As a prospective Tenant you may hear discussions about the different types of fit out, but what do they all mean and how does each affect the lease?
As a prospective Tenant you may hear leasing agents, tenant advisors and/or Landlords talk about fit out, specifically speculative (spec) fit outs, turn-key fit outs and existing fit outs. It is important to clearly understand what each of these terms means, particularly given an office fit out can have an enormous bearing on the financial element of a lease deal. They are different, and we have broken down the meaning/intent of each one as follows:
Existing Fit out
A space that is being offered to the market with an existing fit out has (in most instances) been previously occupied by a tenant, normally for a term of five (5) years or more. The fit out is not considered as new or near new, and it is likely that the fit out is showing some clear signs of wear and tear.
Due to the age and condition of the fit out, the Landlord will (generally) write off most or all of the residual value of the fit out which then allows prospective tenants to use a larger proportion of any incentive as rental reduction. Depending upon the condition of the fit out the Landlord may choose to invest money into re-purposing the fit out to improve its presentation. They may also choose to re-configure the design in some areas if they deem it necessary. Should a tenant wish to make wholesale changes to the fit out, this would be funded via the incentives.
Tenancies with a good quality existing fit out are often quicker to lease, given the tenant can achieve a more competitive ‘effective’ rental rate.
Spec Fit Out
A space that is being offered to the market with a speculative (spec) fit out, has a new fit out in situ that has never been previously occupied/used.
In this instance, the Landlord will look to remove the monies already spent on the fit out from any future incentive being offered to an incoming tenant, with any residual incentive being offered in the form of further fit out works and/or rental abatement. Many Landlords have preferred to build new fit outs within their smaller suites (< 250m2 approx) rather than present them vacant (empty). A prospective tenant can, therefore ‘touch and feel’ the suite and have certainty around the quality of the finishes.
Spec Suites also allow tenants to move quickly without having to allocate time to the fit out design process prior to moving in. Most of the speculative fit outs come without power-points and data-points to the workstations, which is a cost borne by the incoming tenant. Landlords often provide flexibility on terms with a spec suite, generally starting at three (3) years and sometimes less.
Turn-key Fit out
A space that is being offered with a turn-key fit out is one that is currently vacant but will be fitted by the Landlord on behalf of an incoming tenant to their specifications (within an agreed budget).
Turn-key fit outs are becoming more and more popular, particularly as Landlord’s streamline their fit out delivery models and costs. Some prospective tenants will prefer to have a space designed to meet their exact requirements rather than take on a suite with a new spec fit out that has already been designed and constructed without their input. In this instance, the tenant will be required to agree a detailed fit out design (space plan) with the Landlord’s preferred fit out designers, agree on the finishes and sign off on the scope of works up to an amount of money provided by the Landlord (as fit out contribution form the incentive).
The Landlord will engage the fit out contractors directly and manage all delivery of the space. Building owners delivering turn-key fit outs will often have spec fit outs also available within the properties, which are used as the benchmark in terms of quality. Often a Landlord will look to leverage a longer-term lease (i.e 5 years minimum) in return for them delivering the fit out on a turn-key basis but this is not always achievable.