Tenant improvement allowances (TI allowances) are a significant expense for landlords. Customizing even a smaller space can often cost a landlord up to six figures. As with anything carrying that kind of price tag, a lot gets said about the true value or worthiness of tenant improvements. Some of what gets said simply isn’t true. Here are 4 tenant improvement myths that are untrue.
Tenant Improvement Allowances Only Benefit the Landlord
There’s a common myth that a TI allowance adds value to the landlord’s building. This is why you’ll sometimes read that tenant improvements benefit the landlord, not the tenant. This is incorrect.
In actuality, tenant improvements really don’t do much for a building’s market value. This is why even the IRS offers commercial property owners accelerated depreciation for TI costs.
Look at it this way. The landlord is spending money to customize a space to fulfill the needs of one particular tenant. Once that tenant is gone, the next tenant that comes along will have different needs. All of the previous work may very well be ripped out and replaced.
Tenant Improvement Allowances Are For New Buildings Only
It’s true that tenant improvements are a must for a new space. For this reason, a new building’s landlord will typically offer a more generous TI allowance. However, the amount they offer is ultimately defined by the market, not the building or whether it’s a first-or-seventh generation space.
When a new space is being constructed, it’s not uncommon for a landlord to halt construction until a tenant is found. At that point, they’ll finish out construction by customizing the space to suit that tenant’s specific needs.
If a landlord needs to offer a generous TI allowance to attract a new tenant, they’ll do it. However, if space in a new building is in-demand, they can just as easily dial back the amount of the allowance they offer.
Therefore, if you’re in a market where commercial space is tough to fill, you should be able to negotiate a nice TI allowance whether it’s a brand new or older building.
Tenant Improvements Are Always Expensive
Yes, renovations can be costly. There may be partial demolition needed. New construction or buildouts. Plus, cleaning, painting, installing carpeting, signage, etc.
Thankfully, improvements don’t always have to be all that extensive. Not all of these things will be needed at once. And doing one may offset the costs of something else.
For example, open floor plans are popular in many modern offices. While you’ll read how great they are for enhanced collaboration and team building, they also don’t require having to build many large expensive walls.
Reuse elements can also lower costs. Salvaging things like lighting fixtures, ceiling tiles, windows, doors, etc. can save significant money.
Tenant improvements can also be spread out over time to preserve cash flow. If covering upfront costs yourself is a concern, some landlords might even be willing to finance your TI expenses in the form of a higher monthly rate over the term of your lease.
Tenant Improvements Are a Necessity
As we pointed out earlier, this is absolutely true for new spaces that are more or less a shell until that first tenant appears. That said, most businesses should be able to find an existing space that comes pretty close to fulfilling their needs. Some minor customizations may be needed but that’s it.
For instance, a doctor could easily find a space another physician previously used for his or her new office. Various types of offices have roughly the same needs from one type to the next.
Finding a pre-configured space that meets most – if not all of your needs – will save a tenant significant money. These savings just might be enough to justify paying a higher monthly rent to move into a higher-end building.