When you are quoted a commercial real estate price per square foot by a broker or a landlord, you may be wondering: What does this rate include? How is it... Read More
Updated February, 2019
One of the perks of leasing your own office space rather than subleasing, coworking, sharing space, or opting for an executive suite is the opportunity to modify the space to meet your business’s individual needs. The process of transforming the raw commercial space you fell in love with into a fully functional office is called the “build-out.”
A Tenant Improvement Allowance is full or partial funding a landlord provides for a tenant to improve or update a commercial space.
Before signing the lease, you and the landlord will need to agree upon who designs the updates, who will do the construction work, and who will supply the funds. Look at your lease under “Improvements and Alterations,” and you’ll find the clause covering this topic.
So, who is paying for this? Build-outs can get expensive, so it’s a good thing many landlords provide what’s called a Tenant Improvement Allowance, nicknamed TA, TIA, or TI. Also, sometimes landlords offer a turnkey option in which they handle the build-out process, but we’ll get to that later.
What is a Tenant Improvement Allowance (TIA)?
A Tenant Improvement Allowance is full or partial funding a landlord provides for a tenant to improve or update a commercial space. Usually, Tenant Improvement Allowances are measured by dollars per square foot. In most cases, the tenant spends the money to make the changes, and the landlord reimburses the costs in periodic installments or a full sum at the end of the project. Sometimes, the landlord instead awards a set of months as “free rent” so the tenant can use that extra money to pay for updates to the office space. Tenants can also request a cash allowance instead, which means the landlord provides the improvement funds up-front before any construction work begins.
How to Negotiate a Tenant Improvement Allowance
How big of a TIA will you be able to negotiate? That depends on several factors. Obviously, if you have excellent credit and have been in business for a long time, you’re going to get a better deal. Also, the state of the commercial real estate market—basically, how much money the landlord is making—will affect the funds you’re allotted. Yes, improving the space helps the landlord, too, but only if he or she can afford to foot the costs. The space’s current appearance also makes a difference; if it’s in poor shape, a tenant will likely be able to negotiate more funds.
Knowing in advance exactly what kind of improvements you want will make the process much easier. When negotiating what your Tenant Improvement Allowance will cover and how much money you will get, remember that the TIA can pay for building permits, design fees, space planning fees, and other professional fees. However, it cannot usually pay for furniture, technology, or relocation-related costs. Usually, the landlord will either provide the Tenant Improvement Allowance and give the tenant free reign to manage the construction process and choose the contractors or will offer a Landlord Turnkey option, which means the landlord will manage the construction process.
If you’re getting a TIA and managing the update process yourself, make sure you understand exactly what you’re allowed to spend the money on. If you have agreed to a turnkey situation, ensure you won’t be charged for hidden fees like administration costs and overhead. The best way to make sure you’re getting a good deal is to check with your broker or have an experienced attorney examine the “Improvements and Alterations” clause of your lease. Now let’s look at tenant-managed TIAs and turn-keys in detail.
Using Your Tenant Improvement Allowance
Once you and the landlord agree upon a TIA, it’s time to put it to good use. Take the time to decide exactly what kind of updates you want. A space tailored to your company’s specific needs and designed to provide excellent branding can make a huge difference for visiting customers and partners.
Even if your landlord has given you permission to manage the build-out process, he or she will probably have specific parameters for what can and cannot be done with the space. Be sure to discuss your plans before moving forward. A slide that helps employees get from the second floor to the first floor might sound like a great idea, but the landlord may not want to have to get rid of that if you decide to relocate in three years.
Ensure you get the most out of our TIA. If the landlord has been reimbursing you for construction costs, and you didn’t use all of it for the repairs you requested, you can use the remaining amount to offset rent costs for next month.
The Turn-Key Option: Too Good to be True?
What if you didn’t have to manage the build-out, and you could just sit back and relax while your landlord handles making plans, hiring contractors, supervising the construction process, and providing updates? The turn-key options mean the landlord not only provides the funds for the build-out but also manages the process from start to finish so you don’t have to. Landlords may agree to this either as an incentive for a tenant to agree to a multiyear lease or out of necessity to compete with newer spaces on the market.
The landlord turn-key might sound like a great option, and it can be, but potential drawbacks exist. Before agreeing to this option, ensure you know the possible issues.
First, realize you don’t have control over how much time it takes because you’re not hiring and directing the contractors working on the build-out. Also, the landlord will be receiving updates, not you, so you won’t have much information unless you keep bugging the landlord about it.
Second, although hopefully your landlord knows which contractors are best and will hire good ones, you don’t really have any quality control in this situation. You won’t know what’s happening, and you won’t be able to withhold payment until you’re happy with the updates. The landlord may simply choose the carpet, paint, fixtures, etc., based on what’s cheapest and not what looks the best or will last the longest.
If the landlord turn-key sounds like a good option but you’re concerned about some of the issues mentioned above, talk to a SquareFoot broker about FLEX by SquareFoot. We can offer flexible office lease options, and a turnkey space with services typically provided by coworking providers.
When in Doubt, Ask a Broker
However your tenant improvement allowance and build-out are managed, a tenant broker is an invaluable partner in making sure you get the most favorite arrangement possible. Brokers are commercial real estate experts and have extensive experience negotiating leases on behalf of tenants. Best of all, tenant brokers get paid by landlords, so their services are entirely free to you.