When you search for a commercial space for your office, warehouse, or retail outlet, or industrial purposes, you cannot take a property on rent and use it as it is. Some improvements and alterations are always necessary for running your business on-premises taken on rent.
The landlord cannot anticipate and complete everything needed for your business. So, you need to do build-outs to make the rented space more suitable for your purpose.
Can you as a tenant get all the additions you want to make to your newly leased premises from your landlord?
The expenses you have to incur to make the building fit for running your business in the newly leased building are covered under the tenant improvement allowances. As the build-outs you make in the building are necessary for entering into and taking possession of the building, these are covered under the Tenant improvements, and this forms part of your rental agreement with your landlord.
Here in this article, I will give you the nature, extent, and coverage of the Tenant improvement allowance, and you will learn.
- What is a tenant improvement, a tenant improvement allowance and what is TIA and what is not TIA
- Why do you need to do build-outs?
- What Does a Tenant Improvement Allowance Cover?
- How are Tenant improvements calculated?
- How much TIA can the tenant get?
- How much time will it take for Tenant improvements?
- Who Controls the TIA?
- What are the items included in the Tenant improvements?
- What are the things not included in the tenant improvements?
- Who completes the Tenant improvements?
- Who pays the TIA?
1. What is a tenant improvement?
The tenant improvement allowance is also called Tenant improvements (TI), Tenant Improvement Allowances (TIA), or simply Tenant allowance (TA). It is a sum of money that is agreed between the tenant and landlord to be paid by the landlord for covering the construction costs involved in making additions and alterations to the rented premises at the time of occupation of the commercial property.
This is usually expressed as a dollar amount per square foot of the commercial space occupied.
The TIA amount can be used to cover all the build-out expenses. Still, it will not cover the tenant’s expenses for furnishing and interior decoration or other start-up costs that are not related to the direct physical improvements to the rented premises.
What is and what is not TIA
All the expenses incurred by the tenant for making the building fit for his business occupation that physically add to the building and its intrinsic value form part of the Tenant Improvements. But the amounts spent on items needed by the tenant for his purposes and are not needed for the occupation or use of the building for the tenant cannot be claimed as TIA.
2. Why do you need to Build-outs?
All commercial establishments need some basic facilities in the building to run their business. When you are looking for a commercial space for your business, be it a brand new building or a used one, you need to make some alterations and additions to it to accommodate your business’s special needs.
These may involve making some structural alterations, adding partitions and rooms, or making other modifications to the existing structure so that you can run your business activities to fulfill your business goals.
Whatever be the requirement for running an office or for using it as a retail space or running an industrial unit, you need to plan carefully to retrofit the building before moving in.
As most of the alterations you will be made to the building will be permanent and will remain with the building even after you move out, it will benefit the landlord in the long run and add more value to his property. But as a tenant, you will have to spend a considerable amount of money on adding value to the building to run your business in it.
Due to this, it is customary in the real estate industry that the landlord provides a substantial amount of money to the tenant to meet the tenant’s expenses to invest in his building to make the preoccupation modifications. This is to mitigate the costs associated with the build-outs necessary for running the tenant’s business on the rented space.
3. What Does a Tenant Improvement Allowance Cover?
The tenant improvement allowance is an amount paid by the landlord to the tenant to cover the construction costs for making the necessary alterations, additions necessary for his full enjoyment of the property to suit his business and purposes?
The TIA covers all the expenses spent for construction, labor costs, material costs, and all other amounts towards adding permanent fixtures like partitions, doors, windows, and other equipment necessary for the intended use and enjoyment of the rented premises.
Other legal charges like permit fees, legal fees, and architectural fees may also be covered under the Tenant improvement allowance if the landlord agrees to this after negotiation. But the other expenses like moving fees or furniture to be used by the tenant cannot be included.
4. How is Tenant improvement calculated?
Generally, the Tenant Improvement allowance is calculated on a dollar per sq feet rate. However, if both the parties agree, then a lump sum payment is agreed upon based on the size of the unit occupied.
