Add Alternate
An additional item of work that is priced out by a consultant/subcontractor during the contract negotiation or bid process, but isn’t yet part of the scope of work. It is an item that an owner is considering adding to the consultant/subcontractor’s contract, but has not yet been confirmed as to whether the service is wanted. As a result, the owner would like to know/negotiate the price for this item in the case they decide to move forward with it post contract agreement.
For example, the owner of a multifamily residential project is hiring an interior designer to do the layouts for five different floor plans. The owner is also considering having the interior designer do the penthouse as well. Although not currently part of the scope, the owner wants to know/negotiate the price for designing the penthouse and requests the interior designer to include an add alternate for designing the penthouse in the case they decide to pursue the option.
Putting ‘Add Alternate’ in Context
Crescent Development Group, a well-established real estate investment firm, recently acquired Parkwood Office Complex, a suburban office property in Charlotte, North Carolina. The property comprises multiple buildings with a total leasable area of 300,000 square feet, primarily occupied by technology and professional services firms.
Scenario Description
As part of their value-add strategy, Crescent Development Group plans to renovate and reposition Parkwood Office Complex to attract a higher caliber of tenants. A major component of this strategy involves transforming one of the existing buildings into a state-of-the-art technology hub designed to serve as an incubator for tech startups and a satellite location for established tech companies.
Application of ‘Add Alternate’
During the negotiation phase with the construction company tasked with the renovations, Crescent Development Group’s project manager, John Baxter, proposes an add alternate for the integration of an advanced networking infrastructure within the technology hub. This infrastructure is intended to support high-speed data transfer, essential for tech companies, but it incurs significant additional costs.
The add alternate for this advanced networking infrastructure is quoted at $550,000 by the subcontractor. This pricing allows John and his team at Crescent to evaluate the potential ROI from attracting high-value tenants who require such facilities. While this feature is not in the initial scope due to budget constraints, having a pre-negotiated price ensures that Crescent can make a timely decision to include it if they secure tenants whose needs justify the investment.
Financial Considerations
The decision to activate the add alternate depends on ongoing tenant negotiations. John is in talks with a potential anchor tenant, a rapidly growing biotech firm looking for a new headquarters that can offer top-tier tech infrastructure. The lease terms under discussion suggest that the inclusion of the high-tech infrastructure could increase the property’s NOI by an additional $100,000 annually which equates to a compelling 18% ROI on the $550,000 cost (100,000 ÷ 550000).
Conclusion
The add alternate clause in Crescent Development Group’s contract with the subcontractor offers flexibility in project scope and financial planning, enabling them to adapt to tenant needs and market demands without requiring upfront commitment to higher project costs. This strategic use of an add alternate not only optimizes financial outlay but also positions Parkwood Office Complex as a premier location in Charlotte’s suburban office market.
Frequently Asked Questions about Add Alternates in Real Estate Projects
What is an add alternate in real estate contracts?
An add alternate is an additional item of work that is priced out during the contract negotiation or bid process but is not yet part of the project’s confirmed scope. It gives the owner the option to add the item later without needing a new contract.
When is an add alternate typically used?
Add alternates are used when the owner is considering additional work but hasn’t yet decided whether to proceed. It allows for pricing negotiations upfront so the decision can be made quickly at a later stage, if needed.
What is the example of an add alternate in design services?
An example is when an interior designer is hired to design five floor plans for a residential project, and the owner requests an add alternate for the penthouse design. This allows the owner to consider adding the penthouse later at a pre-negotiated rate.
How was the add alternate used in the Parkwood Office Complex project?
Crescent Development Group proposed an add alternate for advanced networking infrastructure during contract negotiations. This item, priced at $550,000, was not in the initial scope but was priced to allow for future inclusion depending on tenant demand.
What financial advantage did the add alternate offer in this case?
It enabled Crescent to evaluate ROI before committing. The projected ROI was 18%, based on a $100,000 increase in NOI from including the infrastructure, compared to its $550,000 cost (100,000 ÷ 550,000).
Why are add alternates strategically important?
Add alternates provide scope and budget flexibility, allowing owners to align project features with tenant or market demands without revising the entire contract or delaying decisions.
Who benefits from including add alternates in contract negotiations?
Owners benefit by having future options priced in advance. It allows for timely, informed decisions based on evolving project needs, tenant requirements, or financial conditions.
Click here to get this CRE Glossary in an eBook (PDF) format.