Tenant Improvements: Who’s Doing What and Who’s Paying?
Almost every tenant of a growing facility will need to make some changes or improvements to the grow space to make the facility work for them. Of course, the extent of needed improvements will vary depending on whether the grow facility in question was previously occupied, how old the existing improvements are and whether the prior uses and the new contemplated uses are the same. A new building that has not been previously occupied may have bare concrete floors, no drop ceilings and no distribution of mechanical, electrical or plumbing systems and may require extensive improvements. On the other hand, a space that had been occupied for a short period of time for a similar use contemplated by the new user may require few changes. In this case, the tenant improvements may be limited to new paint, carpet cleaning and minor touch-ups and repairs.
We are not only going to own the real estate and lease that to our Growers, we’re going to own and blend into the lease all the following:
- irrigation systems,
- lighting systems,
- security systems,
- solar power systems,
- backup power systems,
- water recycling systems,
- permanent grow tables,
- A/C temperature and humidity,
- environment control,
- laboratory space, and
- office space
When addressing tenant improvements in a lease, there are two main questions that need to be addressed: “Who is doing what?” and “Who is paying for what?” We will start with “Who is doing what?”
A common phrase in real estate leasing is “turnkey build-out,” which is meant to imply that the landlord is doing all the work needed by the tenant to occupy and use the space – that the tenant can “turn the key,” open the door and start working. Realistically, it is rare that a space is ever truly “turnkey” as most leases allocate to the tenant the responsibility for some portion of the improvements, namely installation of furniture, phone and data cabling and communication and computer systems. Other phrases include variations of “a white box,” intended to describe a space that has finished floors, ceiling and walls, lighting and heat/air conditioning; and “a cold dark shell,” which is a demised space that has no heat, no light, and no finishes. Of course, different people can have different meanings for the same phrase and those differences can be material. The key is to make sure that both parties are using the term in the same manner. As a real estate owner and developer, we define with words and exhibits what the Grower’s need and what we will pay for so everything is spelled out.
With Fusion as your landlord, we expect to provide the majority of the tenant improvements a Grower needs, and those improvements need to be clearly specified. This benefits both Fusion and the Grower. Fusion needs to know what it is obligated to deliver under the lease. Likewise, the Grower needs to know that Fusion will deliver the space to the Grower in the manner described so that the grow facility will have the utility and fixtures that the tenant expects. One of the easiest ways to clearly describe the tenant improvements is to attach to the lease detailed plans and specifications for the improvements. Many leases include a plan showing the layout of the proposed tenant improvements and provide that the landlord will perform those improvements using “Building Standard” materials and finishes. We work together to clearly describe the “Building Standard” materials and finishes.
A remaining question is: who is paying for the cost of the tenant improvements and how does that impact the lease transaction? The Grower needs to remember that the cost of the tenant improvements is considered by Fusion in agreeing to a rental rate. If Fusion is funding the cost of the majority of tenant improvements, a portion of the rent being paid by the Grower will reimburse Fusion for those costs.
The process related to constructing tenant improvements is a complicated one and can have a material impact on the Growers’ business operations. It is crucial that we both clearly provide for each party’s rights and obligations under the lease with respect to the completion of the tenant improvements in order to ensure each party achieves its business objectives.
We acquire, develop, lease and manage properties that have been approved by state and local authorities for the specific use of growing medical cannabis.
From site selection to financing, to delivery of the finished project, Fusion’s sale/leaseback or build-to-suit approach results in a facility that meets the long-term needs of our tenants. Our team works together to translate your business needs into facility needs. To speak with FUSION PROPERTIES about your specific situation, please contact:
CEO & Principal Investor
FUSION PROPERTIES, Inc.
1155 Camino del Mar, Suite 521
Del Mar, CA 92014
Go To https://calendly.com/kendell-lang in order to schedule a discovery call.