Office tenant improvement allowances let landlords buildout or retrofit an office space to tenant specifications…
Although the market can change at a moment’s notice, there are signs that the 2015 boom of Los Angeles County office market is leveling off. Last year, L.A. office vacancies fell as demand for office space in the region picked up after bottoming out 6 years ago. Vacancy rates are slowly going back up, which means tenants have at least a momentary market condition advantage to negotiate a favorable office lease. This is why they should be sure to get as much as they can when negotiating a tenant improvement allowance.
What Is a Tenant Improvement Allowance?
Building owners will often offer a tenant improvement allowance to entice prospective office tenants. They are generally structured as either a turn-key build-out or a stated dollar amount arrangement – also sometimes referred to as a tenant improvement build-out.
A turn-key tenant buildout arrangement is when the landlord covers the costs of any buildout or retrofit per the agreed upon rent and design plan. This seemingly tenant-friendly arrangement allows the tenant to walk right into a space that’s been customized specifically for them. Turnkey allowances can include anything from walls and closet space to electrical outlets, light fixtures, phone jacks, and other requests within reason. The tenant customarily selects carpeting or paint colors.
Meanwhile, the stated dollar amount arrangement or tenant improvement build-out gives more control of construction to the tenant. The landlord provides the tenant with a stated dollar amount per square foot. From there, the tenant has complete creative control. They can hire an architect or contractor of their choosing. They can select the quality finishes or building materials they want.
Which Is Best?
Most tenant broker reps will push for a turn-key buildout, however, there are problems with this approach. For starters, the landlord controls how the money is allocated. Many will “efficiently manage” costs, which generally means “cutting corners.”
For instance, if the tenant improvement allowance per the agreed upon rental rate is $50 per square foot, but the landlord has the means to build-out the space for just $35 per square foot, the tenant has basically given up the $15 per square foot that didn’t go towards improvements. Or perhaps they’ll pick a lesser quality carpet just to cut costs.
A stated dollar amount or tenant improvement build-out arrangement grants the tenant more control over the build-out process. Many times any construction management fees of the landlord can be reduced or even altogether waived.
That said, there are also many tenants that don’t want anything to do with design and construction process. They’d rather leave this process to the landlord and instead focus on their business.
Get It While The Gettin Is Good
If we’ve learned anything within the past couple years, it’s that the Los Angeles office space market is cyclical with periods of virtually no vacancies to more vacancies and then back to none. When the market favors landlords, Los Angeles tenant improvement allowances become increasingly difficult to negotiate. Many times the property owner will say the space is “as is” and any necessary buildout or retrofit will be at the tenant’s expense.
Tenants naturally prefer to avoid out-of-pocket expenses associated with office space customizations. This is why periods where there are more vacancies are favorable for Los Angeles tenant improvement allowance negotiations – regardless of whether you opt for a turn-key or stated amount structure.