The Work Letter: Managing the Unmanageable, Part 1

Let’s start by making one thing clear: real estate professionals who work for/with chain concepts that are reading this will probably hate it, which means I’m doing something right. 😉

An Introduction

A work letter is a document that’s an exhibit to the lease agreement between a landlord and a tenant which details which of those two parties will be responsible for performing all of the necessary improvements to the tenant space (for ground leases, work letters address improvements to the land). Most commonly, the work letter focuses on work which is the landlord’s responsibility and leaves the tenant’s work to be outlined elsewhere in the lease. Work letters typically cover utility work, common walls, building envelope, hazardous materials abatement, HVAC, restroom facilities, and that sort of stuff.

Work letters are major drivers of development cost for chains, like huge super-major big-time drivers. They are technical documents full of AEC industry jargon where if it’s off even slightly, one side of the deal is getting screwed and is out thousands of dollars, usually after the lease has been executed and construction is getting started. Work letters are negotiated between two parties, the aforementioned landlord and the tenant, where the representatives doing the negotiating frequently understand very little about all that AEC jargon. There’s a recipe for disaster if there ever was one, right? Well, I’m here to tell you we can manage this unmanageable situation…sort of, I mean it’s gonna be herding cats.

How Not to Do Work Letters

I feel like the best way to explain how to do this right is to talk about what goes wrong, and I’ve seen a lot go wrong with these over the years. Generally, you can break down errors into one of two categories: one is using outdated versions of the work letter in the final execution of the lease agreement; and the other is when vagaries or nonsense gets written into the final version.

With old versions making their way into leases, more often than not the tenant ends up shorting itself necessary infrastructure. Old versions happen because the path of least resistance for the real estate folks is to just “save as” whichever version is sitting on the desktop of their computer.

When vagaries or nonsense gets written into a work letter it’s because the deal negotiators just want to seal the deal, so they quickly scribble something down that probably made some sense to them in the heat of the moment. No one on either side understands what it means once it’s time to perform the work and once again, that usually means the tenant gets something it doesn’t want (if it gets anything at all).

It’s less common, but previous drafts can make their way into leases too, which is often a coin toss as to which side gets shorted in the deal. Gotta love it when you look at an executed legal contract and a page in it is filled with handwritten notes and scribbles in red ink. 😬

All of this can be fixed by putting rigorous processes and checks in place. But if we’re being pragmatic, it’s the enforcement of those processes that will be problematic, and downright unmanageable. I think this is because real estate culture is fundamentally different than design or even construction — it’s more casual in the way communications are handled because being personable is important to the art of negotiations. None of this is an excuse for not having good process in place though, which is what I’ll cover here.

Role of the Design Professional

A chain concept’s design team has the ideal skills to bring (some) order to work letter management. Architects are generalists who bring together project teams to get things done, and in-house architects can reach out to and organize the many interests of real estate, design, and construction to craft clear work letters. How do we do this? Like so many things architects do, it all starts with a great template.

The Work Letter Template

To make a good work letter template requires a deep understanding of the concept/building type/space type the work letter is representing. One must come to an understanding of the needs and wants of that concept as they relate to architectural elements as well as plumbing, mechanical, and electrical services, but also to the specific eccentricities of the concept (which could extend to other disciplines such as structural or civil). For example, maybe the concept needs to be in spaces that accommodate drive-thrus or maybe it needs a certain amount of overhead clearance inside the tenant space to accommodate tall fixturing, perhaps it’s essential that the floor be able to bear immense weight — it could be anything, just make sure you know all the needs before you start. Architects will see this is essentially a programming exercise, which makes it the logical first step of the process: learn what is needed. Once you understand the concept’s needs, you may realize you need more than one work letter template to address different site and/or shell building situations, and that’s okay.

With the concept’s needs in hand it’s time to start writing. As this is a technical document that describes what is to be designed and then built, the words need to come from the design team. Make sure that all of the players in development have a chance to review language as it’s drafted and that they understand what it means. Include external design and construction consultants in the reviews the template drafts as these people often deal with work letter screwups first hand. As the template is being written, highlight or otherwise code variables in the language as needed to write deal-specific edits , this makes it easy to adjust the template verbiage to those specific deals (more on this in Part 2). If it seems worthwhile, write a plain language guide to accompany the template(s) as an internal document to help people use the template(s) properly. Every “ask” in the work letter should be individually numbered, which makes it easy to reference later on during negotiations. Each of these asks should have a simple title that briefly explains what the ask is about, this titling makes it easy for the negotiators to understand the range of things being asked for at a glance.

This sample gives an idea of the composition of the work letter template

How you write a work letter is obviously important. It should be written in the imperative. It should be as concise as possible, which will take several rounds of revision. Specificity is vital, not just the specifics of what you want, but saying who does what and when they do it is equally important. Something else that comes into the writing of the work letter is that the style or approach of your real estate team may dictate that certain things that an architect or construction manager may want to leave open-ended (because the certain thing can’t be specific until a space is designed) really need to be specific in the work letter to accommodate a preferred approach to deal making, which requires a big dose of creativity from the design team to resolve.

Start a document version system and imbed it into the template(s). This is key because as you start using the new template(s) you will have updates and corrections, especially in the beginning. Having the version number of the template out there on documents in the wild helps everyone quickly know what they working from as the evaluate the deal (this is super important when corrections/updates to subsequent versions improve deal terms) since the template that starts the deal typically has to be used all the way through lease negotiations, which can drag on for a long time. You may even want to hide the version number or make it as inconspicuous as possible to avoid it getting edited out of specific deals — this is a big problem as the work letter gets handed off from the real estate folks to the attorneys who are…let’s say pedantic, about tinkering with document formats. Make it clear to everyone to leave that version number alone, it’s part of the deal as far as they’re concerned.

In Part 2, we’ll put all of this preparation into action. All of these details help us build a workflow that’s speedy, as time is of the essence when it comes to negotiating a lease.

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