A comprehensive fit-out of Grade A office space in Warsaw now costs EUR 1,000-1,300 per square metre, and the budgets landlords offer have not kept pace. Phasing the fit-out lets the tenant spend part of the money at the outset and unlock the rest after 4-5 years to refresh the office. The tenant gains liquidity, refurbishment funding guaranteed in the lease and a stronger negotiating position. With an institutional fund, a conversation about phasing is difficult; with a private landlord, it is often straightforward.
EUR 1,300: that is roughly what a comprehensive, modern fit-out of one square metre of office space in Warsaw costs today. For 2,000 m², we are talking about a budget in the region of EUR 2.6 million.
A large share of that sum is often spent in full before the first employee has even collected their access card. And then? The lease runs for 7 or 10 years, the way people work changes every few quarters, technology changes even faster, and yet the fit-out budget was closed on day one. That is precisely why phasing the fit-out budget deserves a closer look: it is a mechanism that allows this money to be spread over time.
Costs have run away, budgets have not kept up
Before the pandemic, a tenant could still secure a “turnkey” office funded by the developer within a budget of EUR 550-600/m² (measured from shell & core). Today such offers are rare. A basic fit-out standard alone now costs around EUR 700-900/m², while a typical Grade A standard ranges from EUR 1,000 to as much as EUR 1,300/m². The gap between the budget offered by the landlord and the real cost of the fit-out keeps widening, and someone has to fund it. This often ends with the tenant contributing their own money or committing for 7 or even 10 years instead of the standard five. This is exactly where the conversation about when that money should be spent begins.
Even so, Warsaw remains a relatively cost-attractive market: the same works cost on average over EUR 2,300/m² in Berlin and approach EUR 1,500/m² in Prague.
Two philosophies on the landlord side
Phasing the fit-out budget is a good illustration of how different building owners’ strategic goals can be. Large investment funds value clean cash flows above all, and want to close out their CAPEX commitments as quickly as possible. From the perspective of the property valuation and the lending banks, a fund prefers the tenant to use up all its incentives, from rent-free periods to the fit-out budget, here and now, at the start of the lease. Put simply, they want these costs off their plate rather than keeping cash reserves frozen for years.
On the other side are smaller, often private landlords, who take a more flexible approach. For them, phasing the fit-out is an effective tool for securing long-term leases of 7 or 10 years. The tenant does not have to commit all the funds at the outset. Part of the budget goes on the initial fit-out, and the rest is “unfrozen” after 4 or 5 years, when the office naturally needs a refresh, a facelift or an upgrade to new technology standards.
What does the tenant actually gain?
- Liquidity. Capital the company did not spend on day one stays at work in its core business.
- Certainty of refurbishment funding. Instead of asking the board for new CAPEX halfway through the lease, the tenant has the money for refreshing the office guaranteed by contract.
- Negotiating power. The value of the incentive package grows with the length of the commitment, and in our experience the effective rent (after all concessions are taken into account) can be around 15-20% below asking rents. Well-negotiated phasing is therefore not a “bonus” but part of the real economics of the lease.
How it works in practice
On one lease renewal project, we used this mechanism because the client was unable to settle on a brief for the new fit-out quickly. Rather than make decisions under time pressure, we wrote part of the budget into the lease to be drawn down later. The same approach works for growing companies: if growth is expected to peak only in a few years, we align the clauses releasing the funds with exactly that moment.
You have to remember this money. A common mistake is that, after personnel changes on the tenant side, nobody knows exactly what the lease says any more, or that the set-aside funds can be drawn on after a certain time. By then, the question of changes to the office comes back to the table too late.
What to secure in the lease
Before you sign a lease with a phasing clause, it is worth pinning down several points precisely:
- the amount of the second tranche and the specific point at which it is released;
- the indexation rules (fit-out costs have risen steadily in recent years);
- the list of works the set-aside funds can be spent on;
- what happens to unused funds;
- who owns the building: with an institutional fund, a conversation about phasing will be difficult; with a private landlord, it is often surprisingly straightforward.
