Maximizing the Tenant Improvement Allowance (TI Allowance) is crucial in lease negotiations when building or retrofitting office space. Landlords consider the premises’ condition, lease term, rental rate, and the tenant’s financial standing when offering an allowance amount. For existing office space, basic upgrades like carpet replacement and painting are often all a tenant can expect, and the allowance may be amortized into rent over the term. For new build-outs, understanding construction processes and costs is critical when structuring the lease. The more complex the build-out, the more likely it could run over budget.
The Tenant Improvement Allowance is typically structured either as a cash allowance or a landlord turnkey build-out. Turnkey options involve the landlord managing construction based on an agreed plan and price. Although landlords generally have the experience to deal with the logistics involved in the design and construction process, tenants lose control and flexibility. Making even small tweaks to the original plan can be difficult (and often very expensive). Conversely, cash allowances give tenants control over the process and can offer the opportunity to maximize the Tenant Improvement Allowance value. Although cash allowances empower tenants to oversee construction, there are downsides. Tenants need to manage the upfront costs until landlords reimburse them post-build-out, and the process can be time-consuming.
During commercial lease negotiations, your real estate team should clarify how the landlord handles fees and additional expenses, where the landlord’s work ends and the tenant’s work begins, and how to deal with cost and schedule overruns.
Minimizing disruption and risk and maximizing the Tenant Improvement Allowance requires a proactive approach in your lease negotiation. Because tenants are typically responsible for costs over and above the negotiated Tenant Improvement Allowance, it is critical to be aware of potential problems and address them before signing the lease and starting the construction of your office space.
