Tenant improvements (also referred to as leasehold improvements), are important to understand before beginning negotiations with the landlord of a property. If you do not meticulously plan out your tenant improvement projects in advance, you could miss out on significant financial opportunities.
What Is Tenant Improvement?
Tenant improvements (TI) are changes to a building that a property owner makes to accommodate the needs of a new tenant. This can include alterations to the walls, floors, lighting, air conditioning, plumbing, etc. What the improvements will cover should be negotiated and detailed in your lease under the tenant improvement allowance.
What Is Tenant Improvement Allowance?
Tenant improvement allowance is the predetermined amount of money that a landlord will give to you, the tenant, to help pay for the interior improvements. The number will either be stated per-foot or as a total sum. If you make alterations outside the budget or agreed-upon categories, you are responsible for paying the extra costs.
What Is Included in Tenant Improvements?
You can cut a deal with your landlord to work out what is covered under your tenant improvement allowance, but generally you can expect some things to be on your dime.
Landlords are primarily interested in improvements that will add value to the building and will continue to benefit them even after the tenant has gone. This usually leaves out things like electric equipment, decorations, furniture, etc.
However, your strength as a tenant will have a major impact on your TI allowance negotiations. If you have a business model that has proven to attract significant foot traffic from an ideal group of consumers, building owners may view any TI construction on your part as added value. Your success makes their other leasable space more valuable.
How Does Tenant Improvement Allowance Work?
Usually, the tenant improvement agreement will be detailed under the lease clause titled “Improvements and Alterations.” It’s not uncommon for property owners and landlords to have a preferred supplier for TI construction, but don’t be surprised if the responsibility of choosing a commercial contractor falls on your shoulders.
Tenant improvement allowances are generally reimbursed after everything is finished – therefore you must have the cash to front the costs of your commercial building renovation process as a tenant.
Example: If a restaurant is looking to rent a space for a total $200,000 over 3 years, the landlord might give an allowance of 5% ($10,000) for restaurant build out renovations upon move-in.
6 Tips for a Smooth Tenant Improvement Construction Process
It can be confusing to know what to watch out for during the tenant improvement construction process. Here are some tips to make sure your TI project construction runs smoothly:
1. Get Your Permits in Order
Don’t waste time and money making a big change in your leased space only to find out that your landlord will not reimburse you without the proper permits in hand. Make sure you find out what permits are required and whether the landlord will reimburse the costs! Professional commercial construction companies can help you figure out which requirements you need to satisfy.
2. Double-Check before Submitting Plans
After submitting your tenant improvement plans to your contractor, make sure you do everything possible to avoid having to submit any changes. This will disrupt the schedule the contractor has drawn up and can cause significant delays depending on what the change is.
3. Use Consistent Language
Using the 16 divisions of construction defined by the Construction Specifications Institute (CSI) is a useful way to keep everyone involved in the tenant improvement project on the same page. This standard of organization specifications and other information applies to commercial building projects in the United States of America and Canada.
4. Document Everything
Keep records of every document, bill, and record organized so you can keep track of costs and for future reference. This way you can avoid unexpected costs as best as you can, have a clear list of vendors and subcontractors if you need to contact them, and much more. Anything that will help you protect your investment should be filed away safely.
5. Get an Inspection
Before you even get started, it may be beneficial to have your leasing space inspected so you don’t get any nasty surprises after construction begins. The extra cost of having a professional check for mold, lead, water, radon, asbestos, or any debilitating condition will save you valuable time. TI construction must run on a tight schedule if your business plans on being profitable, so get these dangerous elements out of the way ASAP!
6. Be Flexible
Sometimes a feature you wanted is just not going to happen. Being able to let go of a “want” and focusing on finishing the essentials of your project or finding an alternative will keep the project moving smoothly. If you’re having trouble differentiating the two, step into your customers’ shoes and anticipate what will have the highest impact on them.
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