Tenant improvements’ essentially refers to the changes that an owner makes to a commercial/industrial property for accommodating the requirements of its tenant. These could include wall and floor coverings, partitions, ceilings, fire protection, air-conditioning and security. The amount of the Tenants Improvements (TI) expense borne by the lessor and the tenant is typically documented in a lease agreement. So the allowance for tenant improvement is a major component of all lease agreements. Both TI allowance and duration of lease period have a significant bearing on the negotiation of the rental rate.
Accurate expense forecast
It is important for the tenants to sit for negotiation with a proper estimation of the cost of renovation planned. The other scenario would be accepting a fixed TI allowance (say $10) per square foot. This fixed amount would perhaps end up covering only the plumbing, air conditioning and electricity. The remaining expenses that need to incurred, in order to render the space usable, will then be extracted from the tenant’s pocket.
If you wish to avoid any kind of unpleasant surprises, it is best to consult space designers/ planners in advance so as to have exact cost estimation in hand.
A situation where the landlord decides to take charge of the entire construction process, promising to deliver the fully renovated space to a tenant, it is termed as turnkey build-out.
In the case of turnkey build-outs, tenants might be concerned that the landlords would have no incentive to purchase the best quality products for the best price. Rather he/she would think about finishing the renovation project by spending minimally. The contractor hired by the landlord might or might not be ideal for the build-out. In such a situation, tenants end up compromising and losing out on the opportunity to seek competitive bids.
Tenant control for TI allowance
In certain cases, particularly for larger projects, tenants would like to oversee construction themselves. It would mean more work for the tenant; however it helps in yielding huge benefits since the pick the contractor on their own, make changes to the construction plan so that it fits into the budget or requirements better, and use better quality materials when desired. Tenants would also end up being in better control of time-lines and can avoid paying holdover fee (from the space being vacated by them).
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