How to Avoid Costly Mistakes While Negotiating a Tenant Improvement Allowance
So, you’re moving into a new office space. Like any new commercial tenant, you’ve got work to do: patching walls, smoothing out wear-and-tear, and making the space perfect for your company. These are called the Tenant Improvement (TIs) renovations done to the interior portion of a tenant’s space for their particular use.
To help defray the cost of tenant improvements, many leases contain a Tenant Improvement Allowance (TIA): money a landlord provides the tenant to customize the space. The TIA – which is negotiable and market-based – can be a confusing and misunderstood component of the commercial lease. Misunderstanding the negotiation process can lead to mistakes, which inevitably leads to unnecessary costs shouldered by the tenant – you.
Here are four things to remember about TIAs that can help you avoid making costly mistakes while netting you the highest possible allowance:
Negotiating a TIA can be a lengthy process
Before jumping into negotiations, do your homework. You’ll want to have a solid understanding of your construction needs, what’s critical to complete now — and what’s not.
Two important hires can help you through this process, which really is more of a marathon than a sprint: an architect and a project manager. An architect will help you understand the current trends and how best to utilize your space in an efficient manner. A project/construction manager can help you get your own quotes on what the work will cost, a step that should be done early on in the real estate process.
Turnkey is not always turnkey
Landlords will sometimes build a space out for you before you move in. This is called “turnkey”. Understanding when a project is turnkey and when it requires a TIA is an important first step in any negotiation. But even when tenants and landlords agree on turnkey improvements, many landlords will put a cap on what they’re willing to spend. For instance, turnkey allowances do not include telephone or data wiring or furniture. Tenants must understand the detailed scope of the turnkey improvements so they are able to understand which improvements they’ll be responsible for as well as the cost.
Be a calendar hawk
As you enter into negotiations around TIAs, it’s critical to understand the time frames required to permit and design any needed improvements. Identify the critical milestones, log them in your calendar, and look for any dates or events that could throw a wrench in your timeline – like holidays, vacations, and the like. That said, changes and delays will happen, so build these into your model when creating a schedule. What’s more, some items – glass and custom furniture, for instance – are notorious for their long lead times, so be sure to build those into your schedule at the outset.
Understand the math
The lease you plan on signing will directly impact the TIA to which your landlord agrees. Landlords will amortize any allowance over the term of the lease, so the agreed-upon rent needs to make sense to both parties. For example, if you agree to a five-year lease at $25 per square foot, a TIA of $50 or more per square foot likely won’t be feasible for the landlord. A tenant who has worked through some of this math prior to entering the TIA negotiations will be in a much stronger position than one who has not.