Sorry, folks, I need to ask some stupid Tenant Improvement Allowance questions...
..and I hope some of you have the patience to answer them.  We have a legal team but they're $450 an hour and I'd rather ask them smart, specific questions than dumb vague ones.  We also have a broker but... well, read on please.

So my wife is planning a birth center (think "chiropractic office with bedroom and kitchenette" or "bed &amp; breakfast with exam table").  She's been delivering babies in LA, where several of her friends and colleagues have birth centers.  One we know particularly well opened one a few years ago with less than $30k out-of-pocket.  Her landlord assigned her an architect and contractor; she hired her own interior designer.  Her landlord wanted her space before her lease expired (neighbor wanted to expand) so the landlord paid to move her to a bigger space.  Her total operating budget for the space - lease, insurance, utilities, everything - is less than $5k a month.

So, from the perspective of "a birth center can be opened for less than $50k and operated for less than $5k a month" we went (to another metropolitan area) and looked at commercial spaces.  We've found one we like for $15/sqft/year modified gross - we'd be on the hook for gas, electric and phone only.  It's been vacant for 2+ years.  It’s 2000sqft of a 4000sqft freestanding CMU building, built in the ’60s, remodeled in the ‘00s.  Previous tenant was medical/dental.  It’s currently cold-shell.

Our broker drafted a 5-year, 2-option LOI with $10/sqft TIA, assuming the landlord would pay to bring it from cold-shell to warm-shell.  It seemed reasonable to us because the contract value is only worth about $150k.  However, our broker suggested we have the LOI looked over by our architect prior to submitting it, as the only place we can go is down.

The architect's informed opinion is that our buildout will run $50-60/sqft.

Obviously, there’s a gap between “we’ve seen this done for $30k” and “we need to scrape together $100k.”

So a furious afternoon googling as well as imposing on a relative who is an architect has revealed the following:

 - [$10/sqft barely covers carpet and paint.](http://hughesmarino.com/san-diego/blog/2012/02/06/tenant-improvements-a-practical-guide-for-estimating-project-cost/) but

 - [The Internet thinks $50k isn’t unreasonable for a 2000sqft buildout](http://www.austintenantadvisors.com/blog/when-leasing-retail-space-be-realistic-with-your-budget/) and 

 - [$30/sqft TI for a restaurant is entirely reasonable because it adds value to the property.](http://www.restaurantvoice.com/How-to-Buy-a-Restaurant/restaurant-lease-negotiation.html)

 - We discovered one birth center in Southern California that cost $75/sqft warm shell.

 - We discovered another birth center in Southern California that cost $150sqft cold shell.

So how the hell are we supposed to budget for this?  

What incentive does our landlord have for dropping $35-$45/sqft on a space he’s leasing for $12/sqft?  

I’ve built out restaurants handy-man style; it sure didn’t cost $40 sqft.

I’ve built out nightclubs.  They sure didn’t cost $40/sqft.

The relative said “well, you’ve got a space that’s really only appropriate for a chiropractor.  Anyone else is going to have to spend a lot of money to get it ready for business.”  I responded “her business is basically a chiropractor with a bathtub and a kitchenette.  Where does the $120k difference come from?” and he had no response.  

If I understand SBA loans at all (and that’s a big “if”), building this project out the way our realtor and our architect want us to will end up costing us *MORE* in TI loan repayment every month than it will cost us in **rent.**  And that just doesn’t make sense to me.  I’m certain I’m missing something but I’m a not-too-stupid person and several hours of self-directed investigation hasn’t revealed what it is.  

