The Commercial Tenant’s Guide to a Tenant Improvement Allowance
When it comes to lease negotiations in the commercial real estate market, there’s so much more to navigate than the rental rate – such as the tenant improvement allowance. In this post, we’ll explore the basic concept of tenant improvement allowances and some of the most important details to consider when negotiating the best possible lease contract.
Before we get started, we wanted to remind you that lease agreements can vary greatly. This post is intended to be educational, but it should not replace personalized advice from your real estate professional and/or business attorney. Always refer to the specific details of your lease contract before making decisions.
The Basics: Tenant Improvement Allowances 101
A tenant improvement allowance (sometimes called a TA, TIA, TI allowance, leasehold improvement allowance, or cash allowance) is the amount of money a landlord is willing to spend on renovating or retrofitting the commercial space so it’s suitable for the tenant. It’s generally expressed as either a “per-square-foot” or “lump sum” amount.
Here’s how it works – basically. During your lease negotiations, you and your landlord will agree to a certain tenant improvement allowance. It’s not a gift from the landlord but a loan that’s repaid (including interest) with a percentage of each rent payment. Also, it’s generally not an upfront sum of money but an amount the landlord agrees to reimburse for approved upgrades and improvements.
In most circumstances, your team will be responsible for everything related to the planning, design, permitting, and construction – and you’ll report progress to the landlord.
Once the project is complete (or nearly complete), you’ll submit receipts and other necessary documentation to the landlord so they can reimburse you. It may be possible to negotiate a progress payment structure or even an upfront cash allowance (which would be paid once a binding lease contract is signed).
What’s covered (and what’s not)? It’s important to understand that a tenant improvement allowance is for upgrades to the landlord’s property (aka leasehold improvements) – and not for things that you could take with you when your lease is up, like furniture or appliances.
- Improvements that are generally covered include: flooring, walls, ceilings, doors, paint, specialized lighting, cabinetry, and millwork.
- Improvements that are not generally covered include: furniture, trade fixtures, equipment, appliances, and computers.
Be sure there’s specific verbiage to include construction-related costs – like fees for permits, consultants, mechanical and electrical drawings, construction management, and waste disposal.
A Deeper Dive into Tenant Improvement Allowance Details
Understanding the basics is an essential step for protecting yourself during commercial lease negotiations, but there are many complex details you’ll still need to navigate.
Hidden Costs in a Tenant Improvement Allowance
There can be many “hidden costs” associated with using your tenant improvement allowance – which is one of the reasons it’s so important to have professional representation for your lease negotiations. Here are some potential hidden costs to consider:
- Landlord Supervision Fees (often open for negotiation)
- Sales Tax
- Landlord’s Preferred Contractor Requirements
- Union Labor Requirements
- Actual Build-Out Costs (not just raw construction costs)
- Restoration Provisions or Makegood Provisions (often open for negotiation)
Deadlines for Reimbursements & Unused Balances
Don’t mistakenly believe that unused funds can be saved for a rainy day. Many tenant improvement allowance contracts have a due date (such as 6 months) for submitting receipts and reimbursement paperwork. Attempt to insert a clause stating that unused portions of the allowance will be credited towards future rent payments.
Get Professional Representation for Your Tenant Lease Negotiations
As your Southern California real estate specialists, we help local businesses negotiate commercial leases and navigate tenant improvement allowances.
Allwest Properties, Inc. offers a full range of real estate services for commercial, industrial, and multi-family residential properties throughout Los Angeles, Orange, San Diego, Riverside, and San Bernardino counties.
With more than 25 years of industry experience, we offer a comprehensive suite of solutions, including sales, leasing, tenant representation, landlord representation, investments, site selection, and consulting services. Our goal is to exceed our clients’ expectations with each and every transaction.
Contact us today by calling 949-287-3291 or emailing firstname.lastname@example.org.