Methods A Tenant Allowance Can Be Structured Before A Lease Agreement

Tenant improvement allowance is a term that might be used when you enter a retail lease. This lease inducement--incentives that the landlord may use to "induce" you into renting space with them--may be allocated in a variety of ways, and for a variety of reasons. It's important to understand the motivations of your landlord in order to better understand this type lease inducement.

Straight Cash

Straight cash is the most popular format. A specific dollar amount will be allocated by the landlord per square foot to pay for your construction costs. This is common for institutional landlords and Real Estate Investment Trusts (REITs). These landlords are cash-rich and want to increase rents at their centers by offering cash upfront. To ensure that their money is not stolen, landlords often ask for security.

Landlord's Works

Another form of inducement is the landlord's work. Sometimes the landlord will choose to complete the majority of the work necessary to bring the building up to standard. This is common for restaurants where major issues like HVAC upgrades, plumbing and electrical requirements, as well as ecologizers and plumbers, can arise. To reduce build-out costs and lower your opening costs, the landlord may take on additional work within the membrane of the leased area. This is usually limited to assets and base building requirements that the landlord can quickly reclaim in case of default. However, sometimes the inducement allows for items such as millwork or kitchen equipment. Private landlords who own or manage construction businesses are more likely to use this type of inducement. This allows them to use their own resources to improve the space, and you have the opportunity to open your business.

Rent Concessions

For small landlords or those who are independent, net and gross rent-free period are common methods of inducing them. To compensate for the amount of money, they may ask for the estimated value of the base building and offer either a net or gross rental period. This may be spread over many years to reduce risk for both parties and cost the landlord less upfront. This is in addition the Gross Rent Free provision, which is usually offered during the fixturing phase of building your space.

In all these situations, one thing is important: All this money, in some way or another, goes back into your rent. These benefits are yours to pay for. You may end up paying more for these benefits if you borrow from a bank than you would if the landlord took the money at their internal interest rates. In some cases, you might not have the option. Incentives are often the fastest way to get your rent increased and landlords motivated to lease their space.