The importance of the work letter. (An Advertising Supplement to the Los Angeles Business Journal: Corporate Expansion & Relocation).

While there are many issues for companies wishing to relocate, none are more important than those covered in the Work Letter. This article -- while not a comprehensive guide -- will focus on the important and costly issues that need to be addressed in a "tenant build" situation, where the tenant selects and holds the contract with the architect, engineers and General Contractor.

In a leased premises, one of three conditions is likely: the floor is occupied by an existing tenant, it is vacant but with improvements in-place, or shell condition (either new or "gutted").

Delivery condition of the space is integral to your design and ultimate cost. That's why it is critical that it be specified in detail in the Work Letter. The negotiating tenant should not be afraid to be specific and detailed. It will cost them money if it isn't spelled out.

Once the architect has designed the space and the tenant approves the design, it is time to submit to the landlord for approval. The work letter will spell the conditions for landlord rejection. The landlord's reasonable causes for rejection of the tenant design are:

* the design is not at a minimum consistent with the building standards,

* the design negatively effects the systems of the building,

+ the design is not consistent with the exterior appearance of the building (i.e., special lighting) or the design adversely effects the other tenants.

The other often cited reason is failure to comply with code. Most sophisticated landlord's require compliance, but will not review for compliance. As a matter of fact most landlords have a disclaimer claiming their review is not for code compliance.

The tenant must request a copy of the contractor rules and regulations. The "rules and regs" detail the use of loading dock, service elevators and off-premises storage. They also should spell out the Landlord's hours available to the tenant for delivery, landlord "chargebacks" (landlord fees that will be charged to tenant for building services or penalties), limitations on use of the premises, after hours access and forms needed for use of any of the building services.

Building Managers are typically "form" intensive. Make sure the bidding general contractors are aware of these "rules and regs." The regulations will include starting hours, noise restrictions, odor restrictions (painting/glue), use of hot equipment (torches/welding), time restrictions, housekeeping, etc. The proprietary contractors (the landlord's must use vendors) for such things as energy management (temperature control) and life safety/fire alarm systems and the list of prequalified subcontractors may be part of the rules. If excluded, ask - you don't want to be surprised when ready to bid or worse after award to contractors.

In addition, there may be a document that contains the building standards, which detail the minimum quality of the tenant improvements. Most landlords want a minimum quality on the tenant improvements in their buildings. The standards specify the type of ceilings, light fixtures, carpeting, VCT, doors/frames/hardware, partition types, and HVAC equipment Some Landlords have very detailed ones - others don't. Ask for a copy, put it in the work letter. This will protect the tenant later if the landlord decides to revise its standards.

The landlord's responsibilities also include removing any telecommunication cables or equipment that is not being used. The tenant does not want the liability of removing telephone or communication lines. The same goes for HVAC plumbing and electric equipment or pipes/lines. We recommend in all cases the landlord perform the demolition of existing improvements.

The availability during the improvements of electricity, air conditioning and water at no cost from the landlord should be negotiated and made part of the Work Letter.

It is beneficial to the schedule to negotiate a "staging area" for the general contractor. The landlord is usually amenable when the tenant is not taking the whole shell space floor.

The landlord also is responsible for removing hazardous materials such as asbestos, and needs to prove the removal to the tenant (certificates from registered hygienist). Likewise, the landlord should be responsible to bring the public areas, including the "core" of the floor (and restrooms) up to "Code," which includes ADA (Americans with Disabilities Act) compliance. In addition, the landlord should provide a life safety alarm system and should provide a "backbone" that can handle the tenant's code requirements for fire alarm devices. Again, spell it out in the Work Letter.

Limitations of the tenant improvement cash allowance are easiest to administrate when detailed very clearly. Most tenant improvement allowances may be used for costs associated with design, permit, construction, telecommunications and furniture. Most landlords will object to furniture and to some extent, telecommunications equipment, as both items are not real property. Even if a previous tenant leaves them, they most likely have little value to the new tenant or landlord. If the tenant wants to include furniture in the allowance, the landlord will probably cap the amount allowed. The tenant can only ask.

The tenant will be required to provide a budget of hard and soft costs. The landlord wants to make sure the tenant has a grip on the total cost-of the project. In addition, the landlord is interested in how much of the entire cost the Tenant Improvement allowance will cover. Sophisticated landlords often ask for a copy of the agreement between the general contractor and the tenant to make sure the hard cost in the budget is accurate and the terms and conditions of the lease are included (i.e., insurance, rules and regulations). These are reasonable requests. Tenants should specify that the landlord must respond to the budget in 3 days or less and must be reasonable in their response.

The disbursement of the allowance should be clearly outlined. The tenant would like it all up front but most landlords want to see the improvements in place before they pay. If the cost of the improvements exceed the Tenant Improvement allowance the landlord may want the tenant to fund the amount of excess first. Our recommendation is after tenant written approval, the landlord should pay the vendors directly. In the case of the over allowance cost, the landlord can fund to 90% of the allowance and hold back 10%. This final retainage need not be disbursed until all the funding is complete and tenant delivers the required paperwork and lien releases.

The pay requests process is typically done on a monthly basis, The paperwork requirement needs to be spelled out for all parties. Typically the contractor provides an AIA form for the pay requests and the appropriated lien releases from the general contractor and subcontractors/material suppliers. The tenant will then pass the forms on to the landlord. If the project is a "Landlord Build", the tenant is not responsible for this paperwork. This is an area where the landlord needs to be reasonable on the closeout document requirements.

The provisions for security systems need to be identified: Is there a backbone system that can be utilized for the tenant access control? If there is a vendor, what kind of cost and performance standards may the tenant expect?

In the case of a tenant build work letter, the tenant should not pay a landlord administration or construction management fees. If that is non-negotiable, pay only actual time spent reviewing plans and administrating. It typically is less costly than a flat percentage charged by landlords. The landlord's representative has to justify their hours. Most of the time the landlord's rep doesn't do much.

There is no way one article can enumerate all that a tenant should look for in a building. In addition one article will not cover all the issues that are required in a Work Letter. I don't believe in prolonging the lease negotiations, but the work letter should be as detailed as the expense and escalatable sections of the lease. Remember if an issue is not covered in the work letter, the landlord will impose its "sole discretion" (and that usually translates to additional costs for the tenant). But during the transaction phase and the delivery phase a professional project manager is worth every penny you will pay for his or her services.

Steve Gallagher is with the Cushman & Wakefield Project Management Group.