If you have recently leased a new commercial space for your business, you may need to renovate your space to fit your business’s needs. Fortunately, many lease agreements include a tenant improvement allowance, also known as a TIA or TI allowance, to help offset the cost of leasehold improvements you need to make to the property. In this article, we answer common questions about tenant improvement allowances and how to maximize your allowance best to make the existing space work for you.
What is a Tenant Improvement Allowance?
A tenant improvement allowance (TIA) is the amount of money that a landlord agrees to pay to improve a leased space. You and your landlord negotiate the specific amount of TIA in your lease agreement and what the money can be spent on. Your TIA is often a specific amount per square foot or an overall fixed amount.
What does a tenant improvement allowance cover?
You can use your tenant improvement allowance for hard costs that will be left behind when the tenant leaves that benefit the landlord. This often includes property improvements such as new flooring, windows, HVAC, or lighting. Depending on the agreement, a TIA can also cover soft costs, such as construction management fees, that are a necessary part of the construction process but do not directly benefit the landlord.
TIAs cannot be used for improvements that solely benefit the tenant and will not be left behind when the tenant leaves, such as furniture, electronic equipment, and cabling for the internet.
Is There a Difference Between Tenant Improvements and Building Improvements?
Yes, there is a difference between tenant improvements and building improvements. Tenant improvements are any alterations to assets or property that have been leased. Building improvements are alterations outside the leased space, such as common areas and indoor and outdoor communal areas. Alternations that benefit the entire building are known as building improvements and are funded differently.
TIAs cannot be used for common space improvements such as repaving outdoor walkways, replacing elevators, upgrading the roof, updating the lobby, or landscaping the grounds.
How do I Qualify for a Tenant Improvement Allowance?
A tenant improvement allowance is not a loan, and thus, you don’t need to apply for or qualify for a TIA. Instead, you will negotiate your TIA and the specific details with your landlord when you broker your lease agreement. Consider involving a broker, real estate lawyer, or financial advisor if you are unfamiliar with TIA arrangements and Utah commercial tenant improvement agreements.
Finding a space that doesn’t need improvements here and there is rare. To negotiate the best terms for your tenant improvement allowance, take time to evaluate the space. What will you need specifically for your business? In many cases, a minimal office or business space is the best opportunity because the framework is intact, and you can make any necessary customizations. Consider reusing as much as possible to reduce additional demolition and rebuilding costs. Then, list any tenant improvements you’ll need, ranking them from the absolute essentials to anything considered a want, instead of a need.
Before beginning the negotiation process, it’s also helpful to get an estimate of how much the various improvements will be. Contact contractors if necessary, as this will help you evaluate your allowance offers fairly.
Is a Tenant Improvement Allowance a Loan?
A tenant improvement allowance is not a loan. Instead, it is a set amount agreed to by the landlord to improve the leased property and incentivize potential renters. A TIA does not need to be repaid by the tenant. You can combine a TIA with a loan, called an amortized tenant improvement allowance, which differs from a TIA. Amortization is an agreement between the landlord and leaseholder in which the landlord loans money for capital improvement that will be repaid in installments over the term of the lease, usually with interest.
Who Pays for a Tenant Improvement Allowance?
The landlord pays the amount in a tenant improvement allowance, usually in two ways. First, the landlord will pay contractors and suppliers up to the TIA limit. Alternatively, the landlord will give you a month or two of “free” rent, which frees up your rent money to make the necessary changes. You usually do not receive your TIA directly.
Anything you spend above your TIA will be out of your own pocket.
I Have a Tenant Improvement Allowance. What is the Best Tenant Improvement Construction To Do?
As a tenant, you want to maximize your TIA and have a successful tenant improvement project to make your lease space the best it can be. Remember that TIAs can only be used for the interior of your rented space. The best tenant improvement construction projects will enhance and update your existing space. Basic recommended changes include:
- Framing and Walls
- Updated electrical and plumbing
- Added doors, skylights, and windows
- Fresh paint and new carpet or flooring
- Upgraded HVAC system
- ADA compliance upgrades
If your tenant improvement budget allows, consider adding the following to your commercial properties:
- Break rooms
- Additional meeting spaces
- Reception areas
- High-efficiency lighting
- Increased ceiling height
How will Cook Builders work with your tenant improvement allowance?
The necessary changes you need to make to a leased property and the scope of work involved can be overwhelming. Hiring professional construction services with experienced, licensed commercial general contractors will save time and decrease overall construction costs. Cook Builders are experienced commercial tenant improvement contractors who will complete your project on time and within budget. We work closely with you to understand your vision and improve your leased space with projects large and small.
Whether you need extensive renovations in your space or require more minor alterations for an updated look, the experts at Cook Builders work with you to execute your vision. We understand TIAs and their parameters and will maximize quality, efficiency, and safety within your budget. Contact Cook Builders today if you have questions or wish to request a bid.