Understanding Tenant Improvement Allowances

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In the wake of the pandemic, physical space has experienced a dramatic change. Employees are increasingly choosing to work from home, companies are exploring hybrid working setups, and tenants look to upgrade their offices into top-of-the-line Class A spaces.

As GlobeSt.com recently observed, with “uncertainty and market readjustments being some clear watchwords for 2023,” it’s important to know when and how to pivot. Rent concessions will be more critical than ever for landlords when negotiating with tenants. The coming years will likely bring a major shift in how physical spaces are designed and used.

In this article, we’ll explore how tenant improvement allowances function and what to bear in mind when negotiating for a tenant improvement allowance. We’ll examine the various aspects of these improvements and provide insight into how to get the best possible agreement. Additionally, we’ll uncover tips for making sure you get the most out of your allowance.

coworkers sitting in an open plan office space

What are Tenant Improvement Allowances?

A tenant improvement (TI) allowance – also referred to as a TA, TIA, Fit Out, or Build Out allowance – is often negotiated by landlords and tenants when securing a commercial lease agreement for an office or retail rental. These incentives are usually included in the rent contract of the building.

TI allowances supply funds or credit to tenants to modify and personalize leased space. Property owners offer a tenant improvement allowance as an incentive to attract qualified tenants to rent their building’s available space.

The tenant improvement allowance does not have to be returned to the landlord, as it is treated like an ‘allowance.’ However, most landlords will usually seek to recoup the cost of the allowance by including a portion of the TI in base rent or extending the duration of the lease.

An empty office lounge where office tenants can gather and take breaks

What Does a TI Allowance Include?

The lease outlines the amount of money allocated for tenants occupying the space to use for improvements and details how these funds can be used. This allowance from a landlord is meant to improve the value of their property and thus only covers items that will positively impact their investment.

Tenants can break down TI costs into hard costs for the landlord, which add value to the building, or soft costs that the tenant must cover.

Hard costs included in a TI allowance

  • Interior framing and walls
  • Doors and windows
  • Conference room build-out
  • Installation of bathrooms or kitchen area
  • HVAC, ductwork, electrical, conduits, plumbing, hardware
  • Paint, carpeting, and flooring

Soft costs not included in a TI allowance

  • Window coverings
  • Furniture and fixtures
  • Electronic equipment
  • Cabling for data
  • Interior or exterior signage
  • Moving expenses
The outside of a walkable shop area with hair studios, cake stores, and restaurants.

How to Calculate a Tenant Improvement Allowance

A tenant improvement allowance can be determined as a single sum or set at a specific rate per square foot amount. The budget allocated can vary depending on the nature of the project.

The amount of a TI allowance depends on the availability of space for lease in the area, the tenant’s creditworthiness, how much space is being leased, and the duration of the lease agreement, as well as if it requires any renovations. For instance, if a lessee is renting a 10,000-square-foot newly constructed office setup and has negotiated a TI allowance of $20 per square foot, they will be granted $200,000 in TIs.

The tenant will generally be required to cover the costs of improvements before the project is completed. This includes providing proof of payment, settling any contractor’s liens, and passing code inspections. The landlord will reimburse the tenant for these expenses after completing all tasks.

In certain situations, a building owner with an in-house construction staff may be willing to handle tenant improvement construction costs. Nevertheless, it is recommended that tenants obtain at least two estimates from external contractors before signing off on the pricing plan presented by the landlord.

A view into the inside of a trendy restaurant

Who Controls TIs?

The landlord will handle and manage tenant improvement work in certain situations, particularly for more limited spaces or minor TIs. This can be beneficial to tenants as it gives them time savings. Additionally, landlords benefit by being able to control any improvements made while keeping costs manageable.

Tenants who require a specific look or design for their space may opt to hire a general contractor to oversee the tenant improvements. Landlords and commercial property managers typically have reliable contractors to whom they can refer tenants. Before beginning the TI process, tenants should receive approval from their landlord and keep them informed of progress during the improvement project.

Is a Tenant Improvement Allowance Negotiable?

A tenant improvement allowance is typically up for negotiation, depending on the caliber of the tenant, the availability of space in the local market, and particulars such as duration of the lease. For example, a five or 10-year tenancy agreement provides landlords with more time to amortize their TI outlays via rental proceeds and rent hikes.

To negotiate attractive terms and conditions with a landlord, a tenant should exhibit financial responsibility by offering several years of tax returns and financial statements review. Doing so helps to demonstrate the tenant’s creditworthiness.

A tenant improvement allowance is typically up for negotiation, depending on the caliber of the tenant, the availability of space in the local market, and particulars such as duration of the lease. For example, a 5 or 10-year tenancy agreement provides landlords with more time to amortize their TI outlays via rental proceeds and rent hikes.

To negotiate attractive terms and conditions with a landlord, a tenant should exhibit financial responsibility by offering several years of tax returns and financial statements for review. Doing so helps to demonstrate the tenant’s creditworthiness.

The timing of tenant TI repayment may also be negotiable. In certain circumstances, tenants can negotiate with landlords for periodic reimbursements towards their tenant improvement costs while the improvements are being completed. This helps alleviate some of the financial strain these costs create regarding cash flow.

Coworkers sitting at a conference table in the middle of an office bullpen

Alternatives to TIs

Paying for tenant improvements out of pocket and seeking reimbursement afterward may not be the ideal solution for everyone. Start-up companies often lack enough liquid funds, while small business owners can find it challenging to arrange or oversee a large-scale tenant improvement project. In such cases, two viable alternatives to TIs are worth considering:

1. Search for a turnkey space ready to move into or that only requires minor touch-ups, such as replacing the floor or painting. A local handyperson or provider of necessary materials can usually complete these projects.

2. A rent abatement is an alternative to Tenant Improvements (TIs) that may be more suitable for tenants with the funds and experience to manage a TI project. Such an abatement provides several months of free rent at the start of a lease, allowing tenants to avoid having tenant improvement costs overlap with their rent payments.

The Bottom Line

A tenant improvement allowance is a popular incentive landlords use to draw in tenants – particularly in markets with more office and retail space options than demand. Offering a TI can be advantageous for both parties, yet several elements need to be taken into account during a tenant improvement allowance negotiation.

These include the length of the lease, the type of commercial space being leased, and the desired improvements or renovations that will be part of the agreement. Additionally, landlords may also need to consider additional costs such as taxes and permits and any potential impact on the marketability of their properties. Owners should discuss all these factors prior to establishing a TI allowance for even the most qualified tenants.

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Shanti Ryle
Shanti Ryle

Content Marketing Manager

Shanti leads Crexi's content marketing strategies with 7+ years of content development experience, creating everything from blog posts to award-winning podcasts. Previously, she worked on content teams at Snapchat, Weedmaps, and HopSkipDrive as well as developed copy, articles, and media for freelance publications.

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