The TIA amount depends on many factors, including :
- Present status of the real estate market in the locality
- Credit history of the landlord and the tenant
- The location of the commercial building
- The condition of the commercial building
- The type and number of the units owned by the landlord etc
The amount of TIA must be arrived at after careful consideration of various factors. After getting at least two estimates for all the proposed improvements and additions with careful correlation with the average fit-out costs prevailing in your area, it should be done.
5. How much TIA can the Tenant get?
The actual portion of the TIA, the tenant, can negotiate with the landlord depends mostly on the nature of his business and other key points to be settled between the parties to the lease transaction.
For this, the tenant needs to prove his financial strength and make available all the relevant tax returns for the past two or three years, balance sheets, profit and loss analysis, and other related documents to support his extent of the claim for the TIA with the landlord.
This will clarify the landlord’s mind to understand the extent of property the tenant needs, the type of business he will run on his property, and the extent of the alterations and modifications his business needs in the property. This landlord can easily understand the total improvement costs needed for tenant improvements and how much he can afford to pay as TIA.
If the landlord is satisfied with the tenant’s strong credit and the business stability, he will offer a higher Tenant Improvement allowance, and this may be a subject of negotiation between the parties, and a larger sum towards TIA is possible in case of unfinished shell space than the one for a previously occupied and finished building.
Even if there is no TIA offering in the initial lease proposal, it can still be negotiated with the landlord. Still, the tenant can press for a higher TIA by way of free rental periods or delayed rent commencement, etc.
Generally, the tenant can negotiate for a larger TIA if he commits to a longer lease term.
6. How much time will it take for Tenant improvements?
The time required for completing the tenant improvements mainly depends on the existing condition of the space you want to occupy. If it is a brand new building and you are its first tenant, usually what you get is just a shell. Then you have to build out everything you need to make it fit for your purpose.
In that case, the amount of tenant improvement will be much more, and usually, it will take anywhere from one to two months, depending on the place you are carrying out the tenant improvements.
On the other hand, if another business has already occupied the building and you are moving in after they left the place, there will be some build-outs that your previous occupier has carried out.
Due to this, you need not have to start from the bare shell. In this case, the build-out will be simpler and light that can be completed soon and at a lesser cost. So, you have to take at least a month for the build-outs to be completed before you can move in and start operating in your new premises.
7. Who Controls the TIA
When you are taking a commercial space on rent in a brand new building, the landlord usually carries out the build-out process. He may still have all the construction set up intact. This way, the landlord gets the requirements for build-outs from the tenant and can give the same to his construction team and do the construction by themselves. This type of build-out is called a turnkey build-out.
When the building has already been occupied, you are going to occupy the building as a second or a subsequent tenant; usually, the landlord leaves the build-out process to the tenant. This way, the tenant oversees the construction work carried out by the contractor of the landlord or the one brought in by the tenant. The tenant can make the alterations to his requirements after getting concurrence from the landlord.
When the tenant opts for a turnkey build-out, he has to give his requirements and make sure that the landlord and the contractor working on the space to be occupied have fully understood his requirements and are working towards fulfilling them as the tenant wants.
8. How Should I Negotiate a TIA?
The Tenant Improvement allowance is one of the prominent terms that have to be negotiated between the landlords and tenant while taking a commercial property on lease. So, the tenant has to negotiate with the landlord as he negotiates the monthly rent and other primary terms of the rental agreement.
Though the tenant can give his requirements and ask the landlord to do all the required works, no landlord will accept to do all the works requested by the tenant. Hence, the tenant has to negotiate with the landlord and get most of his requirements accepted by him by way of making the Tenant Improvements allowance.
The terms of the Tenants improvements allowance depends on the
- Type of credit history tenant is having.
- Length of the lease term under negotiation
- The rental rate agreed.
- And whether it is a tenant or landlord’s market.
