The Commercial Space Tenant Improvement Allowance (TIA)

Though companies engaged in the same types of business have similar lease space needs, such as retail clothing sales or grocery stores, they are each unique in certain ways.  There are also commercial real estate needs that are very specialized, possibly requiring work stations, special equipment accommodations or built-in modifications to the lease space.

Generally, things that aren’t attached, such as free-standing shelving or equipment, are considered trade fixtures and not an improvement to the property.  Your landlord will generally leave these trade fixtures up to you and you’ll install them at your expense.  Changes or additions that are attached are generally considered leasehold improvements, and your landlord will want some control over what you do and how you do it.

Improvements remain after you’re gone, so naturally the landlord wants to know that they will not damage the value of the property or impair the ability to lease it out.  If you need to make improvements to the property to accommodate your business operations, your landlord will want to know what you need and to negotiate how the improvements will be done, by whom, and who is paying for them.

One approach is to just negotiate into the lease that the landlord will do the required work at their expense, a turnkey approach.  Of course the tenant has no control over costs, and the landlord will certainly cushion their lease amount to cover possible cost overruns.  Often the best approach is the TIA, Tenant Improvement Allowance.

The Tenant Improvement Allowance – What it Is – Pros and Cons

The TIA is a monetary allowance from the landlord to the tenant for improvements to accommodate the business in the space.  This can be allocated on a per-square-foot basis or a lump sum amount.  In some cases it can be a trade-off for free rent as well.

Pros of the Tenant Improvement Allowance

  • Gives some negotiated control to the tenant of the process, contractors used, and work to be performed.
  • The tenant has more incentive to control costs than the landlord in most cases.
  • Can provide the tenant with better control of the outcome and usability of the improvements.
  • Allows the tenant to select some or all materials and make quality decisions.

Cons of the Tenant Improvement Allowance

  • The tenant is normally responsible for any cost overruns exceeding the negotiated TIA amount.
  • The tenant may have less buying power than the landlord, raising costs for work and materials.
  • Liability and damage can fall to the tenant to remedy.
  • The tenant will spend more of their time in planning and execution, though the results can justify it.

The Tenant Improvement Allowance is a popular way to handle improvements necessary to adapt the lease space to the tenant’s business operations, but care should be taken in negotiating the details.

How Do I Use the Tenant Improvement Allowance and Who Does the Work?

There are several very important negotiated items in a Tenant Improvement Allowance.  The landlord will want some control over what is done to be sure that the property’s future value isn’t negatively impacted by your modifications.  An example might be cutting a new stairwell between floors, a major modification that can have code or future tenant desirability considerations.

The landlord will almost certainly want to approve the major changes to be done, but then may leave the work to you and your selected contractors.  There will also definitely be requirements for you to verify proper bonding, insurance and licensing of all work and contractors.  Sometimes the negotiated terms will split certain work between the contractor and the tenant, especially when major modifications require changes to the structure’s envelope, utilities or safety features.  When work is split between the tenant and landlord, extra care must be taken in negotiating the relative responsibility for costs or unexpected overruns due to structural issues not known ahead of time.

How Do I Get the Best Negotiated Deal on my Tenant Improvement Allowance?

First, keep in mind that landlords didn’t get where they are by being naive business people.  They have a pretty good handle on all of their costs and operating expenses, and you can rest assured that any money or considerations they allow you in a Tenant Improvement Allowance are all factored into the rent over the term of the lease.  It’s best to negotiate your TIA before any lease is signed, and some of the important points to consider include:

  • Is the landlord charging any overhead or administrative fees, even if you’re doing and paying for the work?
  • If you come in under budget, make sure you get to keep the balance of the TIA, which can be a trade-off for free rent.
  • Get broad discretion over what you can spend the TIA money for, such as architect, attorney, or consultant fees, as well as permit and inspection costs.
  • If cost overruns are due to unknown structural problems there before your tenancy, who is to pay for them?

There are other items, many varying considerably with the type of business and the space to be rented.

You Need Experienced Negotiating Help

Owners of commercial buildings, malls, strip centers and industrial properties are often assisted by a team of investment advisors, attorneys and others in the management of their business.  You will be in negotiations with this team, and they are very good at covering their interests and maximizing their return on investment.

Don’t go it alone.  Rodney McNabb with MainStreet Realty Services has been on the tenants’ side of these Tenant Improvement Allowance and lease negotiations.  Take advantage of his experience and skills in getting you the best deal possible.  It’s your future profits for the entire lease term, so get the best.