Understanding Tenant Improvement Allowances

on March 6, 2023

Tenant Improvement Allowances (TIAs) are a common form of financial help offered to prospective tenants of commercial real estate. They are typically provided to tenants when they enter into a lease agreement with a landlord and can be used to fund various improvements to the leased space. Understanding how TIAs work, and how to maximize their impact on your business, is an important part of any successful commercial real estate strategy.

What is a Tenant Improvement Allowance?

At their most basic, TIAs are a form of financial incentive that landlords offer to attract tenants to their buildings. Typically, these incentives are offered in the form of allocated funds or credit from the landlord to the tenant to build out and customize leased space. This money can be used to fund improvements to the leased space, such as building renovations, equipment purchases, and other necessary improvements. In some cases, the landlord may agree to pay for all or part of the costs associated with these improvements.

Ultimately, TIAs can be a great way for tenants to improve their leased space and make it more attractive to potential customers or employees. However, it is important for tenants to understand the terms and conditions of the agreement, and to ensure that the improvements made to the space are beneficial to their business. By doing so, tenants can maximize the value of their TIA and ensure that the investment is well spent.Finally, the amount of the TI Allowance may also depend on the landlord’s financial resources. Generally, landlords with more financial resources are able to offer larger TI Allowances than those with fewer financial resources.

Determining the Eligibility for a Tenant Improvement Allowance Determining the Eligibility for a Tenant Improvement Allowance

Eligibility for a TI Allowance is determined by several factors. The most important factor is the type of improvements the tenant plans to make to their space. Generally, the landlord will only offer a TI Allowance for improvements that will increase the value of the property to the landlord or will increase the tenant’s ability to use the space. Examples of eligible improvements may include installing a new kitchen, adding a bathroom, or installing new flooring.In addition to the type of improvements being made, the amount of the TI Allowance may also depend on the length of the tenant’s lease. Generally, landlords will offer larger TI Allowances for longer leases, as this allows them to recoup their costs over a longer period of time.

Finally, the amount of the TI Allowance may also depend on the landlord’s financial resources. Generally, landlords with more financial resources are able to offer larger TI Allowances than those with fewer financial resources.

Ultimately, the eligibility for a TI Allowance will depend on a number of factors and it is important for tenants to discuss their options with their landlord. By understanding the terms of the TI Allowance and any other applicable restrictions, tenants can ensure that they are able to get the most out of their lease.

What Does a Tenant Improvement Allowance Cover?

The tenant improvement allowance amount and the specific details on how a tenant can use the funds are described in the lease agreement. Since the landlord is providing funding for tenants to upgrade their leased space, they usually only approve expenses that will increase property value. However, the specifics of what is covered is usually negotiated as part of your lease agreement.

TI costs are commonly categorized by hard and soft costs. Hard costs, which increase the building value, would be things like the installation of bathrooms or interior framing and walls. While soft costs would generally include things like window coverings and moving expenses.

Common Arrangements for How a TI Allowance is Controlled

Turnkey build-out

In some cases, landlords often take on the responsibility of managing building costs and may have a contractor on hand who they want to use. When the owner controls TI allowance in this manner, it’s called a “turnkey build-out”.It can be beneficial for tenants as they won’t have to involve themselves with tracking construction progress. However, if you need specific things done such as modifications to your space or changes made throughout construction, you’ll lose some control over the process and might be better off insisting on an allowance instead of a turnkey build-out.

Landlord-controlled build-out

Landlord-controlled build-outs are also under the control of the landlord, albeit with fewer restrictions on tenant input than a typical Turnkey build-out. In this instance, tenants can ask to review the cost and scope of work of a construction bid for more transparency. Furthermore, by specifically outlining what is included in their scope of work, renters can know what to expect beforehand.

Tenant-controlled build-out

Some landlords allow tenants to completely control the remodeling process. Although taking on this project yourself can be more work, having full control over the process can have its advantages such as: 

  • choosing the contractor 
  • managing the timeline 
  • upgrading finishes 
  • making sure expenses are within budget.

Negotiating a Tenant Improvement Allowance

When considering a Tenant Improvement Allowance, the tenant should first analyze their space and determine what improvements are necessary. For example, if the space is an office building, the tenant may need to upgrade the flooring, walls, and lighting. For retail tenants, they may need to account for additional space for storage, or additional features like counters and shelving. No matter what your business is and how much space you are renting, you should consider requesting a TIA during your lease negotiations.

Negotiating a TIA is an important process for both the landlord and the tenant. It is an essential tool for landlords to attract and retain quality tenants. The landlord should consider the rental rate for the space, the tenant’s proposed length of stay, and the impact of the improvements on the rental rate. By negotiating a TIA fairly and equitably, the landlord and tenant can both benefit from the arrangement.

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Christy McFerrenUnderstanding Tenant Improvement Allowances