Part 3: Tenant Improvements

Introduction: We’ve embarked on a big project - the Center for Social Innovation - and have been learning lots along the way.  We’ve decided to share our experience here in the hopes that our lessons will be of some benefit to others. Please reach out if you are thinking about a similar project for your community and we’d be happy to chat - hello@socialinnovationaustin.org  

Read Part 2 

On the one hand, the deal we would strike was straightforward; we would invest in the whole Springdale General project and we would take the master lease on 60,000sf in which to create the Center for Social Innovation.   But there was a major issue that we needed to address to serve non-profit tenants well.

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This hurdle was tenant improvements (TI), or all the things the tenant has to do to actually make the space usable.  Typically, when you lease a commercial property, the landlord delivers you a “shell” or “white box”. You can think of a shell as the exterior and structural walls, all your utilities run to the rooms in which they will be installed, and some level of wall treatment. Then the tenant hires a construction manager to bid, hire and manage a general contractor (GC)  as well as all other parties involved in the project; from the architects to subcontractors to permit expediters, etc.  This is all typically at the tenants expense.  

Then the tenant actually builds the space, incurring costs for materials, labor, delays, etc.  The financial impact of this process to a tenant is significant.  Imagine you are an office of 10 people and you need 2000 sf - a modest sized office about 45 ft x 45 feet or roughly the size of a small one-story home.   And let’s assume that the total cost of tenant improvements is a fairly modest $65/sf including all architect and construction management fees.  This means that the tenant needs to be able to pay $130,000 out of pocket ($65/foot x 2000sf) before moving into their office.  Or imagine you need 10,000 sf.  You’d need about $650,000 ($65/foot x 10,000sf) to ready your space.

Typically landlords will provide what’s called a tenant improvement allowance where they will provide a reimbursement at a set price per square foot for costs incurred by the tenant.  But even in cases where landlords are generous with TI allowances they are rarely, if ever, sufficient to cover all costs, and they don’t eliminate the cash flow problem of having to pay for the TI and then get reimbursed.

After some validation with potential tenants we confirmed our suspicion that we would need to deliver to tenants complete spaces that included everything but their furniture and appliances (called a spec build).   We’d also build out a co-working space and meeting space, shooting for a 300 person capacity that would be available to tenants and the social impact community at large.

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By completing the TI at scale with the help of everyone involved in the Springdale General project, e.g. by utilizing the project’s existing construction (NAVCON) and architecture teams Michael Hsu Office of Architecture and GSC our tenants would be able to move in furniture on day one, turn on their broadband service (Google Fiber or AT&T Gigabit) and have their new office up and running.

Matt McDonnell is a Partner at Notley Ventures, a micro private equity firm focused on the intersection of profit and social impact. He previously served as COO of Famigo, an early childhood EdTech company, and a sailing instructor at Outward Bound. He holds an MBA from the College of Charleston, a JD from the University of Texas School of Law, and has been a contributor to Ed Surge and Venture Beat.