Re-underwriting a signed lab lease after the work letter is resolved
This article works through a 120,000-square-foot lab conversion after the final responsibility matrix moves $5.8 million of building infrastructure to the landlord and integrated commissioning moves rent commencement by 120 days. It shows how unchanged face rent becomes $9 million of additional funded cost and equity.
A signed lab lease can preserve its area, rent and term while the owner's investment case changes materially. The controlling change is often inside the work letter: where the landlord's base-building systems end, where the tenant fit-out begins and which completed, operational and commissioned systems are required before rent starts.
That is the issue here. The initial case treats electrical, exhaust, lab waste, rooftop support and controls as largely available or funded through the tenant allowance. The resolved exhibits place the service upgrades, main distribution, structural work and integrated commissioning with the landlord. Base-building cost increases from $8.4 million to $14.2 million.
The following case is illustrative rather than client data. The acquisition price is $82 million. The lease pays $78 per square foot of annual base rent on 120,000 square feet. The original senior loan commitment is $82.180 million, or 70% of the initial funded cost, and does not automatically increase for later scope or delay.
The acquisition case before the final responsibility matrix
The initial project budget contains $8.4 million of landlord base-building work, an $18 million tenant-improvement allowance, a $3 million leasing commission and $6 million of soft costs and pre-rent carry. Total funded cost is $117.4 million, and rent commences January 1.
The final work letter and design documents make the landlord responsible for additional electrical service, emergency power, outside air, exhaust, heat recovery, lab-waste mains, process-water risers, roof reinforcement, shafts, controls and system commissioning.
The added scope increases landlord work by $5.8 million. Its procurement and commissioning sequence moves rent commencement to May 1 and adds $3.2 million of soft costs and pre-rent carry. The lease's stabilized NOI remains $9.06 million; the funded basis required to reach it does not.
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| Underwriting line | Initial case | Resolved work-letter case | Movement |
|---|---|---|---|
| Landlord base-building work | $8.400M | $14.200M | +$5.800M |
| Rent commencement | January 1 | May 1 | +120 days |
| Total funded project cost | $117.400M | $126.400M | +$9.000M |
| Stabilized NOI | $9.060M | $9.060M | — |
| Yield on cost | 7.72% | 7.17% | −55 bps |
| Required equity | $35.220M | $44.220M | +$9.000M |
Resolving landlord and tenant work at each system boundary
The work-letter reconciliation is made at the system demarcation, not by labeling an entire trade landlord or tenant work. The landlord provides the upgraded electrical service and emergency power; the tenant distributes power from the agreed point to its lab equipment. The same division is applied to exhaust, plumbing and controls.
Existing equipment is not treated as available capacity until the basis of design, field survey and current tenant loads support it. Roof area is checked against equipment layout and screening. Shaft capacity is checked against duct routing. Electrical capacity is checked at service, distribution and emergency-power levels.
That resolution keeps the $18 million tenant allowance intact for the tenant fit-out. Moving a base-building upgrade out of the allowance does not make the upgrade disappear; it creates a separate landlord cost and can change the sequence that controls delivery.
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| System or workstream | Initial treatment | Resolved responsibility |
|---|---|---|
| Electrical service and emergency power | Carried in tenant allowance | Landlord service upgrade; tenant distribution after demarcation |
| Outside air, exhaust and heat recovery | Standard lab-ready allowance | Landlord equipment, roof support and main distribution |
| Lab waste and process-water risers | Tenant fit-out | Landlord mains and neutralization; tenant branch connection |
| Shafts and rooftop structural capacity | Existing capacity assumed | Landlord reinforcement and new screened equipment area |
| Controls, balancing and commissioning | Tenant closeout | Integrated landlord and tenant sequence before rent commencement |
Rebuilding rent commencement from the commissioning sequence
Rent commencement follows the lease definition of substantial completion. In this case, the premises must have operational and commissioned base-building systems. Early access for tenant fit-out does not start rent, and completion of architectural finishes does not satisfy the commissioning condition.
The electrical-service release moves by 59 days. Permanent power and controls move by more than three months. Testing and balancing cannot finish before the landlord systems and the connected tenant equipment are available together, so integrated commissioning moves to March 20.
The rent date is therefore rebuilt from the controlling dependencies rather than moved by the average delay across all trades. May 1 includes commissioning closeout and the lease-required delivery documents after the March testing sequence.
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| Controlling milestone | Initial date | Resolved date | Current dependency |
|---|---|---|---|
| Electrical-service release | July 15 | September 12 | Utility design and switchgear release |
| Roof steel and major equipment set | August 20 | October 18 | Structural reinforcement and crane sequence |
| Permanent power and controls | October 1 | January 12 | Service energization and controls integration |
| Testing, balancing and integrated commissioning | November 15 | March 20 | Landlord systems and tenant equipment available together |
| Rent commencement | January 1 | May 1 | Substantial completion and commissioned base-building systems |
Reconciling the resolved systems to funded cost
Electrical service and emergency power add $1.65 million. HVAC, exhaust and heat recovery add $1.75 million. Lab-waste, process-water and plumbing scope adds $850,000, and structural, roof and shaft work adds another $850,000.