When you are negotiating the TIA negotiations, you need to focus more on the terms and details of the Rental agreement and pay more attention to the terms that govern the payment of the TIA. Many landlords will want to postpone the payment of the TIA amount till the project is complete. In such a case, the tenant should have enough surplus cash to go ahead with the project.
Similarly, some other landlords will agree to pay the TIA as per their schedule here; also, the tenant must have enough cash flow to go on with the work without waiting for the amounts from the landlord. In this case, you must make sure that the landlord pays as per the schedule.
When your tenant improvement goes beyond your budget, the landlord will refuse to pay the excess amount, and you have to bear that excess part of the amount. On the other hand, if you can complete the tenant improvements well below the budget, you should negotiate with the landlord to roll the saved amount into future rental payments. The time at which the lease payments should start is also a crucial point to be negotiated.
Another point to be negotiated is the responsibility of the parties to the agreement for the delay in completion of the project, accidents, or cost overruns during the execution of the Tenant improvements. So, bear all these and other incidental matters in mind to have a clear picture of the rental transaction for having trouble-free leasing of the commercial property.
9. What Are The Items Included In The Tenant Improvements?
Tenant improvements include everything necessary for the tenant’s proper settling in the premises rented that add physical value to the property. Some of the tenant improvement items include
- Demo or remove existing partitions and walls
- Build new sheetrock walls
- Addition of new carpet, laminate, or hardwood flooring
- Painting the premises
- Addition of new blinds
- Doing permanent Electrical works.
- Installing or maintaining Plumbing fixtures
- Installation and maintenance of heating ventilation air conditioning equipment
- Addition of access to disabled persons
- Installation of new dropped ceiling or exposed ceiling
- Installation of slide light windows near the existing office doors
- Any other things negotiated with the landlord.
In addition to these, the TIA will also include the amounts spent towards the architectural, engineering, and space planning fees spent for modification to the ceilings, flooring, and inner walls. At times the amount spent on consultants, legal fees, moving expenses, equipment, fixtures, furniture, and signage is also included.
10. What Are The Things Not Included In The Tenant Improvements?
Certain things are not included in the landlord’s amounts payable to the tenant as Tenant Improvement Allowance. These include the alterations made to the exterior of the building, elevator upgrades, roof alterations, constructions, and the paving of walkways.
Likewise, the expenses towards Proprietary trade fixtures, furniture to be used in the tenant’s office, above standard upgrades, exterior signage, or laying of data and phone cabling are omitted while calculating the TIA amount.
11. Who pays the TIA?
The landlord pays the TIA amount to the tenant for the money he is going to spend on the improvements required by the tenant, and usually, the tenant oversees the work.
The TIA amount is paid in one of the following ways, namely:
Through Discounted Rent for a Certain Number of Months: landlord allows a rent-free period or a lower discounted rent for a certain number of months and the amount saved thus is used by the tenant to complete the Tenant improvements.
Through Build-out Allowance: here, the landlord gives a list of works he is offering and the amount of TIA for each one of them. The tenant selects the ones he needs, and the landlord carries out these works, and those works offered to and accepted by the tenant are included in the TIA.
Through Turnkey Projects: where the tenant gives his list of improvements needed with the estimated cost of the items to the landlord who completes them for the tenant.
Thus, the landlord has many options to pay for the tenant improvements, and this differs from project to project. The landlord takes the responsibility to complete the tenant improvements within the agreed time so that tenant can occupy the property as per the schedule.
Thus, when a commercial property is being taken on lease, the tenant gets the required amounts for doing the necessary additions and modifications to the leased property for his better usage through the Tenant Improvement allowance. It mostly covers all the leasehold improvements, making it fit for the tenant’s occupation adding permanent value to the property.
The TIA is calculated as “ a per square feet ” amount, and the landlord pays this amount to the tenant in many ways. The payment of the TIA may be negotiated as a significant part of the leasehold agreement. The amount and type of TIA payments depend more on the local real estate market conditions.
With the right approach and clear mind, it is possible to get the best deal on the Tenant Improvement allowance as a part of the commercial property renting process.