In the commercial real estate market, there are various financial incentives offered by landlords to entice corporate tenants to their properties. One of the commonest enticements offered is the tenant improvement allowance. This is basically the amount of money a landlord provides directly or indirectly to renovate a space so that it meets the needs of a tenant. This allowance is an important part of the commercial lease negotiation, so it’s important that a corporate tenant knows how to get the most out of it. Here are some helpful tips that can help a tenant get a fair deal:
Tenant Improvement Allowances Aren't Free
Landlords work backwards from a desired return. The savviest of them are concerned with the bottom line, and realize that there are many ways to get to the bottom line. So, if they charge you $50 a foot in rent for five years and give you an $40 tenant improvement allowance, they know that they will get $210 a foot over that period of time. On the other hand, if they give you a $60 allowance, they will only get $190 from you. Most landlords will want to maximize their income so, all things being equal, every dollar in TIs you get usually gets canceled out by a dollar in extra rental expense or in reduced free rent concessions. In other words, TIs aren't free money, so it's wise to pay attention to what you're giving up to get them.
Evaluate the condition of the space
Corporate tenants may wrongly assume that the newer the space, the better the shape it is in and the lesser they will need in tenant improvement allowances. However, a space that’s in a ‘shell condition’ may lack many of the basics such as HVAC systems or ducts, sprinklers, lighting, and ceiling grids. Lack of these basics means that the cost of improving the space will be higher.
While all the basics may be present in an existing space, the need to completely demolish some structures in order to suit the corporate tenant’s needs may augment the build-out costs. The advantage of improving or customizing an existing space is the fact that besides getting the improvement allowance, a tenant can still reuse some of the components and make some savings. It’s good to evaluate the condition of the space beforehand so that you can negotiate a fair deal with the landlord after establishing the extent of improvements and customizations needed.
Negotiating the tenant improvement allowance is one of the most decisive parts of the lease negotiation process. A corporate tenant can use it as leverage when negotiating their lease, as it has the potential of dramatically altering the overall leasing costs and impacting the tenant’s bottom line. The help of a tenant rep broker can prove to be highly valuable when negotiating the tenant improvement allowance.
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