputed interest rate being applied.
Borrow To Finance The Fitout
If all else fails, consider the loan option. It may even be possible to have the fitout contractor finance a portion of the fitout at very competitive rates – they need the contract. In developing the overall strategy to minimise the capital cost and financial impact of the fitout, be wary of the form of contract to deliver the fitout. For the uninitiated the implications and advantages of different forms of contract can be challenging. The traps of ‘design and construct’ and/or GMP (guaranteed maximum price) contract proposals and structures can end up with higher costs for the inexperienced. At the onset of discussions, these forms of contract appear to be attractive low-risk delivery options; however, experience shows that often the outcome is skewed in favour of the contractor. In modelling the financial impact and business case of relocating, remember the enhanced depreciation provisions for the moveable components of fitout – these write-offs can be useful for tenants with profitable businesses
