Episode 20: Negotiating Your Tenant Improvement Allowance
January 26, 2021
You’ve decided to rent a space for your new business. Now you need to negotiate the lease terms. One of the most significant components is going to be the tenant improvement (TI) allowance.
One of the first things you want to understand the difference between grey shell and vanilla shell and the impact on your lease rate and tenant allowance. Most landlords offer some type of allowance to finish the space and this needs to be negotiated into the lease or purchase terms. Typically, the longer the lease term, the more generous your landlord is going to be.
Because tenant improvements are part of the lease agreement and negotiated along with the rental rate and lease term, the tenant improvement allowance does not have to be repaid.
And, when you are comparing different properties, key in mind that you need to look at the total cost of the rental package. And obviously, lease rate, lease duration and amount of tenant allowance are all linked.
As a tenant, your goals for negotiating tenant improvements should be to 1) get an allowance sufficient to cover planned improvements, and 2) maintain a high amount of control of the build-out.
In order to negotiate, we need to understand how tenant improvement allowances are typically calculated. The average tenant improvement allowance amount is based on a negotiated dollar amount per square foot. depending on the property condition and the state of the real estate market.
Alternatively, you may ask for a turnkey buildout rather than an allowance per square foot. In this case, the property owner is responsible for financing and completing all the negotiated improvements before you move in. However, this method is usually negotiated along with a higher rental rate because the owner takes the risk of the upfront improvement costs.
Here are some other details you are going to want to consider:
When negotiating over construction details you want to put in language that speaks to liability for delays and cost overruns. As delays cause you to incur holdover costs and office set-up inconveniences, you’ll want accountability for delays from the landlord if the landlord is managing the construction. If the you’re managing construction, the landlord may request accountability.
The date of first rent paid can be a contentious negotiation point, as landlords will expect rent as soon as their architect declares the space to be ready. On the other hand, you will want to wait until you’re moved in and operational to write the first check. As a matter of fact, you can ask to have early access before paying and before you actually open your doors so that you can get set up.
If you are looking for a shorter lease you have less bargaining power. On the other hand, the tenant improvement allowance is an outstanding benefit, and you should enter negotiations prepared to negotiate hard for it—especially if you are planning to sign a 5 year lease.
Remember that TI allowances can be written off by the landlord as a capital improvement expenses or lease acquisition expenses, and are considered part of the cost of doing business. With the attitude that TI allowances are rightfully yours, you are in a better position to firmly negotiate for the best terms.
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