It's never too early to consider your financing options.
Whether your current office simply needs a face-lift or it’s finally time to move to a bigger space, few projects are as thrilling — or as daunting — as managing an office build-out. Not only must you deal with a never-ending stream of contractors, suppliers and invoices, you must also figure out how your firm will actually pay for all those gorgeous new desks and that fancy new lobby.
Luckily, you have options. Although build-outs may be complicated projects, financing these projects can be more straightforward than you think. And smart planning in the early stages of your buildout will increase your chances for a successful office renovation.
Typically, your finance options will boil down to three approaches:
1) Bank Loan or Line of Credit
This is perhaps the most common finance solution. If your firm has a good bank relationship, obtaining bank financing may be a straightforward, easy process.
Keep in mind, though, that many banks will not loan against soft costs, such as construction services or software — meaning your firm may need to cover those costs in some other way. Additionally, tapping into a line of credit for a build-out may prevent you from accessing that line for other, more critical working capital needs.
2) Tenant Improvement (TI) Allowance
In some situations, landlords will add a TI allowance to the rental agreement to sweeten the deal. Expressed as a lump sum or per-square-foot amount, it can be used to renovate or retrofit the leased space.
However, a TI allowance may not be sufficient to cover all of your build-out expenses. The allowance may also be stipulated for certain project costs such as construction but not furniture.
3) Lease Line of Credit
For many firms, a lease line of credit can solve many of the issues with traditional bank financing and TI allowances, including:
Ability to finance 100 percent of a project’s costs.
A lease line of credit can include all expenses related to the build-out, including both hard and soft costs.
Build-out expenses such as architectural fees, construction, wiring and cabling, audio-visual setup
and carpeting can all be included in a lease along with furniture and fixtures.
Reduction in the tax burden.
Lease payments are recorded on your income statement, which means they are tax-deductible operating expenses.
This can reduce your firm’s tax expenses far more than the depreciation expenses you would claim if
you booked your new equipment purchases as assets on your balance sheet.
Diversification of funding sources.
Traditional bank financing may include covenants that limit your ability to add new liabilities to your balance sheet.
A lease line of credit avoids those covenants and provides you with off-balance-sheet financing.
Leasing will also prevent your firm from becoming too dependent on any single source of funds,
which can ensure stability and peace of mind in an unpredictable finance environment.
Distribution of costs over time.
Your firm’s employees will realize the benefits of your office build-out for years to come, so why should your equity partners
shoulder 100 percent of the costs today? Leasing provides you a fixed-rate financing arrangement where you can spread
the build-out costs over a five- to eight-year period. Particularly for large projects and expensive
equipment upgrades, this may be a smarter long-term approach.
Prevention of phantom income.
With traditional financing, the tax depreciation of office improvements is typically less than the cash expense.
This creates a higher taxable income compared to book income, which means your equity partners
will be taxed at a higher level. A lease program eliminates this phantom income drag.
Let's Reimagine Your Workplace, Together.
First American can help you create the workplace you've always imagined. Our solutions for office renovations and expansions are tailored to meet your business objectives—from project simplification and budget consistency, to tax savings and accounting benefits.
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