Hidden Franchise Construction Costs

The build-out construction process is often the most challenging component of any franchise startup. Blending design decisions, city review, landlord issues and financial concerns, the project culminates with the added stress of final details before the doors open for the franchise. Often if business owners had a mulligan, they would go back and rethink the actual costs in building out the demised space. Hidden franchise construction costs lurk behind each build-out, which after the lease is inked, become the responsibility of the unaware tenant.

One of the most important aspects of site evaluation is understanding the physical condition of the tenant space and how it relates to the franchisee use. A “standard” vanilla box condition, negotiated in most leases, may leave the incoming tenant with many required upgrades not known when the lease is signed. These are often facilitated by code requirements, poor condition of existing construction or design requirements brought to the project by the franchisee.

Consider the following brief list of common potential hidden costs:

A. New or reworked fire suppression system.

B. Additional egress requirements.

C. HVAC system modifications.

D. Demising wall fire rating.

E. Electrical service entrance adequacy.

F. ADA modifications.

G. Asbestos or hazardous material abatement.

H. Water or gas service size deficiency.

I. Additional toilet rooms required.

J. Fresh makeup air requirements or exhaust systems.

K. In-wall blocking, sound attenuation insulation needs.

L. Underground plumbing, fixture requirements, drinking fountains, mop sink, floor drains, etc.

M. Floor prep, waterproofing membrane requirements.

N. Health department finish requirements beyond Vanilla Box specifications.

O. Fire alarm systems.

P. Required use of Landlord’s roofing contractor for warranty.

Q. Adequacy of storefront construction, location of doors, glass areas, energy efficiency, etc.

R. Location of landlord provided work not compatible with plans.

S. Adequacy of site to stage construction, parking, dumpsters, deliveries, etc.

T. Excessive building permit fees, bonds, insurance costs.

U. Stringent landlord required construction site policies and procedures.

V. Union labor requirements or landlord contractor use requirements.

W. Tap fees for utility connections.

X. Hidden or unforeseen conditions in walls or under floor slab.

Y. Complexity of demolition activities – removal of debris from jobsite.

Z. Additional emergency / exit lights required by building department.

The list stretches from A to Z. The best advice is to know the physical attributes of the space you are leasing. It may have a profound effect on your decision when you are considering various locations. Combining various expertise at the outset can be very beneficial: a general contractor for demised space review, a financial planner for business plan review, a real estate agent for site review and a real estate attorney for lease review. Directing a bright light at these hidden issues before you commit can make all the difference.