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What Is a Tenant Improvement Allowance?

A tenant improvement allowance (also referred to as TI or TIA) is a sum of money a landlord agrees to pay for a tenant to build out or renovate a leased property to meet their business needs. The specific amount may be based on square footage (such as $25 per usable square foot), or it could be a fixed sum.

The tenant improvement allowance amount depends on things like:

  • How difficult it is to find corporate tenants
  • How financially stable or valuable the prospective tenant is
  • The scope of renovations needed
  • Other leverage the tenant may have (such as similar offers from other landlords)

In markets where landlords have difficulty finding tenants, they’ll often offer TIAs upfront to incentivize new tenants. But even if they don’t offer one, you can initiate the conversation about it.

Businesses with better access to their lease portfolio through software like Tango Lease will have an easier time with these negotiations, as demonstrating that you have similar locations with existing TIAs could persuade a landlord to offer this incentive. This could also give you leverage to negotiate what your allowance will cover.

Each tenant improvement allowance is unique to the location, the lessee, and the lessor. But when it comes to TIAs, it’s important to consider what it will and will not cover, how much control you want over the improvements themselves, as well as what your other options are if you don’t receive a favorable offer.

What does a tenant improvement allowance cover?

While there are no hard-and-fast rules governing what can be included in a tenant improvement allowance, there are some standards based on how they’re typically used. As a general guideline, TIAs will usually cover “hard costs” such as material and labor, but they won’t cover “soft costs” like furniture, moving expenses, or equipment the tenant will keep.

A few questions that help when thinking about if your TIA will cover a project:

  • Will this project involve construction?
  • Will these changes benefit future tenants?
  • Will this increase the value of the space?

Basically, what it comes down to is, “Is this an improvement which will benefit the landlord or just an expense which will benefit my business?” Ultimately, though, what is and isn’t covered will depend on your unique lease and what you’re able to negotiate. The more you can demonstrate your value (and track record) as a potential tenant and draw from existing leases, the more favorable your terms will likely be.

Who makes decisions about the improvements?

Beyond the amount of your allowance and what it covers, you need to consider how involved you want to be in the process. In most cases, the tenant has the most control and responsibility, but in some, the landlord does. This is all part of the negotiation.

With a tenant-controlled TIA project, you can select your preferred contractors and make choices about materials, design, or aesthetics it includes. But the landlord may also wish to retain greater control over the contractors and long-term decisions. This allows them to ensure the changes actually add value to their property. They may also charge fees for managing the project.

Alternatives to a tenant improvement allowance

Sometimes a TIA isn’t the best solution. Some tenants would prefer a completely hands-off approach to improvements—or the landlord simply wants complete control over what happens to their property. And sometimes a landlord won’t offer a TIA outright, but they’ll give you another option.

Turnkey buildout

In a turnkey buildout, the landlord pays for the improvements and makes every decision themself. They may be most motivated by cutting costs, working with a particular contractor, or increasing the value of their property. What the tenant wants almost becomes secondary. If a landlord offers a turnkey buildout, you may want to push for a TIA or another solution. However, some tenants just want to ensure the property is suitable for their business, and they may not care as much about the details. In that scenario, a turnkey buildout can make sense.

Rent deferral

In lieu of a tenant improvement allowance, some tenants or landlords may prefer rent abatement. The tenant pays for all the construction costs themselves and makes most of the decisions, and in exchange for financing the improvements, the landlord defers their rent payments for a stated period.

When a location doesn’t meet your business needs, there are several mutually beneficial ways to make it work. The right choice depends on what matters most to your business and theirs, and how well you can negotiate for what you want.

Negotiate better TI allowances

Whether you have dozens of leases or thousands, your ability to negotiate largely depends on how well you can leverage your portfolio. Can you easily identify similar sites in comparable areas? Do you have other leases with terms and circumstances like this one?

With advanced lease administration and accounting software, answering questions like these is a breeze. Tango Lease organizes your entire portfolio into intuitive dashboards and makes every lease searchable.

Want to see how Tango Lease could improve your negotiations and simplify lease administration?

Schedule a demo today.

Contributors

Rick Zelinsky

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