Tenant Improvements: Everything You Need to Know About TI
Tenant Improvements refer to the customization done to a space to make it meet your needs. A tenant improvement allowance is a sum of money that your landlord makes available to help defray the cost of your build-out. In order to understand tenant improvement allowance, you also need to know the ins and outs about it.
TIs in New Space
Office space typically gets delivered in shell condition. This means that while some of the building's common areas are completed, the interiors of the spaces are frequently bare and unfinished. This makes a great deal of sense from a developer's perspective. After all, he doesn't know if a tenant will want an entire floor or a portion of one, and he can't guess how you will wish to have your space built out.
Leaving the space unfinished means that the developer doesn't waste effort creating tenant improvements that won't work for you. Instead, assuming space is available, you get to carve off your desired portion on the floor and design your space to suit your needs.
When you want your own office designed to match your needs with your authentic materials of choice exactly, it's almost impossible to beat the flexibility of taking new space. Furthermore, it is frequently a less expensive option.
TIs in Existing Space
Unless you're considering leasing office space in a completely new area, most of the space that will be available to you will have already been built out with tenant improvements for the previous occupant. However, if you have some flexibility, this can be an excellent opportunity.
The odds are that if you look at a typical pre-built space, it won't match your needs. Even if the size and location are correct, the TIs probably won't be. Because of this, landlords know that existing spaces typically need customization. However, if you can look through enough spaces to find one that suits your needs as-is, you could save thousands of dollars in occupancy costs. You won't have to spend anything (much) to customize it, and the landlord won't have to pay for demolition or customization.
On the other hand, the process could get expensive if you have to take existing space and reconfigure it. In addition to your construction costs, you will also have to figure out demolishing the previous TIs to get the space into buildable condition. As you do this, take a careful look at what you can reuse from the old space. Seemingly minor items like ceiling grids and tiles or doors can add up to multiple dollars per square foot, letting you use your TI budget more wisely.
Allowances for Tenant Improvements
Frequently, you can look to your landlord to help you get your space configured. TI allowances are standard on new space —since they're an integral part of finishing the building—and are also readily available on already-configured spaces in many markets. The amount of the TI allowance you receive varies based on multiple factors:
First, new spaces typically get more generous subsidies than already-built ones.
Second, more landlord-favorable leases usually receive more TI money. These are leases with higher rents or longer terms.
Finally, TI allowances are usually more generous in markets with higher vacancies and fewer tenants looking.
If you can get help with tenant improvements from your landlord, read the fine print so that you understand how the allowance works. Seemingly small requirements—like having to use certain companies or certain materials—could significantly impact the value of the budget you get. As in most parts of commercial real estate, the counsel of an experienced tenant representative can frequently help you get the best deal.
If you have any questions on this article or need commercial space, contact us anytime, we're happy to help. Contact us at (480) 330-8897 or send us an email at firstname.lastname@example.org.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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