Whether office, industrial, or retail. commercial real estate renovations to spaces are often made for new tenants. Landlords may choose to pay for these renovations in the form of a Tenant Improvement Allowance (referred to as TI Allowance). This allowance grants the tenant a set amount of money for construction, labor, and material costs associated with making the building ready for occupation. New flooring and efficient lighting are common improvements made by tenants. Tenant Improvement Allowances can be negotiated on a per square foot basis or a fixed amount.
Market conditions play a huge role in the negotiation process. In some markets with high demand for space, tenant improvement allowances can be scarce or non-existent. However, areas with an overabundance of supply give tenants more room to negotiate. Whether you are a tenant or landlord, knowing your market can go a long way in the negotiation process.
The dollar amount of rent and duration of the lease can help fine tune the amount of allowance offered to the tenant. In general landlords are more willing to pay for renovations if the tenant plans to occupy the space for a long period of time. Relatively high rents can also lead to landlords paying a higher allowance. National or well-known tenants should expect more money offered than new or more risky businesses would receive. It all comes down to who is on the lease, how much are they paying, and how long they will be occupying the space.
Fairness is the foremost goal of these negotiations. Landlords should be aware of current tenant’s requirements when occupying a space but at the same time not alienate future use of the space with modifications that are too custom. Tenants should be aware of the landlord’s investment in the space and may elect to fund renovations themselves if an allowance is not sufficiently granted.
Dylan Pumphrey interns at SVN | Dunn Commercial while finishing his Real Estate degree at the University of North Texas. He is focusing on the industrial sector of commercial real estate in the Arlington/Mid-cities area of Dallas-Fort Worth. In his free time, he loves to hike and bike around his home in Denton, TX.