A tenant improvement (T.I.) allowance is a specified amount of money provided by the landlord to the tenant for making improvements to the leased space. A T.I. allowance does not necessarily mean the tenant is on the hook for overseeing the project or needs to start bidding out the job to different vendors. The type of building will also factor into what you can expect in terms of a T.I. allowance. For example, in an office building you’ll see more T.I. allowance than you would in an industrial building. The amount of T.I. allowance a company receives comes down to several factors including length of the lease term, creditworthiness of tenant, the broker negotiating the deal, market conditions, etc.
Pros for tenants:
Typically, a tenant will be given a choice whether to work with the landlord’s construction team or an outside contractor.
The tenant has more control over the design, materials, and quality of the improvements, allowing for customization to suit specific needs.
From a tenant’s perspective, it’s always in your best interest to make sure that any T.I. money that remains unused can be applied towards free rent.
The longer the lease term along with the condition of the space, plays a vital role in how much the landlord is willing to offer in T.I.
With a good broker on your side, you’ll able to maximize the amount of T.I.
Cons for tenants:
There may be cases where the landlord is only willing to do the build out using their construction team.
The dollar doesn’t get you as far as it once did:
Construction costs have increased by more than 10% for each of the past two years. .
More of the tenants’ time is required, for example:
Reviewing Building standard materials list.
Picking out final finishes, securing quotes, and a formal bidding process for outside vendors.
Bi-Weekly or monthly meetings to go over progress.
Potential for upfront costs. If the improvement costs exceed the T.I. allowance, the tenant is responsible for covering the additional expenses.
Typically pay a 4%-5% project management fee to the landlord.
At WRA, we take the necessary steps to avoid any surprises during the construction process. We’ve built relationships with several vendors over the years, to provide our clients with trusted resources. Our goal is to get each client’s space built out on budget and in a timely manner. Meeting with contractors and architects ahead of time provides an opportunity to get on the same page about the scope of the project, the associated costs, and any potential challenges that could arise. This is particularly important for tenants because any costs that exceed the T.I. allowance will come out of their pocket unless otherwise negotiated.