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Mike
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April 19, 2018

Negotiating Your Tenant Improvement Allowance

After a well-organized search, you narrowed the choices of your new office space to a select few. You were again meticulous as you toured each of the spaces, collaborating with the decision-makers in your company to make sure everyone was on the same page. Finally, after an exhaustive process, you’ve narrowed the field down to a single property that hits the most marks on your checklist and it’s time to begin negotiating.

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Although the process we just summarized shouldn't be new to you by this point, we reiterated it for a very specific reason – a lot goes into finding new office space so dropping the ball at the point of negotiation negates many hours of effort from both you and your team. In fact, negotiations aren’t just simply the finish line in your search but, just as importantly, the opportunity for you to negotiate perks that can help stretch your budget and make your office feel like a home to your organization rather than faceless workspace.

For that reason, negotiating your tenant improvement allowance is an important component of the process, giving you financial means within your lease to put your company's personal stamp on the space. It helps you transform that space from random square footage to a place that is customized to your needs, the personality of your team, and the physical foundation of your company's next phase in life.

 

The Basics

Simply put, 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

The allowance variety operates much like it sounds. According to the lease, 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 the mutually agreed-upon allowance does not permit the tenant to make any improvements of their choosing but is strictly relegated to those items specified in the agreement with the landlord. Also, the allowance is typically offered per square foot of space so, while negotiating the TIA, a tenant must be a certain that the designated amount is sufficient to accomplish their needs.

From a tenant's perspective, one of the biggest drawbacks of a traditional allowance is the responsibility of finding the architects, contractors, and sometimes even project manager to work on the improvements. Obviously, particularly for a small business or startup, such a responsibility can absorb significant amounts of time that should be spent growing the business. In some cases a building manager or landlord will have a designated contractor to work with.

 

Turnkey

For a tenant, a turnkey TIA is most entirely about the finished product. From start to end, 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.

Due to the substantial responsibilities absorbed by the tenant in an allowance TIA, opting for the turnkey option can be beneficial if, for no other reason, to simply avoid the many headaches involved with actively managing the project. More often than not, moving in to new office space that has already undertaken necessary improvements is a far more agreeable way to start an organization's life in the new space.

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

As alluded to, longer-term leases make TIAs more financially attractive for landlords, meaning a tenant is likely to get more improvements. 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. Remember, the next tenant won't necessarily want the same type of customization so landlords need to financially protect themselves for future purposes. Longer leases increase expected revenue for the space over a wider duration of time and, therefore, make highly customized improvements more financially feasible.

Likewise, 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.

 

Download the Ultimate Guide to Finding New Office Space

 

Obviously, a number of different factors are at play when negotiating a tenant improvement allowance. Thankfully, when working with a TenantBase advisor, this is one of the benefits included with our service. As a tenant, you invested too much time and effort into finding your new space to simply leave something as important as a tenant improvement allowance to the untrained eye. Let TenantBase help make your new office space a true home to your organization rather than just mere square footage.

 

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