As a tenant, most commercial spaces you tour will need some type of renovations to accommodate your needs. Perhaps a substantial facelift may even be necessary. Most landlords are willing to put in the work to ready their space for the right tenant. In fact, most are ready, willing, and able to offer some sort of cash assistance to build-out the space to your exact needs and preferences. But that doesn’t make negotiating a tenant improvement allowance (aka a TI allowance) any less of an arduous task. In this blog post, H.W. Holmes, Inc. – a commercial construction company in Southern California specializing in tenant improvements – offers several secrets to negotiating a killer TI allowance!
Ask For a Cash Allowance Before a TI Allowance
Although they’re basically the same thing, there is one key difference. With a TI allowance, a tenant will usually have to first pay the contractor out of pocket. When construction is complete, they present the landlord with receipts and they’re reimbursed whatever they paid out.
With a cash allowance, the landlord writes you a check – no questions asked. That said, this check comes with great responsibility. You more or less become a project manager. Overseeing the construction team’s work and making sure the project stays on track and within your budget – a budget that cannot exceed the amount of the check that was handed over to you.
Know that a Landlord in Control of the Construction Process Might “Cut Corners”
When you hear a commercial listings agent or landlord say, “We can turnkey this space for you,” this means they’ll find a contractor, oversee their work, and pay for it. This can appeal to a tenant for multiple reasons. First, you can remain focused on running your day-to-day business. You won’t have to hire and manage a construction crew on top of other responsibilities. And you also won’t be expected to come up with the money up front to pay those contractors. There’s no waiting for a landlord to reimburse you.
However, as a tenant, you’re putting all of your faith in the landlord. Hoping the finished project meets your expectations and there’s no catch.
That’s where it gets tricky. Not every landlord is going to play fair ball. For example, a landlord might tell you a build-out’s cost is $40 per square foot. But they might also have an existing relationship with a local contractor who they know will do the work for $30.00 per square foot. That’s $10 per square foot you’ve paid out that isn’t going towards improving the space you’re about to lease. In fact, it’s going into the landlord’s pockets.
Additionally, landlords typically charge a construction supervision or management fee as high as 4% or more if they’re managing the buildout. This is yet another profit center for a landlord. They then turn around and hire a general contractor to do the actual work.
Maintain as Much Control of the Construction Process As Possible
Given everything mentioned above, do what you can to negotiate a cash amount or stated dollar amount for the tenant improvement.
Then, ask the landlord to either waive or reduce their fee for construction management and look for your own project manager to oversee the construction process.
This lets you obtain a few competitive quotes to ensure you’re getting as much bang for your buck as possible from your TI allowance. Letting the landlord choose a contractor without getting multiple bids is the same as handing them a blank check. You have no insight into the history between the landlord and contractor or what kind of deal was struck between the two of them. There’s also a good chance you could have gotten a lower bid from a competing contractor.
This approach also lets you maintain quality control. You’ll work with the project manager you’ve chosen to ensure construction is completed per specs and on time and on budget.
If you do choose to go this route, try your best to negotiate a tenant improvement amortization. This is a means of protecting yourself if unforeseen factors put you over budget.
While you could pay these costs out of pocket or obtain an SBA loan to cover it, some landlords might be willing to write another check to cover the difference if an amortized TI has been negotiated. This would let you spread out repayment over multiple monthly lease payments.
Ask for Progress Payments if You’re Responsible for Paying Construction Costs Upfront
Most least clauses state that a tenant can’t submit receipts for reimbursement until the entire project is complete. This has the potential to create a cash bottleneck for you lasting anywhere from 90 to 120 days.
If a landlord is unwilling to write a check prior to construction starting, ask for 2 or 3 progress payments through the duration of construction. This way you can be reimbursed three separate times instead of in one lump sum when construction is complete.
TALK TO US ABOUT VENTURA & LOS ANGELES AREA TENANT IMPROVEMENT CONSTRUCTION
H.W. Holmes, Inc. works with both tenants and landlords/property managers in Southern California. Regardless of who hires us, you can rest assured that the job we do will be second to none. We know how to stay within the budget of a TI allowance on tenant improvement construction projects. Call us today at (805) 383-9929 for a free estimate!