Tenant Improvements 101

**This is an update/replacement for the The Tenant Improvement Construction Pricing Dilemma blog post.

Tenant Improvements 101

Tenant buildout or a tenant improvement (TI) allowance can be overwhelming and filled with a lot of grey areas. This is one of the most important aspects to a tenant because the buildout ultimately determines how the tenant’s day-to-day operations flow. When not carefully managed, it can expose tenants to a significant amount of unexpected expenses. This is best illustrated by asking a couple questions.

Will the landlord “turnkey” the deal?

In this case, the landlord (at their expense) will complete all tenant improvements agreed upon in the lease. It is possible that a landlord will complete additional requested improvements, provided the cost is within reason.

Where does the landlord’s work stop and the tenant’s begin?

It is important when dealing with the buildout of new space to understand the landlord’s “base building standards.” Typically, the landlord’s obligations are well defined. However, items such as the demising wall, shared signage, soft and permitting costs, and other aspects are sometimes left out.  Also, this is where you will be able to identify upgrades that your company may need that are different than what the landlord intends to deliver – things such as the number of dock positions, dock equipment package, lighting level, and power, to name a few.

If you are dealing with an existing building, it is a little easier. However, things still need to be defined, like how items are to be delivered in the existing space. It is also common for landlords to upgrade the old lighting, install new carpet and fresh paint, and deliver the mechanicals in good working order at their expense outside of the tenant improvement allowance.

Now that everyone’s responsibility is clear, the next question is a big one.

How much TI allowance should I be looking for?

Quick answer: as much as possible! On new construction, the landlord will typically offer a dollar amount per SF that is being leased. Negotiating the lowest rate and the highest TI allowance can be challenging, so decisions on what is needed in the space will need to be made at this point.

On an existing space, negotiating an allowance can be even more difficult. This is best addressed by referring to what is provided (see question 2) and what else the occupier may need in the space.  The condition and functionality of the space also plays a factor. If the space is functional and in market-ready condition, the landlord is going to be less likely to offer TI money. If the space has issues and clearly needs work, some landlords will provide an allowance upfront.

Will the landlord amortize additional cost?

Many times, the landlord is willing to spend more than the tenant’s allowance but will amortize this excess amount over the lease term as additional rent. Their willingness to do so is generally dependent upon the total cost of tenant improvements, lease term, and credit worthiness of the tenant.

Navigating the tenant improvement process can be complicated and should not be taken lightly. This article outlines some very basic principles but having current market knowledge is just as crucial in the process. Reach out to one of our team members with additional questions or concerns.