The Basics - Tenant Improvement
A tenant improvement allowance (TIA) is the amount of money the landlord or property manager is willing to spend so a tenant can renovate their new space according to their demands. Typically speaking, the improvements are aesthetic or functional, including paint, lighting fixtures, flooring, and similar items. Depending on the wording of the lease, tenant improvement allowances come in two general types – an allowance type and turnkey.
Allowance
With an allowance improvement, a designated amount is allocated towards making tenant improvements with expenses being paid directly by the landlord to the contractors for making physical improvements to the space. This type of TIA does not cover furniture, technology, or customized items but only things specified and mutually agreed-upon by the landlord and tenant.
It should be noted that allowance typically does not permit the tenant to make any improvements of their choosing, but is rather relegated to those items specified in the agreement with the landlord.
The allowance is typically offered per square foot of space so, while negotiating the TIA. Its incredibly important that a tenant must be a certain/ confident that the designated amount is sufficient to accomplish their needs. Particularly, we like to team with some of the best local contractors to give a good sense of TIs that will be necessary to accomplish the tenant build out needs. We highly recommend doing this PRIOR to finalizing your lease.
Potential Drawback:
From a tenant's perspective, a potential biggest drawback of a traditional allowance is the responsibility of finding the architects, contractors, and sometimes even project manager to work on the improvements. Particularly, for a small business or startup, such a responsibility can absorb significant amounts of time that should be spent growing the business.
Turnkey
For a tenant, a turnkey TIA is most entirely about the finished product. The landlord manages the entire process with the tenant approving the layout, fixtures, color palette, flooring, and most other aesthetic choices along with the finished product. The landlord is responsible for covering the expenses throughout the process.
Typically, a tenant is assigned a specified amount per square foot of space. Therefore, it is important to make sure the designated budget can successfully accomplish all of the changes and renovations desired. Any alterations that might be requested by the tenant after the agreement is signed but before the improvements are completed could trigger additional costs for the tenant.
Ultimately, a turnkey buildout is mutually agreeable for both a tenant and landlord if the costs are clearly spelled out. For them to work effectively for both parties, however, the plans should be straightforward, understandable, and financially reasonable relative to the total cost and the length of the lease. Larger, more complicated projects aren’t favored by landlords due to potential complications and slimming margins if the project spirals out of control.
Factors That Can Influence the Allowance
For reasons that would seem fairly obvious, TIAs more financially attractive / palatable for landlords in a longer term lease where the Landlord in confident in a long term tenancy. Typically speaking, a minimum three-year lease is needed for a TIA but, if more substantial improvements like moved walls are requested, the required minimum lease duration will usually be five years or more.
Additionally, landlords prefer their TIA costs go towards improvements that will ultimately improve the value of the space over time. HVAC, plumbing, and lighting improvements are examples of items that are unlikely to be replaced or updated when the next lessee moves in. In other words, more aesthetic improvements like carpet, paint, and drywall are more likely to be approved than costs “above the ceiling" like HVAC plumbing and lighting.
For more information on finding the a great King or Snohomish County Commercial space for your business, consider contact a Snohomish County Commercial Real Estate Broker.
Our office:
Scott Weitz
108 Union Ave,
Snohomish, WA 98290
Scott@WeitzCommercial.com
T: (206) 306-4034
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