After our last article that tackles exactly what is tenant improvement, we thought it would be best to write a follow-up that discusses what a tenant improvement allowance is and how it can help you with your commercial space.
As mentioned in our previous blog, what is best defined as a tenant improvement allowance is when a lessor provides a sum of money to be used towards the costs of making changes or improvements to the lease.
Tenant improvement allowances are basically the fund that the landlord provides if, on your lease agreement, a TIA is included. This is a form of a budget that can be used on paying a construction process such as updating floors, framings, and doors.
Two Types of Tenant Improvement Costs
Since tenant improvement covers different aspects of construction, it would be best to understand that there are two types of costs that come with it: hard costs and soft costs.
Hard costs, as the name suggests, are those that come with the physical changes in the property. These could be the new doors, windows, or any other physical changes in the property. If you’re looking to add a new water line or move an existing one, that would also come under hard costs
In short, anything that requires a change in the actual property would be considered a hard cost as well as those changes that will be left behind and can be of use to future tenants.
Some examples of common hard costs are:
- Tile work
- Lighting fixtures
- Resurfacing countertops
- Plumbing work
- Electrical work
Unlike hard costs, soft costs refer to improvements that are not physical changes in the property. These include services such as architectural and design fees, permits, the construction management fee, and other professional services.
Here are some of the other examples of soft costs in commercial real estate tenant improvements:
- Inspection fees
- Tenant improvement allowance accounting fees
- Construction permits
- and other legal fees
- On your TI allowance, you can also place the cost of other movable furniture and equipment. This already includes the labor, delivery, and installation cost.
In general, all altercations that will not benefit the building after your lease term ends will not be included in the TI allowance.
What Doesn’t Quality for a Tenant Improvement Allowance?
Of course, with any budget or allowance, there are certain restrictions. The same goes for a tenant improvement allowance. Certain leasehold improvements cannot be included in your TI allowance. These are:
- Custom made furniture
- Fixtures that will become a part of the property
- Removable altercations such as internet hiring, electronic equipment, and phone systems
- Altercations done prior to the commencement of the tenancy agreement
In general, all altercations that will not benefit the lease space after your lease term ends will not be included in the TI allowance.
How Much Does a Tenant Improvement Allowance Cost?
The amount of your tenant improvement allowance will be stated in your lease agreement. It varies on what type of renovation and how much work is required. In general, the amount can range from $10 to $20 per square foot. Though it may not seem to be a huge amount, this can still cover a lot of the work that you need to be done.
There are several things a landlord looks at in deciding how much of an allowance to give. But mainly, they will come up with an amount depending on the real estate market in the area as well as how much it will cost to replace your specific unit. They will also look at how long you plan on staying in the property, the average construction costs, and what type of business you have as well as the lease payments or rent payments that you have agreed upon.
Does TIA Count as a Loan to Your Landlord?
The most common misconception that renters have when it comes to TIA is that it’s a loan from the landlord. But this is not the case. A TIA is an agreement between the tenant and landlord that is stated in the lease agreement. The amount is given to you upfront so you can use it for your specific alterations. Sometimes, you are the one to pay the initial amount and the landlord reimburses you once the work is completed. But in general, it is not a loan and you are not obliged to pay anything back to the landlord.
What is a Turn-Key Agreement and Why You Should Know It?
A turn-key agreement is a type of lease agreement where the landlord agrees to provide you with a space that is already built out and ready for occupancy. This means that they solely oversee the construction of your tenant improvements and you don’t have to worry about a thing. This is a great option for those who don’t want the hassle and stress of managing a construction project.
But if you want to be more hands-on with the construction of your tenant improvements and maximize your allowance, then you can opt out of a turn-key agreement. This will give you more control over the construction process as well as the budget.
Who Will Own the Tenant Improvements After the Tenancy Agreement is Up?
In most cases, the tenant improvements that you make will become the property of the landlord. Even if you paid for it using your TIA, it will still be the landlord’s property once the tenancy agreement is up. The only time that this is not the case is when the tenant improvement is considered a trade fixture or otherwise stated on your lease agreement.
The Bottom Line
There are many things to consider when negotiating a tenant improvement allowance. But in general, it is a great way to get the renovations that you need without shouldering the entire cost. If your landlord however doesn’t offer a tenant improvement allowance, it is always better to ask even if it is not specified in the lease agreement. The worst that they can say is no and you can always negotiate from there.