Besides your rent, tenant improvement costs are typically the second most expensive part of any lease. Tenant improvement allowances can sometimes equal 6 to 12 months of rent or even more. What you can do with one dollar in one building or location might not be possible in another. If you want to make out when negotiating a tenant improvement allowance, here are three winning strategies to take into negotiations.
Always Remember the Landlord is Looking for a Return
When a landlord goes into negotiations, they are basically working backwards from a return they desire. This doesn’t mean they’re bad guys. They are just savvy when it comes to business. They are focused on their bottom line just like you’re focused on yours.
Always remember that most landlords are looking to maximize their return. Every TI dollar you get will most likely be canceled out by an extra dollar charged for rent. Be mindful of this when you go into negotiations. You’re almost always giving something up for your TI allowance. Figure out what that is and understand the landlord likely has some wiggle room to offer you a more favorable deal.
The Value of Your Allowance Depends on the Condition of the Space
You might think this means the newer the space, the better shape it’s in, and the less you’ll need for tenant improvements.
This is known as shell condition. It seems ideal but you’ll be throwing a lot of money on basics like lighting, ceiling grids, HVAC systems or ducts, or even things like sprinkler systems. Things that would already be in an existing space.
In comparison, when you lease a space that’s even just minimally built out, much of what’s there can be reused. The cost of improvements or customizations in an existing space may be nothing compared to newly constructed but bare space. Usually you’ll get more efficient use of your TI dollars in an existing space vs. a shell.
Go For the Tax Write Off
Taxes are one instance where it’s actually more beneficial to pay a higher rent and spending as little as possible on tenant improvements. Rent payments are business expenses. They’re 100% tax deductible. However, tenant improvements aren’t. TIs are depreciated over time. And the IRS has eliminated bonuses and accelerated depreciation for a lot of tenant improvement projects.
This means come tax time you’re actually better off paying more in rent and having your landlord pay for most of the tenant improvements out of pocket. This guarantees you the tax write off for rent while the burden of depreciating the work year after year becomes the landlord’s responsibility. It’s highly recommended you speak with a professional accountant or tax strategist prior to going into negotiations.