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Tenant Improvement Allowances [What They Are And How They Work] - YouTube
Channel: Tyler Cauble
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today we're gonna be talking about
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tenant improvement allowances when
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leasing commercial real estate what are
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they and how do they work
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if you've ever started a search for
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commercial real estate you likely know
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that your new space will require some
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form of build-out almost guaranteed
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whether you're searching for retail
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office or industrial property it's
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important to plan for construction and
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the cost associated with retrofitting
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that space although looming construction
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costs can be intimidating tenants do
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have the option to push for a tenant
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improvement allowance in order to help
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mitigate those costs associated with the
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build-out tenant improvement allowances
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also known as ti-ti a or ta are
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pre-negotiated sums of money that a
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landlord will provide to the tenant in
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order to cover all or a portion of the
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costs to build out the space TI is
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typically expressed as a price per
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square foot amount for example if a
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landlord is offering $20 per square foot
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on a 2500 square foot space the landlord
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has agreed to reimburse the tenant for
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$50,000 worth of construction costs
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while a tenant improvement allowance
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could certainly be applied to all
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build-out expenses including labor don't
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expect your improvement allowance to
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also cover the cost of furniture or
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other moving and startup costs that are
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not directly related to the physical
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improvements of the space so how do 10
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and improvements work while you and your
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real estate broker may have negotiated a
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phenomenal tenant improvement allowance
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keep in mind that you will more than
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likely still need to have the capital to
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cover construction costs up front once
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the work is complete and you have turned
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in all receipts and lien waivers proving
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that the work was done and paid for your
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landlord will then be able to reimburse
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you the negotiated allowance returning
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to our previous example if a landlord
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has agreed to a $50,000 improvement
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allowance the tenant must still be
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prepared to use their own funds to
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initially cover that $50,000
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construction budget the landlord will
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then provide the tenant with the $50,000
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allowance upon proof of completion which
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like I said could include receipts lien
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waivers and more how much TI can you
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negotiate how large of a tenant
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improvement allowance you and your
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commercial broker are able to negotiate
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can vary depending on your business as
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well as a few other key points in the
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lease such as length of term rental rate
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and more be prepared to provide your
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potential landlord with financials for
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their review we typically recommend the
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our clients include two to three years
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of tax returns as well as balance sheets
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profit and loss statements and any other
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pieces of information that illustrate
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the numbers that support your business
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while this process is crucial to ensure
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initially being approved for a space it
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also gives the landlord a better idea of
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how much of a tenant improvement cost
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they're willing to cover since they will
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know how financially solvent or
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insolvent your business is now when is a
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good time to negotiate tenant
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improvements well the landlord might
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actually offer tenant improvements right
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off the bat they may already have tenant
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improvements built into their asking
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price at which point you'll find it in
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their marketing materials or they'll
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just tell you since a tenant improvement
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allowance is somewhat of an investment
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and a risk
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landlords are more likely to offer
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allowances to businesses with stronger
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credit proof of concept and financial
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stability
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that being said tenant improvements are
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still almost always negotiable so don't
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be afraid to bring up tenant allowances
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early on in your conversations with the
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landlord asked if they're offering them
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when you first speak with them over the
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phone or whenever you're on a tour of
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the space but what if the landlord isn't
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offering tenant and proven allowances if
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there is no initial T IA offering don't
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hesitate to open that discussion with
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the landlord if you are still having
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trouble obtaining a sufficient tenant
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and proven allowance it may be time to
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discuss other negotiation strategies
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with your broker if you are also asking
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for free rent or a delayed rent
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commencement you may consider conceding
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some of this time in order to receive a
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larger allowance it just completely
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depends on what your goals are with the
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space you may also be able to negotiate
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more tenant improvements if you're
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willing to commit to a longer term lease
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the landlord will have a longer period
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of time to write off those expenses now
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who completes the build-out well unless
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the landlord has agreed to turnkey the
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space by assuming the full
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responsibility of a build-out the tenant
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is almost always responsible for
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overseeing the construction now a
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landlord may offer UTI and do the bailed
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out on their own but it's more typical
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that they'll leave that up to you since
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they have other things to do of course
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you will want this build-out to be done
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through your preferred contractor if
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possible if you need help finding a
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general contractor either your broker or
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even the landlord should be able to
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recommend at least a handful of
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trustworthy options you will also want
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to receive more than one bid to be sure
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you're receiving the quality of work you
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desire with
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in a reasonable price even if the
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landlord prefers that you use a specific
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contractor you do still have the
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opportunity to field competitive bids
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finally be sure to keep in mind that the
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landlord will almost always require some
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form of approval for those build-out
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plans so be sure to send those plans and
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design specs over to them for written
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approval prior to starting to work
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if you can't negotiate for TI or the
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landlord doesn't want to put money into
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the space at all there are alternatives
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to build-out allowances while a tenant
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improvement allowance can certainly be
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helpful in making commercial space work
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it may not be in every tenants best
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interest or even an option moving
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forward you could ask for turnkey
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renovations as I briefly mentioned
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earlier you may be able to ask your
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landlord to just turnkey the space for
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you that means essentially they're gonna
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do all the work and hand you the key so
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you can move in if your landlord agrees
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to such a request they will be
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responsible for overseeing the
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construction and delivering completely
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completed space to you as a condition of
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the lease you will have the ability to
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make selections and choose the design
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but the landlord will finish the work
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you can also go for a rent abatement or
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free rent period if you are less worried
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about covering construction costs but
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more concerned with rent payments and
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build-out expenses overlapping you can
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also focus less on the tenant
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improvement allowance and more unda
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fir'd rental payments you will have a
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period of time where you can occupy the
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space without having to pay any rent
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which will allow you to open up shop and
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start seeing customers and making money
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before rent commences as with all
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commercial real estate negotiations
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tenant improvements are best approached
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with a concise goal and strategy
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independent planning or discussing with
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your commercial broker will allow you to
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head into negotiations with confidence
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and clarity if you're looking to better
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understand how commercial rents are
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calculated check out this video here
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don't forget to like this video and
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subscribe to the channel for more
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commercial real estate investment
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strategies leasing and management tips
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market updates and more and I'll see you
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next time
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