A tenant improvement (TI) allowance is money a landlord contributes toward building out a tenant’s space. It is one of the biggest levers in a commercial lease negotiation, and one of the easiest places for an owner to give away value without realizing it. Here is what landlords in Glendale, Pasadena and the Los Angeles area should know.
What a TI Allowance Covers
TI money usually pays for permanent improvements to the space: walls and doors, flooring, ceilings, lighting, electrical and data, HVAC distribution, plumbing for kitchens and restrooms, and the architectural, engineering and permit costs that go with them. Furniture, moving costs and the tenant’s equipment are usually excluded unless the lease says otherwise.
How TI Allowances Are Quoted
Allowances are usually stated in dollars per rentable square foot. A larger allowance is normally paired with a longer lease term and a higher rent, since the landlord has to recover the cost over the lease. A short-term lease in a second-generation space may come with little or no allowance.
Turnkey vs. Allowance
- Turnkey build-out. The landlord builds the agreed plan and carries the risk of cost overruns. This gives you control over contractors and quality, but you own the budget risk.
- Allowance. The landlord pays up to a fixed amount and the tenant pays any overage. Your cost is capped, but you should still approve plans and contractors.
Lease Terms That Protect the Landlord
- Pay the allowance against invoices and lien releases, not up front.
- Require landlord approval of plans, contractors and permits.
- Decide whether unused allowance is forfeited or can be applied to rent, cabling or moving costs.
- Address restoration: which improvements the tenant must remove at the end of the lease.
- Tie unamortized TI costs to default and early-termination provisions.
TI vs. Free Rent and Other Concessions
TI dollars stay with the building and can help with the next tenant, while free rent is gone once it is used. Depending on your building, your financing and whether you plan to sell, one may serve you better than the other. Your broker should model the net effective rent of each proposal so you are comparing deals on equal terms.
For more background, see our article on tenant improvements.
Get Help Structuring Your Next Lease
Iliad Real Estate Group provides commercial real estate landlord representation for owners in Glendale, Pasadena, Burbank and greater Los Angeles. Call (818) 836-4070 or send us a message.