A Guide to Tenant Improvement Allowance: Tenant Improvements in Commercial Real Estate
When landlords and tenants are negotiating a commercial lease agreement, one of the most common questions a tenant should ask is, “what tenant improvement allowance does my lease qualify for?”
What is a Tenant Improvement Allowance?
Tenant improvement allowances are funds that landlords give to tenants to help them make improvements to the property. In commercial real estate, a tenant improvement allowance — sometimes shortened to TIA or TI — might help an office tenant make valuable upgrades and improvements to their offices before moving in or prior to renewing the lease.
For tenants who have a specific vision for their business space and landlords who want to provide additional incentives for leasing a specific space or unit, tenant allowance can be an important negotiating point.
Continue reading to learn more about tenant allowances, ways you might use them and how to get the most out of them.
Covered in this article:
- What is a Tenant Improvement Allowance?
- Tenant Improvement Examples
- Who Qualifies for a Tenant Improvement Allowance?
- What Doesn’t Qualify as a Tenant Improvement Allowance?
- How is Tenant Improvement Allowance Calculated?
- What is a Turn-Key Lease Agreement & Buildout?
- Tenant Improvement Allowances: Fine Print, Penalties and Accountability
- How to Make the Most of Your Tenant Improvement Allowance
Tenant Improvement Examples
All landlords offer differing tenant improvement allowances and widely varying sets of terms to accompany them. That means simply securing a tenant improvement allowance in your commercial lease agreement is not a guarantee that the landlord will cover every single cost associated with the space you are leasing. You have to set terms with the landlord.
Who Qualifies for a Tenant Improvement Allowance?
What types of businesses can qualify for tenant improvement allowances and what kinds of improvements the landlord will cover will vary on a case-by-case basis. But here are some examples of expenses that are commonly covered in a tenant improvement allowance:
- A fresh coat of paint
- New carpeting
- New wallpaper
- Addition of office spaces or meeting rooms
- HVAC, electrical and plumbing upgrades
- Upgraded kitchen or bathroom spaces
In some cases, landlords may be willing to cover in-depth tenant buildouts meant to modernize office space or make it more supportive of creative thinking or to promote employee wellbeing.
What Doesn’t Qualify as a Tenant Improvement Allowance?
While there is a wide variety if improvements a prospective landlord may agree to, changes, more closely related to a tenant’s business operations, will typically not be covered under tenant improvement allowances. These exclusions are usually costs that only serve to benefit the tenant and have no residual value for the landlord. Here are some examples of costs that a TIA would typically not cover:
- Moving expenses
- Data cabling
- Equipment specific to the tenant’s business
- Office furniture
- Electronic equipment like computers and projectors
- Building common area upgrades
How is Tenant Improvement Allowance Calculated?
In commercial real estate, a tenant improvement allowance is calculated in a relatively simple way. Typically, TIAs are expressed as an amount of money per square foot. For example, a TIA may stipulate that the landlord will cover $10 per square foot. If the space in question is 2,000 square feet, the landlord is agreeing to cover up to $20,000 of a buildout or space improvement.
Where the tenant improvement allowance gets more complex is the negotiations and discussions of what is and is not valuable to the landlord. Remember — landlords want to cover tenant improvements that will actually add value to the building.
No matter the amount of the tenant improvement allowance you receive, it is important to remember that tenants are typically asked to pay the upfront costs of improvements if they are doing a tenant buildout. The landlord would then reimburse you for the costs. However, if you and your new landlord engage in a turnkey buildout — in which the landlord takes care of every improvement before you move in — the tenant allowance will likely already be factored into the costs of the improvements.
In the event that you do not spend the entire agreed-upon TIA amount, some agreements stipulate that the remaining amount will be used to offset rent until they are completely used up. However, it is important to check the details of your specific lease to make sure that this is the case.
Quick Tip from a Commercial Real Estate Professional
“One of the smartest ways to get the best price on space improvements is to go through the landlord. Landlords almost always have relationships with contractors who can typically offer you 20 to 40 percent off what you would find calling contractors on your own. This way you can implement nicer features in your space at a fraction of the cost.”
What is a Turn-Key Lease Agreement & Buildout?
In a turn-key lease agreement or turn-key buildout agreement with a landlord, the building owner will provide the tenant with a fully equipped and ready-to-use space. If the lease agreement specifies that the landlord will provide a turn-key buildout, it means the responsibility of making any improvements or modifications to the space is solely under the landlord responsibilities.
The primary benefit of a turn-key lease agreement is to simplify the tenant’s move-in process as the landlord has made all the improvements necessary for the space to be move-in ready. This process greatly reduces the time and money a tenant would otherwise spend on renovating and setting up the space.
Tenant Improvement Allowances: Fine Print, Penalties and Accountability
Like most agreements in commercial real estate, tenant improvement allowances come with a fair amount of fine print. You and/or your attorney will need to double-check the fine print of any agreement you sign to look for conditions, penalties and other measures of accountability that could have an impact on your tenant improvements.
For example, many landlords will expect you to pay for administration and permit fees related to your improvements, as well as any associated legal, engineering or architectural costs.
Another key area to consider is the “accountability clause.” This is a part of the TIA agreement that specifies who is liable for delays in improvements. These clauses can be structured in a variety of ways, but most involve the tenant paying a fee for each day the improvements are delayed past the agreed-upon deadline.
You will also need to take a close look at the fine print to understand what happens if any of the improvement projects go over budget. In most cases, you will have to pay monetary penalties for costs that extend beyond the project budget.
How to Make the Most of Your Tenant Improvement Allowance
Tenant improvement allowances are a popular and extremely attractive benefit of many commercial leases. But because these are, at their core, complex legal agreements between landlords and tenants, it’s important to involve a team of professionals as you evaluate this and various other parts of your lease agreement.
While it is incredibly important to choose reputable landlords and property managers who have experience with TIAs, you also need to find a professional leasing agent.
Many tenants want full control of their tenant buildout, but allowing the landlord to be involved can save you a lot of stress and money in the long run. Landlords likely already have connections with contractors, and they know the building well. They also have a deep understanding of local building codes, the building’s utility systems and how to minimize disruptions to any other tenants in the building.
To ensure that you remain in a position of control during the improvement process, consider the following measures:
- Outline a clear order and scope of work before the project begins.
- Ask the landlord to request bids for contractors to ensure high quality and reasonable pricing.
- Review the contractor bids with the landlord.
- Have the landlord check in with you at key points in the improvement project.
With a solid agreement, an experienced and reputable landlord and a vision for your new commercial space, you can use your tenant improvement allowance to pave the way for a brighter future for your business.
*Page last updated on February 8, 2023.
About the author:
Sarah Hoopes is the Marketing Coordinator at Hartman Income REIT. She is a graduate of Utah Valley University with a Bachelor’s degree in Marketing and Business Management.