When tenants negotiate leases, they frequently focus on the basic numbers -- the amount of the per square foot rent, the size of the space and the size of the tenant improvement allowance. However, seemingly small details can have a significant impact on the overall economics of the transaction -- frequently outstripping what a dollar or two of rent would mean. This is especially true when it comes to your TI allowance.
Done vs. Dollars
At first glance, a lease that includes turnkey TIs might seem like a good deal. A turnkey agreement means that you theoretically don't have to take any money out of pocket to get your space configured for you. However, behind the scenes, the landlord is offering this because he expects to save money.
When you get offered a flat tenant improvement amount, the landlord is assuming that he can build the space for less than you think. For instance, if you ask for $50 per foot and your landlord comes back with a turnkey offer, he's probably expecting to build your space out for between $40 and $45 and to pocket the difference. Unless you can get an ironclad work order included in your lease that clearly specifies what will be built and to what standards of quality, taking a set dollar tenant improvement allowance will usually get you better space.
Whose Job Is It?
Another way that your landlord can reduce the cost of providing a tenant improvement allowance is to gain additional control over the construction process. If he can get himself or one of his companies named as the construction manager, he will be able to keep any materials discounts as well as retain the contracting fees and any labor markups. In a worst case scenario, he could end up being more expensive than bringing in an outside or managing your own project, leaving you in a situation where your tenant improvement allowance doesn't go as far as you expect.
Measuring Your Space
The measurement of your space doesn't only impact your tenant improvement allowance -- it also impacts your rent. If your space is measured improperly and you end up being assigned too much common area, you will end up paying more rent. While a TI allowance that is based on rentable area will give you more TI dollars, you still will usually do better if your space is measured properly in the first place.
The best way to play the measurement game is to have your space measured accurately. At the same time, write your lease to request that your allowance be granted on the basis of the rentable square footage that you pay for instead of the smaller usable square footage that you occupy. This gives you extra TI dollars to use on your project.
The Cost of TIs
Finally, when you negotiate your tenant improvement allowance, remember the old economist's rule that "there ain't no such thing as a free lunch." Your landlord is looking at the total cost of your lease and an extra dollar that he gives you in TI allowances has to be balanced out somewhere, such as in a higher rent or a more aggressive rent increase schedule. With this in mind, settling for fewer TIs and a lower rent could work out to be the best deal for you.
Here are a few other articles to check out:
Subscribe to our blog for more CRE tips!!
