If you are leasing office, retail or medical space, the tenant improvement allowance can be one of the most valuable parts of your deal. Here is how tenant improvements work in Pasadena, Glendale and Los Angeles commercial leases, and how to negotiate them.
What Are Tenant Improvements?
Tenant improvements, often called TIs or a build-out, are the changes made to a commercial space so it works for a specific tenant. They can include new walls and offices, flooring, paint, lighting, electrical and data cabling, kitchens and break rooms, restrooms, and upgrades needed to meet building codes and accessibility requirements.
What Is a Tenant Improvement Allowance?
A tenant improvement allowance (TIA) is money the landlord agrees to contribute toward the build-out. It is usually quoted in dollars per rentable or usable square foot. For example, a $40 per square foot allowance on a 3,000 square foot suite would give the tenant $120,000 to spend on improvements. Costs above the allowance are typically paid by the tenant, either up front or amortized into the rent.
The size of the allowance depends on the market, the condition of the space, the length of the lease and the tenant’s credit. Longer leases and stronger tenants generally receive larger allowances because the landlord has more time to earn back the investment.
Common Ways Build-Outs Are Structured
Turnkey
The landlord delivers the space finished to an agreed plan and pays the cost. This is simple for the tenant, but the landlord controls the contractor and the finishes.
Allowance
The landlord provides a fixed dollar amount and the tenant manages or approves the work. This gives the tenant more control, along with the risk of cost overruns.
As-is
The tenant takes the space in its current condition. As-is deals often come with lower rent or more free rent to compensate.
Second-generation space
Space that was already built out by a previous tenant may need only paint and carpet, which can save time and money if the existing layout works for you.
Tips for Negotiating Tenant Improvements
- Get pricing early. Ask for a preliminary space plan and cost estimate before you sign a letter of intent, so you know whether the allowance will cover the work.
- Compare total cost, not just rent. A lower rent with no allowance can cost more over the lease term than a higher rent with a generous allowance.
- Clarify what counts. Confirm whether the allowance can be used for architecture and permit fees, cabling, furniture or moving costs, and whether unused funds can be applied to rent.
- Protect your move-in date. Tie rent commencement to substantial completion of the improvements so you are not paying rent for a space you cannot use.
- Watch for building standard requirements. Some landlords require specific finishes or contractors that can raise costs.
- Know your restoration obligations. Find out whether you must remove improvements at the end of the lease.
How a Tenant Representative Helps
An experienced tenant representation broker compares proposals from several landlords, models the full cost of each option and negotiates the allowance, free rent and construction terms on your behalf. Learn more about commercial leasing and office space for lease in Pasadena, Glendale, Burbank and Los Angeles, or contact Iliad Real Estate Group to talk about your next space.