Tenant Improvement Allowance: What It Is, How Much It Costs

If you’re searching to rent new real estates property, such as retail space, office space, or warehouse space, you should be aware that landlords are often willing to offer incentives that will benefit the tenant.

In order to be a step ahead of other competitive bids and make you choose their space, landlords will sometimes offer a tenant improvement allowance (TIA) that you can use to build the place according to your business’s needs.

In this article, you’ll find all the information about TIA, its benefits, what it covers, and how to properly negotiate the terms.

What Is a Tenant Improvement Allowance?

Often referred to as a TI, TA, or TIA, this kind of allowance is a sum of money that landlords are willing to spend for improvements to an office place or to cover other expenses related to moving into a new space. The allowance’s specific amount is negotiable.

The TI will be mentioned in your lease agreement, along with a detailed summary of what it can be spent on. The sum of money that the landlord provides to the tenant can cover all or part of the construction costs. Generally, it will be either a total dollar sum, given in TI dollars, or calculated on a per-square-foot basis.

What Should You Know About the Tenant Improvement Allowance?

TIA can be handled differently depending on the size and type of commercial space you are renting.

Landlord-controlled (turnkey buildout)

In this case, the landlord takes full responsibility and control of the TIA process, and this process is also called turnkey buildout. With this kind of agreement, there’s always the chance that the landlord won’t choose a contractor that fits best for the tenant’s needs.

In most cases, landlords want to hire the contractor they have previously worked with so they can get a better deal, lower the TI costs, and be able get a forecast of the time needed to renovate the space.

In the case of turnkey buildouts, the landlord is the one who is responsible for the improvements, except for minor costs, such as furniture. The tenant is the one who specifies and estimates the minor costs.

This option can be good for the tenants as they don’t have to worry about the building improvements and construction process. Tenants might have concerns regarding the quality when the landlord is in charge of building out the specifications. The landlord may have no incentive to shop for the best quality, settling instead for the best price in an effort to reduce costs.

If the needs of your business are simple and the commercial space has most of the features required, a turnkey buildout allowance may be a great option for you and your business. But, in case you plan to open a restaurant, medical office, or other specialized business, this may not be in your best interest.

Tenant-controlled

Tenant control is usual for a larger project when the tenants will probably want to oversee the construction process. At the same time, this means that the tenants will have to take control of their own hands. In the long run, it may be more beneficial if they choose their own contractor and all the details the tenant improvement costs can cover.

This way, the tenant will know exactly how much time the process should take and prevent holdover costs as well as contingency costs.

The time frame of the TIA’s payment is determined during the negotiations of the lease contract. It can be paid out in cash at the lease contract signing or after the construction is completed.

Mutual control

In some situations, both landlords and tenants negotiate a compromise in which both sides have control over the procedure. In such a situation, the tenant’s project manager receives reports of the progress with an overview of the tenant improvement costs, as well as detailed cost outlays, so he will be able to upgrade the materials as needed. At the same time, the landlord can oversee the construction as well.

All of these particularities have to be agreed upon to the satisfaction of both parties during the lease negotiations and before the actual construction begins.

Key Takeaways

What Does TIA Typically Cover?

What exactly TIA covers can vary from one lease to another. Some landlords prefer to cover only the hard costs of the tenant improvements, and others agree to cover both hard and soft costs.

Hard costs

Typically, hard costs cover the physical renovation of the space, like upgrading the air-conditioning and building walls. Hard costs will most likely make up the majority of the project costs, almost 75%-85%. Also, these are the most difficult costs to estimate without seeing the particular details of the project.

Soft costs

On the other hand, the soft costs of the tenant improvement don’t cover any physical changes to the place. Instead, soft costs cover the services and the expenses necessary to finish the project itself. Generally, the soft costs account for 8%-12% of the total cost of the project.

Moreover, the soft costs can vary depending on the complexity and the type of project, but generally, these types of costs are easier to estimate than the hard costs.

In the following table, you can find some common hard costs that are generally included in the tenant improvements as well as the expenses that fall into the category of soft costs:

What TIA Doesn’t Cover

TIA doesn’t cover expenses that won’t benefit the landlord or won’t be appealing to the next tenant to occupy the place. The landlord would rather invest money in tenant improvement by creating lasting value for the property. Thus, costs like common remodeling expenses, including furniture or fixtures, and some consulting services may not be covered by the tenant allowance.

However, negotiations are always possible, and sometimes a landlord will agree to cover these expenses, especially in the tenant-controlled renovation, or when the allowance is determined by the square footage.

Who Owns Tenant Improvements?

The landlord provides the tenants with a TIA in return for their tenancy, but the tenants might end up spending extra money above and beyond the TI allowance. It’s important to remember that the planned improvements will be owned by the landlord, once the tenant moves out.

Conclusion

No matter whether you’re the landlord or the tenant, it’s crucial to negotiate clear terms and conditions for the improvement of the space. TIA can be an immense incentive for a tenant and a vital cost of doing business for a landlord. But before stepping into the lease negotiation, make sure that you understand fully what a TIA is and how to negotiate the terms that will benefit you and your business the most.