Is this the way it works?  You assume half of your overall operating expenses are TI improvements?  
[{"id": "cojjo90", "text": "Whoa, tough one.  Here's some thoughts from a commercial broker in TX:\n\n1) Architects always over-design and put in expensive materials.  They love it.  You can probably save some money on the finish out by changing some things.\n\n1b)  That being said, construction costs have gone up.  We typically budget between $50-$60/ft for general office finish-outs.  With more plumbing, you could creep into the $70s.\n\n2) If the space is cold-shell, the landlord should be willing to kick in more than $10/ft.  In TX, landlords usually offer $25/ft for medical offices.\n\n3)  The incentive for landlords is that when you leave the space, you've subsidized the cost of their finish-out and they've got a space they can theoretically quickly lease out to somebody else.  \n\n4) I am having a real tough time believing that your wife's friend was able to go from cold shell to move-in ready for less than 30k.  It seems impossible.  I think you probably need to let this expectation go.  \n\nIf I were your broker, I'd try to get 3-5 months free rent on a 5 year deal and also ask for $25/ft in TI knowing that I'd probably settle for $15.\n\nQuestions to ask your broker:\n\n- What are other properties offering in TI who are close by?  Is it $10/ft, or $25/ft?  If this landlord is way below the mean, then you have some negotiating power.  \n- Can you get free rent?  1mo/year is the standard.\n\n", "replies": [{"id": "cojk97f", "text": "Sincerely appreciate the input.  One clarification - the $30k number was warm shell, minus the TI allowance.  We're meeting with them to get a more detailed breakdown of that cost, but her rent is ~$12/sqft/yr so can't imagine that her TI allowance was in the $45/sqft range it would have to be:\n\n1500sqft warm shell\n\n$30k owner investment\n\n$50-$60/sqft TI cost (first went live in 2011, so inflation isn't a huge factor)\n\n = $30/sqft TI", "replies": [{"id": "cojknev", "text": "$30,000 for 1500 sqft = $20/ft that the tenant invested per her claim.  \n\nSo, if the total buildout was $55/ft or $82,500, that means the landlord kicked in $35/ft in TI allowance.  \n\n", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cojjp7x", "text": "Also, you need to get a contractor to give you a general bid idea based on the plans your architect has drawn up.  ", "replies": [], "depth": 1}, {"id": "cojr2kp", "text": "Phoenix checking in: $120/SF to build out medical office space from shell, which is generally office space with more plumbing and way more cabinet and counter space. I would try to value engineer the space with your contractor and architect.", "replies": [], "depth": 1}, {"id": "cojta5r", "text": "The big thing I've seen in mo that drives cost is cabinets/plumbing. \n\nIf it was remodeled in 00's why are you calling this cold shell?  I'll admit that isn't a term we use a lot locally but when I hear cold shell I'm picturing dirt floors &amp; no hvac.  What is actually in the space now?  Does it need mechanical and everything?\n\nWhat is in the scope of work exactly?  \n\nSome medical I've seen that can almost use standard office build out, some (omg dentists come to mind) 100+ / ft\n\nRestaurants tend to have a lot of expense in the kitchen/bathroom then its all flooring and paint etc.  Like I said above you are going to be hard into cabinets and plumbing etc.  \n\nI think your architect is giving you a general white box figure when you have existing stuff you can use maybe?  \n\nI think you are getting odd advice all around.  When we look at TI on the landlord side we are looking at a few things such as the marketability of the finish and how long we can amortize it.  \n\nNot sure if that helps or not.  I'd get a general contractor in there and get some rough prices on what you actually have to do to the space.  Is going in second gen space a possibility?  \n\nAlso about the lawyer, I wouldn't do that yet.  You have a brokerage and architectural issue right now.  Unless I am missing something I'm not sure what you expect a lawyer to help you on here.", "replies": [{"id": "cokfftc", "text": "\"Cold shell\" in that when the landlord cleaned up after the last tenant, he removed all the HVAC, the tegular grid and some of the electrical, not sure why.  He says he has it \"in storage.\"  The lease we're negotiating specifies warm shell.  \n\nScope of work for the landlord would be \"get it to warm shell.\"  Scope of work for our team would be \"get the space built out and ready to occupy.\"  It isn't really medical space; it's more like a day spa.  \n\nIn the past 24 hours I've approached 3 design-build firms.  One of them is going over to the space in an hour.\n\nAgreed on the lawyer... we're coming to recognize that our broker isn't exactly finding the cheapest solutions for us.  The property in question is one of 25 he recommended looking at and one of a handful that isn't Class A medical/dental.  ", "replies": [], "depth": 2}], "depth": 1}, {"id": "cojtnhn", "text": "also I'm not sure what market you are in, but I'm in the midwest in a lower priced market.  15/sf mod gross is lower end space here.  We run into your problem a lot actually.  The solution unfortunately is usually to find existing build out that doesn't need a lot, or extend the lease out and ask for more TI.  When you move up to more expensive space this becomes less of an issue.  \n\nThe other solution is to purchase so you can retain the value of the ti better.", "replies": [{"id": "cokfiq0", "text": "It's fair to say we're looking at low-end space.  \"Existing build-out that doesn't need a lot\" doesn't help us that much as most spaces don't really have \"bedrooms\" and \"corner tubs\" in them so a certain amount of build-out is to be expected... but it isn't particularly technical.\n\nWe'd *love* to purchase, honestly, except LoopNet shows exactly *one* commercial property anywhere near our desired site and it's a gas station.  Not being in the commercial real estate bidness I'm not sure what other choices we have, other than telling the broker \"forget all that, show us spaces we can buy.\"  That might be a discussion for Monday.  ", "replies": [{"id": "coms2kq", "text": "It's much more cost efficient to find an existing build out and ask the landlord to retrofit it to your needs. I usually put cold shell properties at the very bottom of the list when showing Tenant's available space. \n\nFor what it's worth, I don't think it's the best idea for a startup (which I'm assuming you are from your OP) to spend a ton of money building out a cold shell space or to purchase a property. ", "replies": [], "depth": 3}, {"id": "con9ld0", "text": "Do you have any of those use to be houses that are now in commercial zoning properties around town?  That would seem a near perfect fit.  Maybe anyhow, I don't know if you will have ada/access issues up the ass with that or not.  Just a thought.  \n\nWhat did your design build guys say?", "replies": [{"id": "copj7va", "text": "I thought the same thing when reading the original post, but I have not worked with this type of product before and don't really know what the finances would look like. I think a lot depends on the market as well (is it a zoning restricted place like most of California, or more like Kansas City/Houston with cheap construction everywhere?)", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]