When leasing commercial property, there are times when the location and price is right but the available space does not quite fit specific business needs. In such instances, property owners may agree to allow for tenant improvements which can be a workable compromise for both parties to finalize the lease. If it is decided that tenant improvements will be a part of the agreement, a Tenant Improvement Allowance (TA) should be discussed in detail and documented to remove any questions.
A Tenant Improvement Allowance is an amount of money deducted by a landlord from the property lease price in exchange for a tenant making any necessary improvements. This results in a business getting what is needed to operate and a property owner paying for such improvements through a discount on the lease for a certain period of time with the improvements becoming the property of the owner.
Although it sounds simple enough, a TA agreement can be complex and should be negotiated with caution. This is beneficial to a business looking to lease a specific commercial property; however, there has to be a benefit for the property owner as well in order to go to the trouble of negotiating and allowing a tenant to make improvements. In a weak rental market with many properties sitting empty, this provides the ability to get a space leased and bringing in a monthly income.
Before a TA amount is agreed upon, construction estimates of the work to be done should be obtained. All work should be completed by professional contractors per normal contract stipulations. The TA amount is usually discussed after estimates have been received; some details should be handled before a contract are signed, including who will actually manage the improvement project.
- Landlord Control – In this instance, the owner hires the contractors, see the job to completion, and pays for the work. The lessee pays for this agreed-upon amount of rent as previously discussed during negotiations which is frequently the estimate cost and not the actual cost of the improvements. The tenant has little control over what is actually done or whether it suits business needs.
- Tenant Control – The tenant may have control over the project, which sounds very good for the tenant. There is a chance that any complications during construction such as increased material price or faulty prior construction that must be repaired before new construction could begin the responsibility of the tenant. This could cause a tenant to have to pay for adjustments and repairs costing more than what the TA allows.
For the above reasons, it would be wise for a tenant to retain either a broker or a real estate lawyer to handle the issue, especially if the project will be in the hands of the lessee, which would be beneficial to the property owner to be relieved of responsibility for any consequent construction problems. Most brokers advise tenants against being responsible for such a project as major construction problems should be the responsibility of the owner and not the tenant. A professional broker can handle any such issues for a tenant.
Beside control of any construction project when leasing with a TA, there are other concerns as well, including: documentation of any agreements; specific information on agreed-upon improvements; completion delays; and distribution of leftover TA funds if not exhausted at the end of the project.
With all of the important points discussed above well-clarified, any commercial property lease that allows for tenant improvements can work out well for both of the involved parties and deliver a resolution satisfactory to both tenant and owner!