Controls, testing, balancing and commissioning add $600,000. Design, permitting and contingency add $100,000. The landlord-work budget reaches $14.2 million before the unchanged tenant allowance or leasing commission.
The budget retains the responsibility trace. A switchgear change order returns to electrical service; roof steel returns to the equipment layout and structural design; commissioning returns to the systems and acceptance criteria it covers. The model does not hold the $5.8 million as one unallocated lab contingency.
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| Model line | Initial case | Resolved work-letter case | Movement |
|---|---|---|---|
| Electrical service and emergency power | $1.600M | $3.250M | +$1.650M |
| HVAC, exhaust and heat recovery | $2.400M | $4.150M | +$1.750M |
| Lab waste, process water and plumbing | $1.100M | $1.950M | +$0.850M |
| Structural, roof and shaft work | $1.250M | $2.100M | +$0.850M |
| Controls, balancing and commissioning | $0.650M | $1.250M | +$0.600M |
| Design, permitting and contingency | $1.400M | $1.500M | +$0.100M |
| Landlord base-building work | $8.400M | $14.200M | +$5.800M |
Carrying delivery into project basis and equity
Total funded cost increases from $117.4 million to $126.4 million. The $9 million increase is the $5.8 million of additional landlord work plus $3.2 million of soft costs and pre-rent carry from the longer delivery period.
The $82.180 million construction commitment remains fixed under the current loan documents. Required equity therefore increases from $35.220 million to $44.220 million. Stabilized NOI is unchanged at $9.060 million, but yield on cost falls from 7.72% to 7.17%.
Alternate treatments change both cost and date. Accelerated commissioning adds temporary systems and second-shift testing to start rent one month earlier. A tenant-funded specialty-scope case moves process-specific distribution beyond the agreed demarcation to tenant cost. The equipment delay case moves integrated testing and rent by another two months.
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| Model line | Initial case | Resolved work-letter case | Movement |
|---|---|---|---|
| Acquisition price | $82.000M | $82.000M | — |
| Landlord base-building work | $8.400M | $14.200M | +$5.800M |
| Tenant-improvement allowance | $18.000M | $18.000M | — |
| Leasing commission | $3.000M | $3.000M | — |
| Soft costs and pre-rent carry | $6.000M | $9.200M | +$3.200M |
| Total funded project cost | $117.400M | $126.400M | +$9.000M |
| Committed senior loan | ($82.180M) | ($82.180M) | — |
| Required equity | $35.220M | $44.220M | +$9.000M |
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| Delivery case | Treatment | Rent commencement | Funded cost | Required equity |
|---|---|---|---|---|
| Resolved base case | Current landlord scope and integrated commissioning sequence | May 1 | $126.400M | $44.220M |
| Accelerated commissioning | Early controls integration, added temporary systems and second-shift testing | April 1 | $127.000M | $44.820M |
| Tenant-funded specialty scope | Tenant funds process-specific distribution beyond agreed demarcation points | May 1 | $123.900M | $41.720M |
| Equipment-delay downside | Switchgear and air-handling delivery move integrated testing by two months | July 1 | $129.000M | $46.820M |
Reworking the case in Cap Orbit
Cap Orbit can work across the lease, work letter, responsibility exhibits, basis of design, construction documents, GMP, buyout log, change orders, equipment log, contractor schedule, commissioning plan, loan agreement and existing acquisition model in the same deal. Each system can be tied to its responsible party, cost, procurement milestone and delivery condition.
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| Current source | Model treatment |
|---|---|
| Lease, work letter and responsibility exhibits | Landlord work, tenant work, allowances and commencement conditions established |
| Basis-of-design and issued construction documents | Loads, capacities, demarcation points and system scope reconciled |
| GMP, buyout log and change orders | Current base-building and fit-out cost assigned to responsible party |
| Equipment log and contractor schedule | Procurement, installation and permanent-power dependencies phased |
| Commissioning plan and closeout requirements | Testing sequence tied to substantial completion and rent commencement |
| Loan agreement and acquisition model | Cost, carry, committed debt, yield on cost and equity updated together |
From there, you can have Cap Orbit reconcile the system boundaries, update the landlord-work budget, rebuild the commissioning sequence and carry the resulting rent date through pre-rent carry, funded cost, yield on cost, committed debt and equity in the existing model.
The same deal record supports the delivery cases that matter here: earlier commissioning with added acceleration cost, tenant funding beyond a stated demarcation, different equipment dates or a later integrated test. Each case returns the same connected outputs—scope, responsibility, cost, substantial completion, rent commencement, basis and equity.
The standard for AI on this asset class is a delivery case in which the lease definition, lab infrastructure, commissioning plan and capital stack resolve to the same rent commencement date.