Tenant Improvement Allowance
CONSTRUCTION PROJECT MANAGEMENT SERVICES SIMPLIFIED
Landlords like good-quality tenants – they also know they must give a little to get a little when it comes to attracting and retaining quality clients. Landlords can create different things to attract tenants but one incentive that is very promising and rewarding is a Tenant Improvement Allowance (or TI Allowance).
The Tenant Improvement Allowance is the amount a landlord will spend so a tenant can renovate or upgrade a rental space to suit their business. This amount is based upon a per-square foot or total (For example: $30 per square foot of rental space). While drafting up a lease, the TI allowance amount is negotiated between the landlord and tenant.
Tenant Improvement Allowance Negotiations
During the lease negotiations, the tenant should aim to get a TI allowance that will cover all-planned improvements, while having control of what improvements occur in the space. The TI allowance should cover materials, labor, and other work-related fees. Sometimes, the TI allowance will cover attorney fees, architect costs, permit fees, etc. However, the TI allowance usually does not cover furniture, décor, cabling, or moving costs. if there is money left over (not used), the tenant can usually negotiate with the landlord that the remaining balance can be used towards future TI.
As the project begins, a tenant will front the money for the project and the landlord will reimburse the tenant. The way/frequency that the landlord will pay back the tenant can be determined during the lease negotiations.
If the tenant negotiates too low of a Tenant Improvement Allowance, the tenant will have to pay (out of pocket) whatever the TI allowance does not cover. It’s a good idea that a tenant does his/her research before negotiations with a landlord. A tenant should talk to contractors and designers to get quotes and costs, so they can present an accurate number for the landlord to agree to for the TI allowance.
As a tenant, you must be prepared that the landlord may not fully cover the amount you’re requesting for the TI allowance. In many cases, both the landlord and the tenant pay a portion of the TI expenses. Often, the landlord’s decision on what he/she will give depends on the market, value of the tenant, and how much the TI will improve/increase the value of the property.
Now, if you need to cough up more money than planned (ahead of time or out of pocket) and you don’t have the cash flow, you can make your TI into a cash allowance. With a cash allowance, you will have the funds upfront. This change of allowance can be done during the negotiations.
You will also want to negotiate fees and taxes. There could be overhead and supervision fees you could lower or eliminate. You also want to negotiate the taxes into the TI allowance.
During the negotiations, the tenant and landlord need to agree when the tenant will start paying rent. It’s in the tenant’s best interest to start paying rent once they move in and are doing business.
Like stated earlier, the landlord is offering a TI allowance as a great benefit to his/her future clients; however, the tenant should always negotiate hard and push back to get the best deal possible.
Landlord or Tenant Control with Tenant Improvement Allowance?
Landlord Control – Turnkey Buildout
If it is decided that the landlord will take complete control of the TI process, this is called the turnkey buildout. With a turnkey buildout, the landlord doesn’t necessarily choose a contractor that is a great fit for the tenant’s needs. In many cases, the landlord will want to hire the contractor. He/she may have worked with this contractor before. The landlord already has an established, trusting relationship with this contractor and may possibly be able to get better deals and will want to use this contractor.
The landlord has no incentive to shop for the best price, and what the landlord wants to do with the project may not be in line with what the tenant truly wants. The tenant may be concerned the landlord is cutting corners. In general, it is in the tenant’s best interest to not say “OK” to a turnkey buildout but push for TI allowance.
Landlord Control – Tenant Improvement Allowance
During negotiations, the landlord may not want to give the tenant total control of the project/improvements. It is at this time the tenant can negotiate a better deal to get more for their money. The tenant can ask the landlord to go through a bidding process, so the tenant will get quality work for his/her project. The tenant can find out if the landlord will charge fees for partially overseeing the project. If the landlord plans to ask for fees, the tenant can find out if these fees are standard and try to reduce or eliminate the fees. The tenant can outline exactly what will be expected during the project, so he/she will not be surprised by anything the landlord does.
Tenant Control – Tenant Improvement Allowance
In many instances, the tenant will want to completely oversee the TI project. The tenant can determine the scope of the project, who the contractor will be, what materials will be used, etc. While being in complete control, the tenant can better control the timeline and costs. The tenant gets to choose how the money is spent – there will be little to no surprises or hidden fees.
Looking for Tenant Improvement Services?
Negotiating a Tenant Improvement Allowance with a landlord can be a lot of work, but it is worth it when you can build out the space you need for your business. You want to find the best quality materials, contractor, labor, etc. for your project. We wish you luck on negotiating the best-possible TI allowance for your project.
If you’re looking for a contractor for your rental space, Hurd Construction Management will deliver a space that reflects your business’ brand. Our Hurd team has a combined 75 years construction and architectural experience that we bring to your project.
We will deliver you quality work within your budget and time frame. We have completed more than 2.6 million square footage of new construction, renovation, and improvement projects on different types of buildings and industries. We have built and renovated many office/retail/business spaces and buildings. We look forward to working with you next.