What is a Tenant Improvement Allowance?

By April 19, 2019Market Insights

Keel CRE Tenant Advisor – Blog

Tips for Leasing Commercial Real Estate

In commercial real estate, most companies lease office space rather than buy real estate property for their business. However, unless a space for lease is completely built out and in move- in ready condition, chances are that an office space will need to be improved or modified beforehand.

Tenant Allowance for Leasehold Improvements

 

Tenant Allowances

Landlords generally will provide a tenant improvement allowance, which are funds provided by the landlord to the tenant to build out new office space or alter/renovate existing, previously occupied office space for the new tenant’s particular use. There are several factors that will influence the amount of funds (allowance) the landlord is willing to commit to build/improve/renovate the tenant space, but it’s imperative that the tenant representative understand and negotiate the maximum amounts necessary for the tenant build out or renovation, which are reasonably attainable in the competitive market. There are no set amounts landlords are willing to fund, however, there are general guidelines, which include, but are not limited to: tenant size and creditworthiness, new vs. relet space (previously occupied), lease term, timing, market conditions and competition.

Leasehold Improvements

Generally, the agreed upon funds can be obtained from the landlord under two separate and distinctive methods; the first, known as “turn-key” means that the landlord takes on the entire responsibility of design, space planning, permitting, project management and construction for the tenant (design-build). This method is usually preferred if the tenant has limited time or a set date to occupy the new space, such as a govt. contractor or tenant who has waiting too long to relocate, as the landlord becomes liable for achieving the set commencement date.  Additionally, if the tenant is below a generally accepted square footage, it’s more productive and beneficial to use the landlord’s clout to assemble the necessary team and streamline the process.

Alternatively, if the tenant is of a certain size, the tenant can and should control the agreed upon funds and complete the build out or renovations itself, assembling its own team. Under this method, the tenant is liable to achieve the agreed upon commencement date. The tenant representative will assist the tenant in interviewing specialists in each category, negotiating their fees (to be paid under the fund allowance) and controlling the critical path timeline to occupancy. This process takes additional time vs. the turn-key method, however, with ample time for relocation, the benefit is that the tenant has greater control of the funds and the assembly of its preferred team to perform the improvement work. The savvy tenant representative should also ensure that if the tenant is a for-profit entity, it should establish the funds be dispersed through an escrow account as opposed to a lump sum payment from landlord to tenant, to avoid tax ramifications tied to the improvement dollar funds.

Role of Tenant Representative

The tenant representative and assembled team will need to pay close attention to the existing condition of both new and relet space, comparing how well or poorly each space plans out and costs to achieve the tenants desired design.  Additionally, the tenant representative will analyze the affects each buildings core factor will play in calculating the amount of usable space the tenant will occupy vs the amount of rentable space it pays for.

Depending on the tenants size, the tenant representative may also negotiate common area upgrades and improvements, which are above the tenant improvement allowance, such as new common area restrooms and elevator lobbies, base building mechanical/hvac upgrades, elevator upgrades, private restrooms, new and reserved car charging stations, roof-top access, etc.

If the tenant already occupies space and plans to expand, renew or upgrade in place, a tenant improvement allowance can be negotiated, however, the funding process usually takes on a different approach. Check back soon to see our blog about negotiating expansion, renewal and/or upgrade funds.

The tenant improvement allowance is an important element in negotiating the tenant lease. It is always best negotiated by a professional tenant representative who understands the tenants needs, market conditions, building owners/lenders and competition to achieve maximum results.

About Keel Commercial Real Estate

Keel CRE is an agency of tenant representatives led Rick Henneberg who has over 30 years of commercial real estate experience.  Business owners and company representatives who seek real estate for lease in Washington DC or Northern Virginia are discovering the Keel Commercial Real Estate Advantage by working with Rick and his experienced team of office leasing experts.

For a free consultation, call Keel CRE at 703-625-3666.