A tenant improvement allowance (TI allowance) typically sounds great when first presented. The landlord agrees to reimburse the tenant a portion of the costs of any improvements or buildouts needed for them to move into a space. However, be cautious prior to signing a lease and binding yourself to TIA terms. Tenant expectations often differ from how things actually go down.
Why the TI Allowance Is So Misunderstood
It’s very common for the net effect of the received TI allowance to differ from a tenant’s expectations going in. First and foremost, your TIA isn’t a cash advance. The landlord is merely agreeing to reimburse the tenant a portion of the construction costs. And, for this to happen, certain conditions must be met. A landlord isn’t even required to reimburse a TIA until 90 days after work has been completed.
The Devil is in the Details of a TIA
Most tenants really have no idea how far a TIA of say $15 per square foot will go. This means they often pay more out-of-pocket than they originally projected for improvements or buildouts.
Tenants need to assess the true costs of building improvements PRIOR to signing any agreement. Once there’s a signature on the lease, it’s too late to change any terms. A deal has been struck and a commitment has been made. Even if things play out in a completely unfair manner, commercial tenants aren’t protected by the same type of consumer protection real estate laws homeowners are.
For example, a space in a newly constructed building vacant may be “raw” or a “shell” upon walk through. The ceiling type and lighting fixtures are to be determined. The tenant moving in has a say in what goes in. A lease is signed with a seemingly reasonable $15 per square foot TIA. What’s not realized is those things lacking in this “shell” that other buildings have will be classified as tenant improvements by the landlord. Whether it’s a dropped ceiling, recessed lighting, an HVAC system or plumbing and electrical work. Things that can absorb as much as 50 to 60 percent of a tenant improvement allowance.
It all comes down to asking the right questions while lease terms and the TIA are being negotiated. You need to confirm that the entire allowance being offered is to be utilized for tenant improvements. And what exactly these improvements include. You absolutely must understand the scope of work prior to signing.
A failure to do this can prove to be very costly. You never want surprises after all construction bids are in, leases are signed, and deposits have been tendered. Not much can be done at this point. Always remember you’re responsible for any expenses over the tenant improvement allowance. And various fees like landlord management or administrative fees and contractor overhead fees must also be accounted for.
Tenant missteps are all too common, yet completely avoidable if you slow down to analyze and iron out all details.