Oct 08, 2013

3 Tenant Improvement Allowance Myths and Why They're Not True

By Don Catalano

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Tenant_Improvement_Allowance_Myths

A tenant improvement allowance is a significant expenditure for landlords. Even on smaller spaces, it's not at all uncommon for landlords to cut six or even seven-digit checks. With this in mind, there is a lot that gets said about the value of TI allowances. Unfortunately, much of what gets said isn't true. Here are three myths that come up in the industry and why they aren't true:


1. "TIs Are Only Available on New Buildings"

It's true that new buildings typically offer a tenant improvement allowance. When a landlord builds space, he plans on finishing it, but typically stops until he can find a tenant so that the space can be finished to meet the tenant's needs. With this in mind, a new building will typically offer a more generous TI allowance.

However, TI allowances ultimately aren't defined by the building or the landlord. They're defined by the market. If landlords need to offer a tenant improvement allowance to bring in a new tenant, they will. At the same time, if a new building is particularly in-demand, the landlord can dial back the allowance it offers based on the better-than-expected demand for the space. With this in mind, if you're in a market where space is tough to fill, you should be able to negotiate a generous allowance regardless of whether you're in first- or tenth-generation space.

If you're in a market that is difficult for the landlord to fill space, you can negotiate a more generous tenant improvement allowance.

 

2. "TIs Are Created Equal"

If you think $40 a square foot TIs always mean the same thing, you're in for a big surprise. Unless you get a flat tenant improvement allowance where the landlord agrees to build your space out at no cost to you, what really matters is how much you have to spend at the end of the day. 

 

  • Dark vs. Vanilla

    A plain vanilla shell typically offers drywall on the demising walls, some electrical outlets, ceilings, lighting, plumbing and HVAC. It might even include rest rooms. Dark or grey shell, on the other hand, has electrical and plumbing stubs to the demising walls and nothing else. The effect of this is that a $40 tenant improvement allowance on a vanilla shell could be worth more than $50 on a dark shell.

  • New vs. Existing

    Similar to the difference between dark and vanilla shell, when you have an existing space, you may have some demolition expenses, but you also have elements that you can reuse. Even if you gut the space, being able to use existing ductwork, lighting fixtures or interior pre-hung doors could save tens of thousands of dollars.

  • Common vs. Private Amenities

    If the building offers an amenity package that you can leverage for your space, it may reduce your build-out costs and let you shift TI spending to other areas. Bathrooms, kitchens and break areas can all be expensive to construct.

 

3. "TIs Benefit Landlords"

Landlords benefit from getting tenants to fill vacant spaces, but the tenant improvement allowance that they give doesn't do much for their buildings. Even the Internal Revenue Service realizes this, since they've been offering accelerated depreciation on TIs for years. At the end of the day, your TIs don't add value to the landlord's building. In his mind, they're just something that he pays for and will pay for the next tenant to rip out and replace.

 

Remembering this may help you to keep TI allowances in perspective since they aren't the giveaways that they may appear to be. There's a real cost in paying for your tenant improvement allowance and just like the rent you pay, it impacts your landlord's return on the building.

 

Other great Tenant Improvement articles:

Tenant Improvement Options to Keep in Mind

Basic Tenant Improvements for Commercial Real Estate

5 Ways to Stretch Your Tenant Improvement Allowance

 

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Topics: tenant improvement allowance

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Don Catalano

Don Catalano

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