The Difference Between a Tenant Improvement, Build-Out, and a Leasehold Improvement
What’s the Difference?
If you’re in the real estate market for commercial space to rent, you’ve likely heard of the terms tenant improvement, build-out, and leasehold improvement regarding the space you’re looking to rent. You may have heard one, or two, or all three of these terms. Maybe you’ve heard different people use these terms interchangeably. Do you happen to know the difference between the three?
In short, these three terms are basically the same when looking into a commercial business space – they are all structural and/or architectural changes needed to make the space better to meet the needs of your business. The main (and only real) difference is the industry you are in and the person you are speaking to, but these three terms essentially all mean the same thing. They all mean improvement to commercial spaces before a new tenant moves in.
Tenant improvement is often used by commercial real estate agents, while build-out is a term more regularly used by those in the construction industry, and accountants prefer to use the term leasehold improvements.
Whether you call them tenant improvements, build-outs or leasehold improvements, these costs only benefit the single tenant in a space – not an entire building. Improvements that benefit multiple tenants are called building improvements.
What Improvements Can Be Made?
Regardless of the term, these are structural or cosmetic changes that need to happen in the leased space before a new tenant can move in and be open for business.
These improvements can include:
- New interior layouts and designs
- Mechanical upgrades including plumbing, Electrical, and HVAC
- Lighting enhancements
- New countertops, floors, paint, signage and graphics to make the space unique for your business
What is the Cost of Tenant Improvement?
Tenant improvements can cost a business a lot of money, especially if the landlord does not contribute much financially. If upfront capital investment funds are limited, it’s a good idea to look for spaces that are already designed for a business like yours, requiring less work. The difference between building out a newly constructed “grey shell” can be twice what it might cost you to renovate a space that currently houses a business like yours.
Landlords usually provide a small tenant improvement allowance, but that is usually far less than you need to customize your new space. Tenant improvement allowances are typically more generous when you commit to a long lease term and when your improvements add value to the landlord’s property. Sometimes, landlords can also help stretch your cash on hand by funding tenant improvements and incorporating those dollars into your rent throughout your lease term.
Below we’ve developed and shared a FREE cost calculator for you to use to get an idea about tenant improvement construction costs.
Pros and Cons of Tenant Improvements
If planned properly, the pros of making tenant improvements include being able to showcase your capabilities, value proposition and brand in the constructed environment while creating unique customer experiences. These investments are also a business asset because they are attached to property and can be capitalized and depreciated over time. It is important you keep track of all costs of the improvements and consult your tax advisor to make sure you select the accounting treatment most consistent with your needs.
The downside of tenant improvements is that they cannot come with you when you leave a space, so it is important to make sure the improvements made will make your business strong and successful in the new location, so you get the full benefit of the investment. There is no such thing as a “sure thing”, so before making a significant investment in tenant improvements, do your homework on the area, make sure to understand the demand for your products and services and make sure you have a powerful marketing plan to jumpstart the business in the new space.
Looking for Tenant Improvement Construction in Jacksonville, Orlando, Tampa, or Miami?
No matter what you call it, our experts at HURD Construction Management will help you maximize your landlord tenant improvement allowance while helping you avoid the pain and cost of poor construction planning.
At HURD, we have “boots-on-the-ground” across the entire state of Florida to support your expansion no matter the location and we bring you a complete project manager mindset to integrate planning, reduce risk and stretch your tenant improvement dollars further. We also do our best work when you get us involved before you sign your lease helping you make informed decisions, with full understanding of what it’s really going to cost to build out your space.
Looking for tenant improvement construction for a commercial space? Give us a call 866-231-2477 or CLICK HERE to connect with one of our Florida tenant improvement experts. With locations and resources in Jacksonville, Orlando, Tampa, Miami and beyond, we are your Florida buildout specialist.