Sometimes, when moving to a new location, it may need a few updates to suit your needs. This is where commercial tenant improvement allowances come into play.
To help secure tenants and create a positive landlord-tenant relationship, some landlords may be inclined to offer a commercial lease tenant improvement allowance, or TI, to provide a lease incentive that essentially gives a tenant an allowance to make the improvements they want. This way, the landlord covers the costs, and the tenant can achieve the space they want, hopefully solidifying a long-term relationship.
To better understand TI allowance in commercial real estate, 620 N LaSalle are breaking down just what TIA is and all the perks of this landlord allowance.
What Is the Tenant Improvement Allowance?
Curious about what a TI allowance in real estate entails? We’ve got you covered.
Tenant improvement allowance, referred to as TI and TIA, is an incentive in commercial leases that tenants can often negotiate. As part of this, the landlord will set a construction allowance that allows the tenant to customize the space during their lease to better fit their goals and vision.
Since the commercial lease tenant improvements are negotiated when signing the lease agreement, this is negotiated at the same time as the lease term and rental rate, tying in all the lease considerations in one. With this, the tenant improvement allowance will never have to be repaid by the tenant to the landlord, ensuring the space is updated on the landlord’s dime.
So, why does this exist? Well, a TI allowance in real estate serves as a pretty significant incentive for potential tenants looking at commercial properties. And while this may get expensive for a landlord, they may otherwise have a hard time finding tenants, so this can serve as the perfect way to get someone signed to their space.
How Do Tenant Improvements Work Once the Terms Have Been Negotiated?
Now that you know what a TIA is, how does tenant improvement allowance work exactly?
Beyond the allowance, tenants and landlords also have to negotiate over who will handle the improvements. When diving into these negotiations, you’ll need to be well-versed in the two potential outcomes: landlord-controlled renovations vs tenant-controlled. Here’s how it works.
Landlord-controlled renovations are most common when a tenant is looking for a turnkey build-out that will be ready upon their arrival. That being said, this can also happen in situations like large offices where tenants typically ask for the same type of improvements. In these situations, landlords usually already have the operations in place to take on the work.
When it comes to the landlord, the biggest perk of this option is that they will have more control over the improvements that are made. Additionally, they can work to keep costs lower and avoid creating too hefty of an allowance. However, the clear downside is that it creates a lot more work for the landlord.
From the tenant’s side of things, the biggest benefit is that they get a hands-off way to upgrade their space with ease. By avoiding handling the renovations, the tenant gets to move into a completed space that’s ready to get the business up and running. However, they will be left out of much of the decision-making process and will need to rely heavily on the decisions of the landlords.
On the other side of the commercial lease tenant improvements options is tenant-controlled renovations. This negotiation result is best for tenants who have super specific needs or ideas that they want to see out themselves.
In tenant-controlled renovation situations, the landlord must make the guidelines extremely clear when it comes to what is allowed and how much they are willing to pay. Setting a budget in advance will avoid any outrageous charges, and ensure the tenant is responsible for budgeting within that limit.
The tenant, on the other hand, will get the opportunity to create the space they’ve always wanted. By making their own design choices, they no longer have to put so much trust in the landlord. That being said, they may have a tight budget, and overspending would cut into their wallet.
How Do You Calculate a Tenant Improvement Allowance?
Most often, a commercial lease tenant improvement allowance is set based on a negotiated dollar amount per square foot. The amount will depend on the tenant and their needs, as well as how negotiations play out, but this will come down to the state of the space. Typically, this allowance can range between $15 and $40 per square foot.
To make this work properly and avoid any disagreements, how exactly square footage will be determined must be negotiated at this time. Will it be based on solely usable square footage? Or the rentable square footage? This can affect final costs and will be important to iron out in advance.
In the case that a tenant asks for a turnkey buildout instead of an allowance per square foot, the property owner will cover all costs to complete the improvements that were negotiated, no matter the square footage. That being said, this kind of agreement usually comes with a higher rental rate to help alleviate some of the burdens of the cost of improvements.
What’s Included in Tenant Allowance?
There are a lot of different improvements that may be covered under the TI allowance in real estate negotiations. Typically, these funds cover engineering, space planning, and architectural costs, as well as some construction costs. This can include everything from walls and frames to HVAC, plumbing, and electrical improvements, plus paint and carpet.
There are some cases in negotiations where a commercial lease tenant improvement allowance can additionally be used for consultants, moving expenses, fixtures, and equipment or signage. Ultimately, what the allowance covers is up to the landlord and tenant negotiations, so clearly laying it all out during the leasing process is a must.
What’s NOT Included in Tenant Allowances?
Depending on how negotiations proceed, there are some “soft costs” that may not be included in a TI allowance in commercial real estate. This can include some of those more aesthetic elements, like fixtures and furniture. However, as we mentioned before, these elements can be negotiated into the lease, it just comes down to how those conversations proceed on each basis.
Think about what typically doesn't count towards a tenant allowance as things that will not be possible for future tenants to benefit from. So, aspects like furniture, equipment, and moving expenses tend to be left out as they don’t provide a long-term improvement that can be passed from tenant to tenant. Ultimately, the landlord is going to put money towards aspects that have lasting value to attract future tenants, and if your asks don’t fall under that, they will be left out of the TI allowance in real estate negotiations.
TI Allowance Alternatives
There’s a great appeal of a commercial tenant improvement allowance for those looking to lease a property, however, it isn’t always the best option. Depending on what you’re looking for and the improvements you hope to see, there are a few TI allowance alternatives that may better suit tenant needs.
One of the first alternatives to a TI allowance in real estate is turn-key renovations. With this option, tenants can request that the landlord is responsible for construction to update a space and bring it up to the condition a tenant is looking for in a lease. This leaves the entire responsibility up to the landlord to bring a space up to the necessary standards for a tenant.
Instead of agreeing to a commercial lease tenant improvement allowance, a rent abatement is a good option in the case a tenant is more concerned about their rent due dates and construction overlapping. With this alternative, instead of offering an allowance, tenants can receive a deferred rental payment option to offset costs during the build-out. However, this will require a clear timeline and strategy to make this option work for both tenant and landlord.
So, have you found a space that needs some work, but is otherwise perfect for your business? Negotiating a commercial lease tenant improvements agreement may be the way to go. To get the improvements you want negotiating in your lease, a commercial lease tenant improvement allowance will help bring your new spot into better condition to better suit your company’s vision.
Whether you want a turnkey office space or are looking to negotiate for commercial lease tenant improvements, our team at 620 N LaSalle is ready to hear you out. With many commercial spaces to rent, 620 N LaSalle has a variety of options that can suit different companies’ specific needs and goals. To begin exploring our property today, contact us to schedule a tour.
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