Commercial property landlords will frequently offer extra incentives to bring in new tenants in the form of a tenant improvement allowance reimbursement, also known as a TI allowance. These additional funds are used to build out and customize a rented office, retail, or warehouse space to your needs.
An average tenant improvement allowance is a predetermined amount of money a landlord is willing to let you spend for renovations in your rented commercial space. The TI allowance is usually a total dollar amount or broken down into a dollar amount per square foot rented. The tenant improvement allowance reimbursement is typically negotiated upfront before the lease is signed and finalized.
Improvement allowances can be applied to various areas and parts of the space, including:
- Glass entry doors
- Glass sidelights
- Lighting improvements
- Specialized ceilings
How is a TI Allowance Calculated?
The amount of a TI allowance depends on a number of factors, including the size of your rented space, your personal credit and rental history, the competitiveness of the real estate market, and the number of units owned and managed by the landlord.
If you are a tenant wanting to negotiate a tenant improvement allowance reimbursement, you will need to do your homework and prepare an accurate budget for the changes and renovations you would like to make in your rented commercial
property. Multiple estimates from contractors will help you better prepare to get the most of the improvement allowance funds.
A TI allowance will typically cover architectural, engineering, and space planning expenses, and the total cost of construction. As a tenant, you can also negotiate for the allowance to be used for the cost of:
- Design fees
- Equipment and materials
- Legal, consulting fees
- Mechanical, electrical drawings
- Moving expenses
- Space plan fees
- Waste disposal
Average Tenant Improvement Allowance Negotiation Factors
The total amount of an average tenant improvement allowance is determined by a number of factors, including:
Tenant Credit, Rental History
A tenant’s ability to pay the rent for the term of the lease is a major factor in a landlord’s willingness to apply a tenant improvement allowance reimbursement. If you or your business does not have a good credit rating, you may need to make a larger deposit, put down a security deposit, a letter of credit, or simply wind up paying more monthly rent.
State of the Commercial Real Estate Market
As the markets change and landlords look for ways to draw in new tenants, they will often offer a TI allowance instead of lowering the rent. Improvement allowances are effective ways for landlords to offer financial incentives without sacrificing rent amounts built into their budgets.
Condition of the Rental Property
Properties that are in poor condition and need significant improvements are prime locations for landlords to offer substantial TI allowances above the market averages. Instead of the property owner making improvements and then leasing the space, you as the tenant have the chance to make those improvements that cater to your needs and preferences.
Landlords with multiple properties and steady cash flow will be more willing to offer amounts larger than the average tenant improvement allowance. These large, successful commercial property owners have deeper pockets and more flexibility to allow tenants to make improvements they see fit. Smaller landlords are less likely to agree to larger TI allowances, as they have a lower risk tolerance with less available cash on hand.
Tips to Negating a Tenant Improvement Allowance Reimbursement
There are no hard and fast rules or laws regarding the negotiation of a tenant improvement allowance reimbursement. The following are some tips and suggestions when negotiating a TI allowance with your landlord.
Ask for Cash First
A cash allowance is essentially the same thing as a tenant improvement allowance reimbursement, except there is no obligation or mandate for making improvements. Few landlords will go for a cash allowance, but it is worth asking. With a tenant improvement allowance, you have to put up your own money to make the improvements and then get reimbursed.
Tenants Charged 10% of Construction Cost
The improvements tenants make on their rental property using a TI allowance is a nice rental perk, but it is not free. Your landlord will charge you 10 percent on the funds being lent to you for improvements.
Obtain Required Permits
Tearing down walls and other types of structural construction or improvements will often require building permits. If you do not file for and receive the proper permits for the work done, your landlord may not release the reimbursement funds from the IT allowance.
Request Progress Payments
Typical TI allowance clauses provide for the reimbursement receipts to be submitted once the improvements are completed. If your construction project is expansive and expensive, you may request 2-3 progress payments throughout the course of the renovation to compensate for a long waiting period of significant funds instead of waiting for the entire reimbursement payments at the end.
Remember the Taxes
When totaling the cost of the work to be done under the IT allowance, it is important to make sure you add in any applicable taxes associated with the improvement project. Failing to include state and provincial taxes could wind up costing you money that your landlord should have covered in the tenant improvement allowance reimbursement.
Apply Balance to Free Rent
If there is any money left over after the improvements have been made and paid for, those funds will typically go to the landlord. In the negotiation process, you can have the agreement state that all leftover funds are applied to your rent. Not all landlords will go for this, but it is certainly worth asking.
Contact the Commercial Property Online Resource at MyeListing
MyeListing is a free comprehensive online resource for the listing and viewing of available commercial properties for rent or sale. Contact the commercial property specialists at MyeListing today for complete information on the process of tenant improvement allowance reimbursement and to find a wide range of available commercial properties in your area