What Are Tenant Improvement Allowances?

  • 3 weeks ago
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Viewing a number of commercial properties prior to finding the ideal office space is common for businesses. However, even after finding a property that suits a number of the business’ needs, the space may not meet 100% of all the requirements.

This is where tenant improvements become beneficial because they allow tenants to receive an allowance that allows them to renovate the space to their liking prior to moving in. Learn more about the importance of tenant improvements and allowances below.

The definition of a tenant improvement allowance

A TIA is money that is provided by a landlord to assist a tenant with customizing an office space. Although this type of allowance is usually offered to tenants that move into newly constructed buildings, it can also be used as a way to attract tenants to existing commercial buildings.

Why do landlords offer allowances for tenant improvements?

Landlords offer TIAs as incentives for tenants to sign leases. The amount offered by a landlord is negotiable and written in the lease, along with specifics on what the tenant can spend the money on.

TIAs aren’t considered ‘free’ for tenants because landlords recoup their costs through rental increases, limiting access to other privileges, and more.

Does a tenant improvement allowance cover all office renovation costs?

As beneficial as a TIA can be, it’s important to keep in mind that it doesn’t cover all costs associated with an office space. Even if the allowance received is a substantial amount of money, it’s unlikely that it will be enough to cover all the office renovation costs.

Added to this, landlords typically restrict what the allowance can be spent on in the lease agreement. This is done to ensure that tenants spend money on upgrades that will improve the value of the property.

What does a tenant improvement allowance cover?

A TIA can cover both hard and soft costs. Hard costs are improvements that the tenant will leave behind and are directly beneficial to the landlord whereas soft costs include services that are needed for renovations (such as design, insurance, etc).

Things a tenant improvement allowance doesn’t cover

Furniture, equipment, and data cabling are a few examples of expenses that aren’t covered by TIAs. This is because they don’t improve the value of the property and therefore are of no benefit to the landlord. Despite this, on rare occasions, it may happen that a landlord offers to contribute a portion of the TIA to these types of costs to make signing the lease more attractive.

How is the allowance calculated?

A TIA is calculated by using the square footage of a space. For every square foot, a certain amount is offered. It’s important to clarify whether your TIA is calculated using the usable square footage or rentable square footage as the figures will differ significantly. Using rentable square footage to calculate a TIA allows you as a tenant to receive more money for improvements.

Being able to negotiate a tenant improvement allowance is beneficial for tenants who seek to customize an office space according to their business’ needs. Despite this, tenants should keep in mind that the amount they receive is dependent on many factors and that it isn’t there to cover all the renovation costs.

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