This is an area that many tenants are confused about. The confusion is that many tenants mistakenly believe that tenant improvementI (TIs) are free when they are not. Landlords expect to make their money back from any TI allowance that they give you, and do so either by including their costs in your lease rate or your lease term.
A tenant improvement allowance is meant to compensate a tenant who improves a commercial space. Tenants typically spend their own money on these build-outs and then seek TI dollars as a reimbursement. The allowance is typically paid out based on the square footage of the lease. For example, a landlord may agree to provide twenty dollars worth of TI per square foot of rentable area. This fee can apply to leasehold improvements and construction-related expenses such as design fees, contractor fees, and building permits.
The idea behind tenant improvement allowances is that since a tenant often pumps significant investment into the leased space, they should be reimbursed since they are making a lasting improvement to the property — the upgrades they make could last for much longer than their lease. In a lease agreement, a cash allowance is one that is available upfront, whereas tenant improvement dollars are generally used as reimbursements.
The amount of tenant improvement allowance that you need varies greatly depending on the condition of the space and the requirements of the tenant. The creditworthiness of your business may play a role in how much tenant improvement allowance you can negotiate. Landlords may have more wiggle room when it comes to negotiating tenant improvement allowances rather than the base rent price. This is why it’s advisable to have a good tenant rep broker and commercial real estate lawyer on your side to negotiate on your behalf.
Tenant improvement allowances are recouped by the landlord throughout the lease term. In order to account for defaults, bad debts, and bankruptcies, the landlord charges interest on the allowance money they provide you. This may vary from 8-10 percent. The specific terms should be laid on the lease agreement, which also explains what the allowance can be used for. You should also make sure that the improvement allowance allows you to choose your own contractors, not only landlord-supplied ones.
Any unpaid tenant improvement allowances should be applied to rent. Remember that this is money available for you to use to improve the space and, since the landlord typically owns the leasehold improvements, it’s in your best interest to either use it or have it put toward rent. A good tenant rep or commercial real estate attorney can help you ensure that you get the allowances that are available to you. Use your tenant improvement allowance to make a commercial space the perfect fit for your business.