Tenant improvements or lease improvements are pre-negotiated customized alterations to a property space that the owner builds to meet the tenant’s needs. Typically, rental property modifications are done to make it more appealing to potential clients.
Whether you’re looking to rent a residential or commercial space, finding one that fits your exact requirements may be difficult. Often, a rental property’s interiors will be bare and unfinished so that you can customize depending on your needs.
Continue reading to find out how tenant improvements are paid for, how to negotiate for your tenant improvement allowance, and the other ways to pay for the tenant improvements.
Types of Tenant Improvements
Commercial Tenant Improvements
Commercial tenant improvements usually revolve around the specific needs of the business. For instance, if the tenant is looking to use the space as an office, they might require more landline sockets or perhaps overhead lighting that runs across the ceiling. They may request new drywall partitions or even new flooring.
Residential Tenant Improvements
For residential spaces, on the other hand, a tenant may want new built-in kitchen appliances, a new air conditioner, or even a swimming pool. The landlord then alters the property to meet the client’s requirements. Typical modifications include improved kitchen and bath spaces, replaced tiles, or renovated bedrooms.
Other Tenant Improvements
Some tenant improvements, however, may be more custom-fit than others. For example, a dental practice may request to install dental chairs, while an artist studio may require built-in cabinets to store paint and other supplies. Owners will typically consider making these modifications, so the space fits the tenant’s operational needs.
Who Pays for Tenant Improvements
The owner or tenant pays for these modifications in several ways, but both parties typically use the Tenant Improvement Allowance (TIA). The TIA is either a fixed sum or calculated by square footage.
How It Works
The landlord allots a specific budget for the renovation, which she can offer to pay upfront. Other times, the tenant has to pay for the improvements, which she later reimburses through the TIA.
Tenants typically have a say on the cost of the improvements. The reason is simple: the tenant will cover any amount over the set budget. And since the TIA will not cover furniture or other costs unrelated to the physical improvements of the space, it’s ideal to have some control over the build.
Negotiating the Tenant Improvement Allowance
Tenants can negotiate the TIA based on the length of the contract period. If they plan to stay for a minimum of three years, for example, landlords may be persuaded to increase the allowance. If the company is a well-known brand and can increase foot traffic for the commercial area and there is revenue sharing, tenants can negotiate based on this as well.
Tenants who plan to negotiate based on the strength of their brand must be prepared to show their financial statement to their potential landlord, so they can encourage them to spend on improving the rental property. On the side of the owner, knowing that a tenant can expand or is well-versed in paying business costs suggests credibility and responsibility, which are both big pluses in any landlord’s book.
Other Ways to Pay for Tenant Improvements
Turnkey spaces are commercial or residential spaces that are ready for move-in. Here, the tenant will submit an improvement plan with cost estimates, which are often part of the lease terms. If the landlord agrees to these improvements, he’ll pay to build and oversee all work related to it.
Rent abatement is the deferral of rental payments to offset the heavy overlap of rent with construction costs. Since the tenant shoulders construction costs until the work is complete, reimbursement could take a long time. To reduce the pressure of paying so much upfront costs, pushing rent payment back makes it far less financially taxing for the tenant.
Building Standard Allowance
Also called a build-out allowance, the Building Standard Allowance is an improvement package that the landlord may offer the tenant. This package will most likely include fixtures, fittings, and flooring at a specific price. The tenant can choose items from the improvement package, but the tenant must pay for anything outside the package. The landlord oversees the improvement work.
Tenant improvements are always up for negotiation. The tenant does not have to agree to the terms, especially if he thinks these modifications will not improve the rental value. The terms up for negotiation include the budget, responsibility and method of payment/reimbursement.
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