When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (also known as a TIA or TI).
Tenant improvement allowances are often one of the most important items for a new tenant when finding and negotiating a commercial lease – and this is for good reason. But what exactly is a tenant improvement allowance? Well, you’ve come to the right place because in this blog post, we will provide you with a simple and to-the-point introduction to tenant improvement allowance so you have a better understanding of what this is and what it entails before signing a commercial lease.
What is a Tenant Improvement?
Before we jump in with both feet here, we need to talk about what a tenant improvement is before discussing an allowance for such improvement(s). Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. Tenant improvements are very important if you want to make sure that your business space is customized to your needs and essential to your brand.
Understanding what a TI is and what types of improvements are available is very important to know as you consider lease space for your business.
Who Pays for Tenant Improvements?
The most common practice is that the landlord pays for the improvements with a tenant improvement allowance and if the cost of improvements exceeds that TI allowance, the tenant pays the difference. It is usually expressed in a per-square-foot or total dollar sum, and this amount is decided upon during lease negotiations.
It’s important to note that landlords do not have to offer any type of TI allowance, especially if the lease market is strong, however, as we mentioned above, it has become a popular enticement for leasing space. Most landlords are flexible and will work with you to include TI overages bundled into the monthly lease cost should the allowance be exceeded, so make sure you ask a landlord if this is a possibility when planning ahead. This will eliminate the need for you to come up with additional money for improvements over the allowance at the time of the lease initiation.
What is a TI Allowance?
Now that you have a better understanding of what a tenant improvement is, let’s take a look at what a tenant improvement allowance is all about.
A tenant improvement allowance is money given from a landlord to a tenant to help pay for the improvements to an office space, or sometimes other expenses associated with moving into a new space. The specific amount of this allowance is negotiated into the lease, along with a detailed outline of what it can be spent on. A tenant improvement allowance is a number generally referred to in dollars per square foot.
Because a TI allowance typically does not have to be repaid (it is a function of the other deal terms in a lease such as rental rate and term length), it can be a major incentive for a tenant to sign a lease. If you are planning to do renovations to your new space, securing a TI allowance is an important negotiating point.
What Does TI Allowance Cover?
Tenant improvements are broken down into hard and soft costs. What does this mean?
Hard costs in tenant improvements may include items such as (but are not limited to):
- HVAC, electrical, and plumbing
- Interior framing and walls, doors and windows
- Lighting, drop ceilings, painting and flooring
Soft costs in tenant improvements can include (but are not limited to):
- Permitting and planning fees
- Design, architect, and attorney fees
- Construction management fees
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.
What Does TI Allowance Not Cover?
When landlords give tenant improvement allowances, their goal is to improve the space for the current tenant and make the space more valuable for the next tenant to occupy. This will allow the landlord to justify a higher rent the second time around, since the space will be move-in ready. This is why landlords generally do not pay for tenant improvements that aren’t useful for future tenants.
Tenant improvement allowances typically do not cover:
- Tenant moving expenses
- Phone line installation
- Furniture, fixtures and equipment
- Lighting fixtures and window coverings
While the landlord would almost always rather put money towards creating lasting value for their property, under some circumstances landlords 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 them.
