The tenant improvement allowance is an important part of any commercial lease negotiation. This allowance given the landlord enables the new tenant spend money to build out the space so it better fits its specific needs. This along with the length of the lease are going to the be two most significant issues to impact on the amount a tenant pays on its negotiated rental rate.
How it works
There are generally two different formats for a tenant improvement allowance. These are:
- Turnkey build-out: The landlord covers the cost of the build-out and factors that expense into the rent.
- Stated dollar amount: This is more in the spirit of the allowance in that landlord provides a stated amount to cover the work, which includes architecture and engineering fees.
Whichever approach is negotiated, commercial real estate experts believe that it is best for tenants to minimize the out of pocket cost to the tenant and maximize the value of the improvement based on the amount of rent paid.
Maintaining control of the work
A dispute that will bring the landlord and tenant back to the negotiating table is the control of the work being done. It is important to remember that the two sides do not always have parallel interests and priorities, so there should be clear language about expectations for the work and who has the final say for the quality and amount of work done. Tenants are also advised to have control of the schedule of the work so that it is done before their old lease expires.
Legal guidance often necessary
A knowledgeable real estate attorney can be a tremendous asset as the rental agreement is negotiated. They can not only address the above issues, but they can also handle other unique needs and concerns before the tenant or landlord signs on the dotted line.