There are many different incentives that commercial landlords can offer potential tenants. One of the most common incentives we see is a Tenant Improvement Allowance.
This incentive goes by many different names including build-out allowance, fit out contribution, and leasehold improvement just to name a few. Whatever you call it, it’s a very attractive perk to any tenant who wants to customize their space.
In this article, we’ll go over how this incentive works, what it covers, and how you can negotiate it as part of your commercial lease terms.
What is a Tenant Improvement Allowance?
A Tenant Improvement (TI) Allowance is a pre-negotiated sum paid by the landlord to the tenant to offset the cost of customizing the space the tenant is leasing.
Typically, it’s referred to in a dollar amount per square foot ($$/sq ft). It can cover many of the critical aspects of a commercial renovation. However, there are some restrictions on what exactly it can and cannot pay for.
How Does A Tenant Improvement Allowance Work?
A TI Allowance is flexible, but it typically can’t be used to cover every single part of a tenant’s remodeling expenses. Generally, anything that contributes to the overall value of the building is okay, while things that only benefit the tenant are a no go.
Knowing precisely what you can and cannot use your TI Allowance for is crucial for ensuring your renovations stay on budget. So, we’ve grouped some of the most common renovation costs into ‘covered’ and ‘not covered’ categories below. Of course, do your due diligence with your landlord and lease to understand the intricacies of your TI terms.
What’s Covered by a Tenant Improvement Allowance?
To determine if a cost can be covered by a TI Allowance, ask yourself ‘will this improvement be left behind at the conclusion of my lease?’. If the answer is ‘yes’, it’s more likely that that cost is covered. Examples of these kinds of costs include:
- Framing
- Drywall and painting
- Flooring replacement or refinishing
- Door and window replacement
- Electrical, plumbing, and HVAC upgrades
- Ceiling tiles and lighting
One important note; both the material costs and the labor costs associated with these types of upgrades are covered. So, if you enlist a contractor or a commercial remodeling firm like Diversified to assist with your renovation, their fees that pertain to these services will also be eligible for the TI Allowance.
What is Not Covered by A Tenant Improvement Allowance?
On the flip side, if an improvement is something that the tenant can take with them at the end of the lease agreement, it’s less likely to be eligible for the TI Allowance. This also applies to any improvements that are permanent but don’t provide any additional value for the landlord.
Examples of improvements not covered by a TI Allowance include:
- Furniture
- Light fixtures
- Electronic equipment
- Internet and data cabling
- Moving expenses
How is a Tenant Improvement Allowance paid?
Usually, a tenant must have enough funds on hand to pay for the improvements up front. The landlord will then typically provide the TI Allowance as reimbursement after receiving proof of completion. This proof needs to be documentation of the improvements, not just the improvements themselves, and often comes in the form of receipts.
However, just as the amount of the TI Allowance can be negotiated, so too can the payment terms. If a tenant prefers that the landlord pay the contractor directly instead, that can be discussed when finalizing the lease.
What Is a Reasonable Tenant Improvement Allowance?
A reasonable TI Allowance will vary, depending on market conditions and where your lease is located. Many experts offer an approximate range of between $10 and $50 per sq ft. Working with an experienced Tenant Representation Broker is often the best way to understand if a landlord’s offer is competitive.
However, even If you have concerns that an offered TI Allowance is too low, the rate is often negotiable. That means that either you or your Tenant Representation Broker may be able to work with the landlord to improve the allowance terms.
To fully assess the reasonableness of a TI Allowance, it’s sometimes helpful to understand how the landlord reached the amount on offer. Typically, they’ll use one of three methods to calculate a TI allowance:
- Fixed Amount: A predetermined sum, usually calculated as a percentage of the first year’s rent.
- Per-Square-Foot: A predetermined amount per square foot is multiplied by the total square footage of the lease to arrive at the final amount.
- Percentage of Total Costs: The final allowance amount is calculated as a percentage of your eligible renovation expenses.
Who is Responsible for Executing the Improvements?
Barring something like a turn-key agreement (more on those below), the tenant is usually responsible for overseeing the renovations. Sometimes, a landlord may have a preferred contractor they want the tenant to use. However, unless the lease terms state otherwise, the tenant is at liberty to field multiple bids and go with the contractor of their choice. Before the renovation is commenced, the landlord will often need to provide approval for the final plans.
Alternative Incentives to Tenant Improvement Allowances
Way back at the top of this article, we mentioned there are many different incentives commercial landlords may offer tenants. Some of these, like Turn-Key Renovations and Rent Abatement, are alternatives to a TI Allowance in that they address necessary improvements to the property in other ways.
Turn-Key Renovations
A Turn-Key Agreement is similar to a TI Allowance in that, typically, it allows for renovations to be completed right away. However, instead of the tenant being responsible for the up-front payment and oversight of the work, it’s the landlord who takes responsibility for the process. A landlord may prefer this term to a TI Allowance as a way for them to save money.
Rent Abatement
Rent Abatement is a lease provision that entitles a tenant to reduced or suspended rent payments. It can either run for a set amount of time or be contingent on the landlord completing specific property repairs or upgrades. A tenant may prefer this term if their primary concern is about making rent payments.
Get the Most Out of Your Tenant Improvement Allowance
A TI Allowance is an amazing way to get the office, retail, or other commercial space of your dreams at a great rate. But to make the most of it, you’ll need an experienced renovation specialist. One who knows what’s covered by your lease terms and will work with you to get the most out of this incentive.
Luckily, you don’t have to look any further to find that specialist. At Diversified Construction, we have decades of experience renovating commercial spaces. We’re experts in every nuance of the process, and we can help you find innovative ways to achieve your design goals while staying on budget. So don’t wait. If you’ve got a project inquiry on your mind or a TI Allowance filling your head with renovation dreams, get in touch with us today.
