It’s rare to find an office space that is 100 percent ideal for any company as-is. That’s why many businesses take advantage of tenant improvement allowances to improve and renovate their spaces prior to move-in. Read on to learn more about this important feature of commercial leases and find out what you need to know when negotiating for a fair allowance.
What Is a Tent Improvement Allowance?
A tenant improvement allowance is a sum of money that the landlord provides in order to cover the costs of renovating or customizing an office space. Tenant improvement allowances are common with newly constructed buildings, but may also be offered in existing buildings in order to attract tenants.
How are Tenant Improvements Allowance Calculated?
The tenant improvement allowance is typically based on square footage. You’ll receive a certain dollar amount per square foot. It’s important to pay attention to whether the allowance is being calculated off of the usable square footage (the actual amount of space that your company will occupy) or the rentable square footage (the actual office plus a portion of shared spaces within the building). Because your actual rent is calculated off of the rentable square footage, you’re within your rights to ask to have the allowance calculated off this figure, giving you more money to use for improvements.
Who Pays for the Tenant Improvement Allowance?
Landlords pay for the tenant improvement allowance, but that doesn’t mean that they are free for tenants. Typically, landlords will try to recoup the cost of the allowance elsewhere in the lease, such as by increasing the rent rate or limiting other concessions. If you have a big wish list when you head into negotiations, you may want to ask the landlord for a rent abatement in lieu of tenant improvements. Providing free rent through an abatement is a cheaper option for landlords, and you can put your rent savings toward improvements.
What Is a Shell, and How Does It Affect a Tenant Improvement Allowance?
The shell refers to what’s already in place in the office. There are two main types: vanilla and dark or gray. A vanilla shell usually has drywall, outlets, ceilings, lighting, plumbing and HVAC and may even have restrooms already in place. With a dark or gray shell, there are only electrical and plumbing stubs. With a vanilla shell, your tenant improvement allowance will go much further than it will with a dark or gray shell.
Who Controls the Project During the Tenant Improvement?
Your lease will specify who has control over the improvement process as it unfolds, and it’s important that you pay attention to this language. Whenever possible, try to at least retain the right to have some input in selecting the contractors and managing the project. Increased transparency will help to ensure that you’re getting the best professionals for the job at the best possible price. It will also help you to avoid unpleasant surprises—like the project running behind schedule and suddenly delaying your move-in date.