A landlord’s tenant improvement allowance is intended to incentivize a prospective tenant. But how much TI allowance a tenant is offered varies based on several factors. Here are a few things assessed prior to a landlord’s TI allowance offer.
Tenant’s Credit Strength
Any experienced landlord will carefully consider a tenant’s credit strength. Landlords will often request detailed financial statements and/or previous years’ tax returns to underwrite a tenant’s credit worthiness.
The reason for this is simple. Landlords obviously want a return on their investment. They’re renovating or building out to accommodate your specific wants and needs. If you have little to no credit, a poor credit standing, or no real viable operating history, the landlord is risking not being repaid or recouping their investment.
Volatility of Tenant’s Business or Industry
Similar to a tenant’s credit strength, the stronger a tenant’s business or industry is, the more confidence the landlord has that they’ll be repaid. When offering an improvement allowance, the landlord is essentially making an investment in your business just as much as they’re making an investment in their property.
Most landlords are more willing to cover most, if not 100%, of leasehold improvement costs, if they have strong tenant that has no doubt about the sustainability of their business or industry for the next 5 to 10 years.
Length of Lease Terms
With a strong sustainable business comes having no qualms about signing a 5 to 10-year lease. Keep in mind that a landlord will always be assessing how long it will take them to get every additional dollar they put towards improvements back. Longer lease terms offer a landlord a predictable and stable month-to-month cash flow. The healthier they know your business and industry is, and the longer you sign into occupying their space, the less they need to worry about not recouping their investment or being exposed to future re-leasing expenses.
A landlord with a space in a very strong market will likely have many potential suitors. In a hot market, you’ll see more landlords offering space in as-is condition with little to no TI allowance offered.
Meanwhile, someone looking to lease out a space in a slow market will be more receptive to presenting a stronger TI allowance offer. They’re looking to secure occupancy as soon as possible to avoid eating the loss that comes with unoccupied commercial space.
Developers typically offer more TI money for newly constructed spaces. This is because they’ve already factored TI dollars into the project’s overall cost and projected rents.
However, tenants need to be cautious in this scenario. What may seem to be a very generous per square foot TI allowance isn’t when you learn you’ve been given nothing more than a “dark shell.” In an existing structure, your TI spend won’t be going into things like providing concrete flooring, wiring the space, setting up HVAC systems, etc. This a common pitfall tenant run into when leasing a new construction. What they think is a steal thanks to a high dollar TI allowance offer is far from it.