What are Tenant Improvements and what can I expect?

Tenant improvements are commonly called “TI” for short or “tenant improvement allowances”. As a tenant, you have the potential with any landlord to have your space be it Retail, Office or Warehouse property be improved. The mistake most tenants make fall under the following categories:

• Expecting the landlord to do too much of the improvements
• Under-estimating the true costs of the improvements
• Not understanding how the allowances work
• What is meant by “move in ready space”

Let’s tackle each of the bullets above to provide some clarity on what is expected. Let’s shine some light on the true reality for a tenant leasing a  commercial property.

Managing Expectations for Tenant Improvements 

For all commercial properties a property owner has exposure, or risks. These risks equate to money, dollar and cents- meaning if a landlord dedicates funds to finish out a space depending on the cost. The owners have to measure their exposure. It is just being smart about how they mitigate their risk with a new tenant. The higher the allowances to make the space ready for a tenant, the more the money gets amortized into the base rent.

You can also use more term from the tenant to absorb the costs.  Keep in mind , as a tenant you want a good deal, but the landlord wants to make positive cash flow. Any type of fixture that is not permanent does not stay with the property. This is usually on the tenant’s nickel , this bodes especially true in Retail situations.

Costs of construction and improvements

Typically, all estimates are approximately 15-20% under quoted. Unfortunately it is not usually in the favor of the tenant. The construction process has be managed whether the tenant is using the landlord’s contractors or their own.  You do not have an inordinate amount of time to get your tenant improvements done. If you are using your own contractors and they delay your construction it could eat into your operational period. Highest costs are always HVAC, re-routing electrical and plumbing .

 

Allowances and how they work – Move in Ready

A commercial property is made move in ready when tenant finish out is “substantially complete” that means a tenant can take possession of the space and start running their business fairly quickly. Again, all non permanent fixtures are the tenant’s responsibility, if it does not stay with the commercial property then it is not the landlord’s concern. If a landlord dedicates funds to finish out your space that means the ceiling is what they offer. As an example if $10,000 is dedicated that means that is all you have , if  a tenant can provide the finish out at a lower cost, they do not get to keep the money left over. Also, the landlord never cuts a tenant a check and says go ahead and finish out your space , it is always controlled.