For both occupiers and landlords, understanding tenant improvements and how they are negotiated is crucial to navigating the commercial lease process, regardless of the type of space needed (office, retail, industrial, etc.).
What are Tenant Improvements?
In commercial leases, tenant improvements (commonly referred to as “TIs”) refer to modifications and customizations made to a rental space to fit a tenant’s specific needs. These alterations range from minor flooring changes to more extensive buildouts, such as multi-story construction. The topic often becomes pivotal in lease negotiations as both landlords and tenants navigate who bears the cost and responsibility. The structure and allocation of tenant improvement costs can have significant implications and influence other lease terms, rental rates, and the duration of the lease agreement.
What is considered “Landlord’s Work”?
In a commercial lease, “Landlord’s work” refers to the specific improvements and modifications the Landlord agrees to make to the leased space before the tenant takes possession. This can include building interior spaces, installing fixtures, and making necessary repairs or upgrades. The scope and details of any landlord’s work are negotiated in the lease and typically take the form of turnkey improvements or a tenant improvement allowance.
What is a Tenant Improvement Allowance (TIA)?
A tenant improvement allowance is typically a fixed amount, often expressed per square foot (e.g., $10.00/psf), that the Landlord provides to help cover the costs of improvements for a specific occupier’s use of the space. Sometimes referred to as a “leasehold improvement allowance” or “tenant finish allowance,” the tenant improvement allowance is one of the most typical incentives a landlord uses to entice an occupier to lease space at a property.
This allowance provides an occupier with a fixed budget for constructing a tenant’s unique space. Landlords like the tenant improvement allowance because it provides them with a clear line of sight on costs and places the burden and responsibility of construction with the occupier. Because the occupier uses the funds to improve the property, landlords are more willing to negotiate because it enhances the facility for the future.
It is important to note that because the tenant improvement allowance is a fixed allowance, there are pros and cons to this type of incentive. If negotiated well, Occupiers can efficiently manage costs and get more use out of the tenant improvement allowance towards other items such as furniture, moving costs, or decreased rent. It can also expose occupiers to risks of unexpected expenses, tenant delays, delays in substantial completion, and earning a certificate of occupancy. TIAs can also come with other caveats, such as limited uses towards hard and soft costs, construction documents, time restrictions, and how it is paid. Sometimes, landlords will pay the expenses directly up to the allowance amount. In contrast, others will require the occupier to foot the bill and be reimbursed by the Landlord upon completing crucial thresholds.
