Learn Commercial Real Estate
Happy new week!
This week we are covering Tenant Improvement Allowances. AKA Tenant Improvements = TI OR TA ( I use TI)
A Tenant Improvement Allowance is money provided by a Landlord to a Tenant to help pay for improvements needed in their new business space.
It may also cover expenses associated with getting started in the new space.
It is usually expressed in a per-square-foot or total dollar sum.
The specific Tenant Improvement request begins in the Letter of Intent.
Tenant Improvements will be negotiated and solidified during Lease Negotiations.
Tenant Improvements are a big part of commercial leasing.
As either a Landlord Rep or Tenant Rep, understanding Tenant Improvements can literally change the course of a deal.
Tenant Rep goals during the negotiations should be to:
1) get an allowance sufficient to cover planned improvements, and
2) maintain a high amount of control of the build-out.
Landlord Rep goals during negotiation should be to:
1) save Ownership as much money as possible
2) make certain Tenant gets proper permits, receive outline of build out request
3) Ownership maintains control of buildout
What Does TI Cover?
Landlords will usually allow TI to be spent on the hard costs and soft costs of the project.
Hard costs are the result of improvements that will be left behind once the Tenant leaves, which could be a direct benefit to the landlord.
While soft costs may not be as directly beneficial to the Landlord, they are a necessary part of the build-out process (such as a construction management fee).
Whereas hard costs are generally accepted, soft costs typically need to be individually defined within the TI section of a lease.
Some examples of hard costs are:
- Framing, walls
- HVAC, electric, plumbing
- Doors, windows
- Paint and carpet
What Does TI Not Cover?
On the other hand, Landlords are not likely to let a Tenant use their TI on miscellaneous expenses specific to the tenant’s needs. If the improvement will not be useful or appealing to the next Tenant to occupy the space, or can be removed when the Tenant leaves, the Landlord will receive no benefit from paying for it.
While the landlord would almost always rather put money towards creating lasting value for their property, under some circumstances Landlord’s are willing to contribute a small portion of the TI allowance toward these types of expenses in an effort to secure the Tenant and sweeten the deal for the Tenant.
Some examples of these costs are:
- Furniture, fixtures and equipment
- Electronic equipment
- Data cabling
- Moving expenses
There are times when the Landlord will not want to allocate an TI = The work around is asking/ offering to give free rent to the Tenant for a short period of time. This helps the Tenant offset cost for TI.
This is known as Rent Abatement. Rent Abatement = an amount of time Tenants do not have to pay rent.
When I am representing a Tenant, I always negotiate TI and Rent Abatement in the LOI. Best practice is to get the best deal for my client.
When I am representing a Landlord, I always negotiate the minimum Tenant Improvement and Minimum if not any Rent Abatement. Again, best practice is for me to make sure Ownership makes as much money as possible on the Lease deal.
It all comes down to the numbers in commercial real estate. Every time - All the Time
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