Strategic Ways to Think About Your Buildout

Are you excited and a little nervous about funding your buildout project? Here are some important factors to consider when deciding how to finance a buildout.

A new buildout project often feels like an exciting fresh start. After all, you’re either rejuvenating your current space or making your new space feel great by designing it to meet your specific needs. While it’s true that getting a new look for your space is exciting, getting the funding is often a little overwhelming.

It’s most common for tenants to seek funding through either a bank or a landlord because both will give business owners money for a buildout through various avenues. However, don’t assume those are your only options.

There are four basic ways to fund your next buildout – through a bank loan, through your landlord, through tenant savings, or a mix of these three options. Regardless of the route you choose, you still need to understand your short- and long-term goals and have your finances in order.

At Verity, we’ve worked with many business owners on buildouts, and we’d like to share what we’ve learned. Read on for more!

Funding Through Landlord

Landlords typically fund a buildout through reimbursement, free rent, tenant improvement allowance, and cash allowance. There are also hybrid options like an amortized tenant improvement allowance, a mix between a loan from your landlord and tenant improvement allowance, or obtaining funding from both the landlord and the bank.

The catch? Many people underestimate what a landlord will evaluate to approve funding. They usually require almost as much information as a bank. If you think this is a good option for your business, start gathering info like your personal credit history and a current balance sheet now. Don’t be unprepared!

Funding Through Bank

Bank rates are almost always more affordable than landlord funding—but the flip side is that they are often harder to obtain. It’s important to know that getting a bank loan or line of credit may be easier and more cost-effective if you already have a good relationship and a history with the institution.

However, many banks won’t loan against soft costs, such as professional fees or software. Also keep in mind that if you’re tapping into a line of credit for a buildout,  you may not be able to access your line for other future, more urgent needs.

However, as we mentioned earlier, it’s important to weigh the situation even if the solution seems obvious at first. For example, medical providers often think landlords’ funding offers them a great deal, not taking into account that a term loan through the bank would be a better option due to valuable collateral, such as their office’s medical equipment.

Best Use of Capital

Using your landlord’s money or your own depends on your business’ short- and long-term goals. Also, there are some situations using a mix of the landlord’s and the tenant’s capital is a great solution. Here are some examples of when to use whose capital:

• If you need to show cash flow, it’s often better to negotiate a lower lease rate and use a bank loan or your own savings to fit out the space.
• If you just want to conserve capital, you can negotiate that the landlord finance the buildout.
• If your bank loan is the best finance opportunity but they won’t cover all the costs associated with the buildout, consider negotiating a hybrid option.

There are many factors that determine whose capital to use. Remember, there is always a cost associated with tenant improvements, whether the capital is the landlord’s or yours.

Luckily for you, there are a variety of financing options for your next buildout project. Although buildout projects and finding the right funding source can be overwhelming, understanding your business strategy and goals will help you determine which funding is right for you.

If you’d like some guidance, Verity Commercial would be happy to look your specific strategic business goals to help you figure out what financing route is best for you.

Contact a Verity Commercial tenant advisor today!