What are tenant improvement allowances and what do they cover?

Let’s learn about tenant improvement allowances. If you’ve been looking for commercial property to lease for your company, you’re probably familiar that the leased space will require moderate to major improvements to meet your needs. When these construction costs can be challenging, tenants do have the option of requesting that the landlord offset these costs by completing a portion of the build-out or paying for it.

A tenant improvement allowance, or TIA, is an amount of money provided by a landlord to cover all or part of a tenant’s commercial space build-out costs. Such contracts are arranged as aspect of the rental agreement, reducing a tenant’s out-of-pocket expenses significantly.

 

How do tenant improvement allowances work?

 

When leasing a new space for your business, you will need to make significant changes. Tenant improvement allowances can be lump sums, but they are usually negotiated on a square footage basis. If the owner agrees to pay $20 per square foot and your office space is 10,000 square feet, the TIA is $200,000.

It is critical to specify whether the figure is for “usable” or “rentable” square footage. Ultimately, the rate is influenced by several factors, including location, the condition of the space, real estate market competition, and your credit and tenant history. Other considerations entail if the landlord owns other units in the building and whether the renovations increase the value of the property.

 

Managing the design and construction

 

The construction can be managed by the tenant or landlord, which is negotiated in the lease. The three most common structures are:

1. Tenant-controlled build-out: The tenant selects the contractor, supervises the work, determines the timeline, and keeps track of the tenant improvement allowance budget.
2. Landlord-controlled build-out: Although the landlord manages the project, the tenant has some say over bids, plan approval, and oversight.
3. Turnkey build-out- The landlord is in sole control of the building improvements before the tenant moves into the space. This structure is for tenants that do not want to be involved in the construction process.

Requesting a TIA usually means gaining more control over the project.

What is typically covered by a tenant improvement allowance?

Generally, landlords want to limit the agreement to basic construction costs. Tenants may wish to include labor, architectural fees, permit fees, and legal fees in their budget. Cabling, internet, moving costs, and office décor or furniture are typically not included. All these items must be negotiated and documented. In exchange for longer-term leases, landlords may be more willing to include some of these extra costs.

 

 

Tenant improvement allowances are typically paid to the tenant in the following manner:

TIA is typically paid out to the Tenant as a reimbursement based on certain stages of completion and proof that the work was completed if the Tenant controls the build-out or even a portion of it. The Landlord may pay the Tenant for the TIA after all work has been completed and mechanics lien waivers have been received, so that the Landlord is confident that contractors will not sue the Landlord for unpaid work performed. The Landlord benefits from deferring payment until all work is completed and the Tenant can provide lien waivers from all contractors as well as a certificate of occupancy. It is advantageous for the Tenant to obtain upfront and ongoing payments from the Landlord.

 

 

Choosing the Best Commercial Contractor

It is always preferable to obtain multiple bids from different commercial contractors. When choosing a commercial contractor, make sure they can provide quality work while staying within your budget. The following are the top four qualities we recommend looking for in a commercial contractor:

1. Request Recommendations and Referrals

Inquiring with friends who have recently completed commercial construction projects can be extremely beneficial. Request referrals. Examine the feedback. Learn which commercial contractors are getting rave reviews and which ones your peers would not hire again. Inquire as to why. You’ll quickly learn which contractors are respected by the local business community.

 

2. Inquire about credentials, qualifications, and experience

Contractors specialize in a specific niche, while others can handle a wide range of projects. Do your research when evaluating potential commercial construction companies. Examine their services and portfolios to see if a company is a good fit for your project. Consider their credentials, affiliations, and track record of safety.

 

3. Put Quality First

Speed and cost are important considerations, quality should be your top priority. Ultimately, focusing solely on initial costs is short-sighted. It may cost more in the long run if it increases operational and commercial building maintenance costs. A project completed with high-quality materials, expert insight, and a dedication to quality workmanship will benefit you more. Working with a commercial general contracting company with a solid reputation is a good way to ensure a quality result and a good return on your investment.

 

4. Think about communication.

Effective communication increases efficiency. It also reduces errors and provides a better experience. A commercial construction contractor who consistently provides excellent service recognizes the importance of effective communication. They’ll set up a system to keep everyone informed. Take the time to meet with a building contractor before hiring them. Then consider their willingness and ability to respond to questions and share information. How do their communication styles differ from yours? It’s critical to get along with your general contractor and share the same communication style.

 

Robert Hakes Construction is your go-to commercial builder in Vancouver, WA and the Portland Metro Area. We have worked with some of the area’s largest commercial brokers and property managers. All while specializing in working one-on-one with business owners to ensure their commercial space is customized exactly how they imagined. Speak with our knowledgeable team to learn what distinguishes our family-owned commercial construction company from larger competitors.

 

Robert Hakes Construction Blog, 2022