Let’s face it…tenants can often be demanding. Nearly all lease negotiations require some form of negotiation for tenant improvements. The Tenant Improvement Allowance, also known as TIA, TA, or Work Letter, sets forth a fixed amount of what a landlord is willing to contribute to tenant improvements. As a landlord, it’s important to be well versed in the arena of tenant improvements. Typically commercially rented space may need to be customized in order to fit a tenant’s needs, and you will have to come to an agreement that will address the Improvements and Alterations within the lease clause.
This Improvements and Alterations Clause is designed to protect all parties involved and define who is going to do the work, when and how it will be done and most importantly, who pays for it. Typically the contract states either a total dollar sum for improvements or the per-square-foot amount. It will also specify who is responsible for any additional costs should the project go over budget. Typically part of the contract is that a landlord will pay the agreed upon costs to the suppliers and contractors until the limit for the Tenant Improvement Allowance is reached. After that, it is the responsibility of the tenant. The amount of a Tenant Improvement Allowance will vary from each landlord and project to the next, but it’s important to have a general idea of the costs involved to make the necessary improvements. In some cases, a tenant will pay for their own improvements out of pocket, or some additional improvements over and above the originally agreed upon tenant improvements. Some tenants will request that a landlord put the job up for competitive bids rather than choosing his or her preferred contractor. In addition to the TIA, a landlord also usually charges an administrative or overhead fee in relation to the tenant improvement work. These fees will come out of the TIA.
There are two common Tenant Improvement Allowances that are provided by a landlord for the improvements to a rental space. The first is a stated dollar amount, this is when a landlord provides a stated dollar amount that the tenant may utilize in the build-out of the space. The second type of TIA is a turn-key build-out. This is when a landlord covers all costs involved in the tenant build-out as it has been agreed upon in the space and rent plan. The scope of work will obviously vary from one project to the next with some tenant improvements being as simple as a fresh coat of paint or new carpeting. While other tenant improvements may be very specific to the tenant and involve putting up or removing walls, and other major construction undertakings.
Space build-out can be a key component of any commercial lease negotiation. The Tenant Improvement Allowance is meant to protect all parties involved in laying out the terms and responsibilities ensuring that a mutual agreement is reached. As a landlord, one can typically write-off tenant improvements as either a lease acquisition cost or a capital improvement. When a tenant agrees to take a space as-is, then they typically feel that they should be able to pay a lower rent amount. Capital improvements made to a building can increase the value of the building and also raise the rent amount charged to the lessee.