what is tenant improvement
Written by Brian B

What is Tenant Improvement

In the commercial space where you often see office buildings, factories, or other large-scale commercial spaces, the owner of the space will sometimes allow a tenant to make changes or building improvements to the space.

If you are a business owner planning to move your business to a legit commercial property through the lease market, then it is in your best interest to understand what TIs are, how they can impact your business, and the potential cost of making changes to the property.

Keep on reading to know everything about TIs including what they are, how to negotiate for them, and the usual tenant improvement costs for improving a commercial space.

How Does Tenant Improvement Work?

TI or tenant improvement is where leasehold improvements are made to the property at the tenant’s request. The landlord usually agrees to these changes, as long as it does not affect the structural integrity of the building. TIs can be anything from a simple altercation of the drywall to something as significant as a complete renovation of the property.

If you are a new business owner, it is important to know whether tenant improvement is listed on your lease agreement as this can be a great way to have the lease space customized to your business’ needs without having to shoulder the entire expense.

Examples of Tenant Improvements

Every business has its preferences and not all of them end up leasing a property that is to their liking in the first place. This is the reason why TIs became a thing. There are certain tenant improvements that are commonly requested by businesses which include the following:

  • painting the walls
  • installing new carpets
  • adding or relocating windows
  • adding or upgrading the HVAC system
  • installing new lighting fixtures
  • expanding the restroom space
  • Building a new wall to create separate office spaces
  • reconfiguring the floor plan
  • installing a kitchenette
  • and more

Given such an advantage, the commercial real estate market has seen an influx of businesses requesting tenant improvements to spruce up the space and make it their own.

What is Tenant Improvement Allowance?

The building owner often provides you with a tenant improvement allowance which can cover the full or partial construction costs. That means your landlord pays for part of your build-out! In some cases, if you are moving into a newly constructed commercial space, the TI allowance can be used as a marketing tool to attract new tenants. It is not uncommon for the landlord to offer lower rent payments in exchange for a higher TI allowance. As a tenant, you will have to weigh the pros and cons of this type of arrangement before signing the lease agreement.

Some landlords are more flexible than others when it comes to negotiating the TI allowance. If you are planning to ask for a TI, be sure to do your research on the current market rates for such an allowance. This will give you a better idea of what is a reasonable amount to ask for and increase your chances of getting the allowance that you want.

It is also important to note that there are some landlords are not like to let tenants use their TI on miscellaneous expenses specific to the tenant’s needs. Take, for example, a restaurant owner who wants to use their TI to build a new kitchen. The landlord may not be too keen on this idea as it is not something that can be used by the next tenant should you move out. In this case, it is best to ask for a TI that can be used for more general improvements such as painting or carpeting.

Negotiating for Tenant Improvements

Once the tenant occupies the space, the landlord is not obliged to make any changes to the property unless it is stipulated in the lease agreement.

This is why it is important for tenants to negotiate for TIs before signing the lease. The best way to do this is by working with a commercial real estate broker who can help identify properties that are willing to make changes according to the tenant’s preferences.

The usual negotiation process involves the following:

  1. The tenant expresses the changes they want to be made to the property.
  2. The landlord creates a work order for the changes and provides the tenant with a cost estimate.
  3. The tenant decides whether to proceed with the changes or not.
  4. If the tenant decides to proceed, the landlord begins work on the changes.
  5. Once the changes are completed, the tenant pays the landlord for the cost of the improvements.

It is important to note that not all landlords are open to negotiation, especially if the changes require a lot of work. In this case, the tenant may have to shoulder the entire cost of the improvements or not be able to do any changes at all.

But for many cases, since landlords think of it as an investment where the tenant is more likely to have a stable business and stay longer in the property, they are often amenable to these kinds of requests. So, make sure to ask one even if it is not said in the lease agreement.

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