Tenant improvements refer to customizations made to a leased space to meet the tenant’s specific needs. A tenant improvement allowance is a sum of money that the landlord provides to help offset the cost of these modifications. To fully understand tenant improvement allowances, it’s important to know how they work in both new and existing spaces.
Tenant Improvements in New Spaces
Office spaces are typically delivered in shell condition. This means that while common areas might be complete, individual spaces are often unfinished. From a developer’s perspective, this makes sense. They don’t know if a tenant will lease an entire floor or just part of it, nor can they predict how the tenant will want the space built out.
Leaving the space unfinished allows tenants to customize their portion of the floor according to their needs. This flexibility is a major advantage, especially when you want to design your office with specific materials and layout preferences. Additionally, customizing a new space is often less expensive than altering an existing one.
Tenant Improvements in Existing Spaces
Most available office spaces will already have been built out with tenant improvements for the previous occupant. While these spaces may not perfectly match your needs, they can offer opportunities. If you find a pre-built space that aligns with your requirements, you can save thousands in occupancy costs. You won’t need to spend much, if anything, on customization, and the landlord avoids the cost of demolition and renovation.
However, taking an existing space and reconfiguring it can be costly. Besides construction expenses, you’ll need to account for demolishing the previous tenant’s improvements. Be sure to evaluate what can be reused, such as ceiling grids, tiles, or doors. These seemingly minor elements can save multiple dollars per square foot, allowing you to stretch your tenant improvement budget.
Tenant Improvement Allowances
In many cases, landlords will help tenants cover the cost of customizations. Tenant improvement (TI) allowances are standard for new spaces, as they are part of finishing the building. These allowances are also common for pre-configured spaces in many markets. However, the amount of the TI allowance depends on several factors:
- New spaces usually offer more generous allowances than pre-built spaces.
- Leases with higher rents or longer terms typically receive more TI money.
- Landlords tend to offer larger allowances in markets with higher vacancy rates.
If your landlord provides a TI allowance, read the fine print carefully. Requirements like using specific contractors or materials can impact how much value you get from the budget. Consulting with an experienced tenant representative can help ensure you secure the best deal.
Even after outlining all the information above, deciding whether to go for a 1031 Exchange or a Cash Refinancing can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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