Tenant Improvement Allowance Basics

Tenants have particular needs when leasing new spaces, whether office, retail, or warehouse. They will often need modifications to make the space their own. Commercial owners often offer a tenant enhancement allowance to attract potential tenants. But what exactly is it?

Tenant improvement allowance, or TI allowance, is a monetary amount that the landlord provides to tenants. It covers all or a portion of the commercial space's buildout. A TI allowance will help you create a space that meets your specific requirements and preferences by reducing out-of-pocket expenses.

This guide will address some of the most frequently asked questions regarding a tenant improvement allowance.

• Calculation of a TI allowance

• What a TI allowance covers.

• Who determines the TI allowance.

• How to negotiate a TI Allowance

This information will allow you to negotiate favorable terms with your landlord to get the best space for your business.

How is a TI Allowance Calculated

Typically, a TI allowance will be negotiated into the lease before signing. It is usually expressed in a dollar per sq foot amount based upon the size of the unit or a sum total. You should clarify whether the rentable square footage will be used to calculate the allowance if you negotiate based on square footage.

Imagine an owner agreeing to a $25/square foot allowance for TI. This would be equivalent to $250,000 for a 10,000-square-foot commercial office space.

Many factors can influence the dollar amount, such as the market's competitiveness, credit history, and tenant history, location, space condition, landlord's ownership, and renovations needed to increase the property's value.

To ensure that your buildout costs are covered, you will need to have an accurate budget. Before you agree to any terms with your landlord, getting at least two estimates from contractors is a good idea. This will allow you to determine the allowance you will need for your buildout. It would be best if you also researched the average cost of fitting out your office and allowances for that market.

What does a Tenant Improvement allowance cover?

The TI allowance should cover basic construction costs. On the other hand, tenants will try to increase it to include additional charges such as to permit fees, legal fees, and labor. Therefore, your lease agreement should also discuss the details of what is covered.

Remember that the TI allowance does not cover costs associated with moving, cabling, furniture, or internet set-ups.

Sometimes you can negotiate that, if your project is completed within budget, any remaining funds may be used to make future improvements or other uses related to the lease, like free rent.

Who controls the TI allowance?

The owner and tenant can control the management of the project depending on how ample the space is. Three common ways to control TI allowances are turnkey builds, tenant-controlled builds-outs, and landlord-controlled builds-outs.

Turnkey construction

Sometimes, the landlord can manage costs in older or smaller buildings and have a contractor ready to go. This is called a "turnkey construction" because the owner can control the TI allowance.

This is a good option for tenants, as you don't have to be involved in the construction details. However, if you have specific requests for the space, you may lose your ability to control it. Therefore, it is often in the tenant's best interests to request an allowance rather than a complete buildout.

Tenant-controlled buildout

Some landlords will let tenants fully control the buildout process. Although it is more work to manage the project yourself, there are many benefits. For example, you can choose the contractor, manage the timeline and make sure you stay on budget.

Landlord-controlled buildout

Although landlords can still control the allowance, they may not be as strict as in a turnkey buildout. Tenants should request to see the construction bids and be transparent about the costs. They also need to know the scope of the work involved to understand what they can expect when the space is handed over.

Sometimes, both parties can share control of the construction process. Tenants should negotiate with the owner to have the final say over details like contractor approval and plan approval. They also need to be updated on construction progress and the ability to make any changes. Before any construction can begin, it is essential to clearly state who has final approval.

How do I negotiate a TI allowance?

Don't forget the details when it comes to TI negotiation.

Some landlords won't pay the allowance until the project has been completed. The tenant will need to have cash flow upfront to cover costs in these cases. Once the expenses are covered, they will be reimbursed. Owners may charge interest to tenants who don't have enough cash to pay upfront for improvements. Others owners may provide the cash flow required on a pre-determined schedule. Make sure you have the lease document indicating the TI payment schedule.

If your per-square-foot allowance exceeds the budget, you are responsible for paying the extra costs. However, many landlords will allow you to roll your savings into future lease payments if your budget is below. It is also important to negotiate when lease payments start after construction is complete.

Remember to be open to the unexpected. It's not uncommon for construction projects to experience delays, accidents, or cost overruns. You should negotiate who is responsible for these issues in your lease so that both parties are aware of their responsibilities if you encounter unexpected problems.