Sep 24, 2013

5 Ways to Stretch Your Tenant Improvement Allowance

By Don Catalano


5 Ways to Stretch Your Tenant Improvement Allowance1.jpg

Will your tenant improvement allowance cover all of the costs of the build-out of your dreams? If not, you have two ways to get there. You can spend money out of your own pocket or you can get creative in how you structure your lease and how you use the money that you have available to you. Here are 5 ways to stretch your tenant improvement allowance:

1. Rentable vs. Usable

Your usable space is the actual square footage between your space's demising walls. The rentable space is your usable space plus your pro-rata share of the building's common areas. While you occupy and build out the usable space, you pay rent on the rentable space.

When you submit your lease proposal, write the tenant improvement allowance to be granted on a rentable square foot basis. You have a legitimate argument to do this, since the landlord's getting the same rent on the common area that he is on your space. Doing it will effectively increase your TI by the building's load factor. If you get a $50 per foot allowance on an 8,000 square foot rentable space, you really have $57.14 per square foot to spend on your 7,000 usable area.

Rentable Square Feet: An Expensive Metric


2. Smart Negotiating Tricks

Once you've negotiated your best lease offer and gotten the best possible allowance, offer to add one more year on to your lease term. Adding a year won't make a big difference in the scheme of your occupancy, especially if your term is long enough to justify a generous tenant improvement allowance. However, your landlord might be willing to give you extra dollars per foot of TIs for the extra stability.


Another trick is to trade free rent for TIs. There's a big difference between the two for your landlord - TIs cost him money while free rent simply means that he's not collecting money that he wouldn't collect regardless. With this in mind, if your occupancy costs are $5 per foot per month, getting two month's free rent is the same to you as getting $10 in TIs, and if the landlord will let you pay him back for TIs over time with low or no interest, it won't affect your cashflow to give up TIs for free rent.


3. Reduce. Reuse. Recycle.

Once you start construction, reuse as many elements as you can from any existing space. Ceiling grids and tiles can be good for a couple of bucks a square foot. Reusing a kitchen or server room could save tens of thousands of dollars. Recycling doors, light fixtures and other elements can all stretch your tenant improvement allowance a bit further.


4. Go Open Floorplan

The less you build, the less it costs. While it's possible to spend a lot of money on open floorplan space, working with a space planner that knows how to substitute creativity for capital can help reduce your costs. Wireless networking reduces wiring costs. Bean bag chairs and a mural can turn an empty space into a retreat for employees to relax and boost creativity.


5. Manage Bids and Construction

Don't let your landlord manage the construction without your involvement. This is especially important if your landlord is using his own crew for the work or if you're adding your own money on top of your tenant improvement allowance. Controlling overtime and controlling your change orders can reduce your costs so that you come in on-time and on-budget.

Other great Commercial Tenant Improvement articles:

Basic Tenant Improvements for Commercial Real Estate

Understanding Tenant Improvement Negotiations


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Don Catalano

Don Catalano