Commercial, industrial, and sometimes office properties often need tenant improvement to match the new tenants requirements. The improvements costs are usually split between the landlord and the tenant. Both the landlord and the tenant negotiate the improvements in the leasing agreement. So the real estate definition of a TI (tenant improvements) is:"the customized alterations a building owner makes to rental space as part of a lease agreement."
Tenant Improvement largely determines everything about a building after its Shell phase.
What are the Most Common Tenant Improvements?
Tenant improvements can vary depending on the property type and the tenant’s needs. Usually, there are two kinds of improvement costs:
- Costs of improvements that will remain when a new tenant leases the property.
This can include framing, walls, doors, windows, paint, carpet, HVAC, fire safety systems, electric, and plumbing.
- Costs of improvements that will NOT remain in use when a new tenant occupies the property.
This can include electronic equipment and appliances, furniture, fixtures, and data cabling.
Please keep in mind that landlords will feel more pitched in to pay for improvements that will increase the value of the property.
How Do Tenant Improvements Work?
Before signing the lease contract, it is necessary for the tenant and landlord to discuss improvements in construction. Some improvements will payed by the landlord and the others by the tenant. There are many ways to agree about this:- The landlord will pay a per-square-foot or total dollar sum to make the improvements before delivering the commercial property. For example, if a landlord has agreed to a $100,000 improvement allowance, they will initially use their funds to cover construction. The landlord and tenant may discuss who will select the contractor to complete the work.- The tenant improvement allowance. The tenant improvement allowance is a pre-agreed-upon amount of money that is given to the tenant by the landlord for the improvement of the shell. If the initial improvements exceed the agreed budget, a loan can sometimes be given to the tenant by the landlord. The tenant can then pay in installments over the lease term, usually with interest.- A turn-key agreement or a turn-key build-out. Here the landlord oversees the construction process of tenant improvements. This agreement is beneficial for the landlord because it allows saving, for example:If a landlord estimates $50 per square foot during the lease-signing process but completes the project for $40 per square foot, the landlord will save $10 per square foot. Yet, this agreement isn't so beneficial for the tenants. Tenants may have losses because this $10 savings per square foot is money they could have used for other potential improvements.
The tenant will also only be able to move into the space once the landlord is finished with the improvements.
- No initial improvement allowance. Here is the tenant who has to pay for the improvements. In return, the landlord offers free rent for a while or a delayed rent commencement. This eliminates the landlord's need to have the capital to cover construction costs for improvements.
The Bottom Line
Tenant improvements are almost always negotiable.Keep in mind how much the tenant improvements will cost and how it will be paid. Thinking about what will happen if a build-out costs less than the tenant improvement allowance is just as important. Both the landlord and tenant have to plan early before signing a lease, in regards to what will happen with money saved on the build-out. This money can be used for future rent payments. Or, for future tenant improvements when the company grows. Remember, this, along with many other aspects of the lease agreement, can be negotiated.
If you need help completing tenant improvements, then don't hesitate to contact us here.
