By: Gary Edell           Follow us on Twitter @ROSSICRE

In today’s commercial real estate market there are several financial incentives being offered by landlords as inducements to lure companies to or retain tenants at their properties.  One of the most commonly offered enticements is a Tenant Improvement Allowance.  The Tenant Improvement Allowance, often referred to as a TI Allowance, is a set amount of money that the landlord is willing to contribute to assist with or, in some cases, offset the cost of building out or renovating the space that a tenant will be occupying. 

 When negotiating a TI Allowance, there are several factors that you want to consider.  Here are 5 such factors:

1. Understand the type of property where the space is located – Office buildings typically offer larger TI allowances than retail or warehouse properties.  There are some exceptions (see below), but most office building landlords pro forma their lease transactions with enough money to complete a building standard buildout, which includes walls, lights, HVAC and related duct work, electrical outlets and wiring and finishes such as paint and carpet.  Most retail and warehouse spaces are delivered in a shell condition with a nominal amount of TI dollars to be used for the tenant fit out.  Understanding the property type will allow tenants to set realistic expectations as to the level of TI Allowance that might be available and make for a more efficient negotiation for the tenant and the landlord. 

2. What is the Tenant’s Use? – Within the different building types, there are a variety of uses that will fill these properties and each use will have a different level of buildout expense in order to complete the space for the tenants’ occupancy.  Most landlords will budget higher or lower TI Allowances for lease transactions based on the use types.  For example, a warehouse building that is looking for lab use will typically understand that the buildout cost for a lab is several hundred dollars per square foot.  To make the property attractive for such a use, a landlord will need to budget a large TI Allowance to attract this type of user.  In retail centers, a cell phone or clothing store does not require nearly as much buildout as a restaurant.  The retailer will usually receive a warm lit shell and in some cases a limited allowance, while a restaurant has significant construction expense to address venting, cooking equipment, seating, etc… and a larger TI allowance is often available.  Lastly, in office buildings there is often a significant difference between the TI allowance that is available for a medical tenant versus a traditional office tenant, as a medical office buildout is much more expensive.  Keep in mind that the rent that a tenant pays will be reflective of the level of TI allowance that is provided.  Nothing is free in life, so be prepared that a larger TI allowance corresponds with a higher rent. 

3. Know Your Market – It is important to understand the market dynamics for the property where you will be completing a buildout.  Office buildings in downtown Washington, DC offer a much higher TI Allowance than a property in Germantown, MD.  If you are moving from the district to the suburbs, do not expect to receive an allowance in the suburbs anywhere close to downtown, even if you think the buildings are comparable in quality.  This also holds true for warehouse and retail space in different submarkets.  Supply and demand will definitely influence the amount of TIA that is available, as high vacancy rates typically motivate landlords to be more aggressive in making tenant improvement dollars available. 

4. Renewal vs. New Lease – While it is as important for landlords to retain tenants as it is to find new tenants, the economics of a lease renewal do not typically include the same tenant improvement allowance as a new tenant is likely to receive.  Existing tenants usually require new carpet and paint with the possibility of some minor work to reconfigure an office or two, while new tenants normally have more extensive buildout requirements.  Landlords recognize that there are a lot of expenses and aggravation involved with relocating and the same incentive package is not generally required for a tenant to agree to renew as it is to attract a new tenant.  Additionally, most existing tenants do not want to work through a major renovation of their office.  It is important to understand your situation and align your buildout requirements and TI Allowance expectations accordingly.

5. Get a Space Plan Completed and Priced Out – Do not put yourself in a situation where you are guessing what your buildout needs are and how much completing the buildout is going to cost.  Most landlords will provide an architect, at the landlord’s cost, so that a tenant can determine how they layout in a particular space.  Once a space plan is completed, you can either ask the landlord to recommend or contact a general contractor directly to request a construction estimate for the space plan that has been completed.  Most general contractors will agree to provide a price estimate at no charge, as long as they are provided an opportunity to bid on the work.  The price estimate is not something that is set in stone and it will fluctuate through the planning process as changes are made to the layout and more construction detail is provided.  However, the estimate will provide a cost guideline for the negotiation of the tenant improvement allowance and offer a level of understanding as to potential out of pocket expenses beyond any allowance that is negotiated. 

Utilizing the above tips should help to establish realistic parameters as to what a tenant can expect a landlord to provide in a tenant improvement allowance and to negotiate a tenant improvement allowance that is commensurate with the work that a tenant requires. 

– Gary Edell

 For more information regarding tenant improvement allowances or for assistance with any commercial real estate requirements, please contact ROSSI Commercial Real Estate at 301-355-0070.