Basic Tenant Improvements for Commercial Real Estate

Tenant improvements refers to the customization done to a space to make it meet your needs. A tenant improvement allowance is a sum of money that your landlord makes available to help defray the cost of your build-out.

TIs in New Space

Office space typically gets delivered in shell condition. This means that, while some of the building's common areas are completed, the interiors of the spaces are frequently bare and unfinished. This makes a great deal of sense from a developer's perspective. After all, he doesn't know if a tenant will want an entire floor or a portion of one and he can't guess how you will want your space built out.

Leaving the space unfinished means that the developer doesn't waste effort on creating tenant improvements that won't work for you. Instead, assuming space is available, you get to carve off your desired portion on the floor and design your space to suit your needs.

When you want your own office, designed to exactly match your needs with your exact materials of choice, it's almost impossible to beat the flexibility of taking new space. Furthermore, it is frequently a less expensive option.

TIs in Existing Space

Unless you're considering leasing office space in a completely new area, most of the space that will be available to you will have already been built out with tenant improvements for the previous occupant. If you have some flexibility, this can be an excellent opportunity.

The odds are that if you look at a typical pre-built space, it won't match your needs. Even if the size and location is right, the TIs probably won't be. Because of this, landlords know that existing spaces typically need customization. However, if you can look through enough spaces to find one that suits your needs as-is, you could save thousands of dollars in occupancy costs. You won't have to spend anything (much) to customize it and the landlord won't have to spend on demolition or customization.

On the other hand, if you have to take existing space and reconfigure it, the process could get expensive. In addition to your construction costs, you will also have to figure in demolishing the previous TIs to get the space into buildable condition. As you do this, take a careful look at what you can reuse from the old space. Seemingly minor items like ceiling grids and tiles or doors can add up to multiple dollars per square foot, letting you use your TI budget more wisely.

Allowances for Tenant Improvements

Frequently, you can look to your landlord to help you get your space configured. TI allowances are common on new space -- since they're an integral part of finishing the building -- and are also readily available on already-configured spaces in many markets. The amount of the TI allowance you receive varies based on multiple factors:

New spaces typically get more generous allowances than already-built ones.
More landlord-favorable leases usually receive more TI money. These are leases with higher rents or longer terms.
TI allowances are usually more generous in markets with higher vacancy and fewer tenants looking.

If you are able to get help with tenant improvements from your landlord, read the fine print so that you understand how the allowance works. Seemingly small requirements -- like having to use certain companies or certain materials -- could have a significant impact on the value of the allowance you get. As in most parts of commercial real estate, the counsel of an experienced tenant representative can frequently help you get the best deal.