Tuesday, April 5, 2016

TENANT IMPROVEMENT (TI) ALLOWANCE - ‘An Effective Marketing Strategy’

Successful landlords will often offer TI allowances in order to attract tenants on vacancies that they are looking to fill. Commercial premises generally require some level of customization to suit a new user considering the space. This may include floor plan changes and general upgrades, including baths, staff rooms, floor and wall finishes, ceilings, lighting, and more. The intent in many cases may be to build and finish the unit, so that the property is turn-key for tenant use.

TI allowances are generally quoted on a $/ft. basis. For example, if you are marketing a 1000-ft space and offer $15/ft as a TI allowance, you are offering an incentive of $15,000 to the prospective tenant. From the landlord’s perspective, if this results in a 5 year lease deal, you are in effect investing $3000 per year ($15,000 divided by 5) in order to secure the tenant in your property.

Questions to consider:

Q: Is it the difference maker in securing the tenant?
A: Yes, it often is and is based on the competitiveness of the market.

Q: Is the tenant stable and do they offer a good covenant?
A: Investments with stable tenants are always a good idea.

Q: When do you pay the TI allowance?
A: After the lease is executed and the work is complete.

Q: Can it be given as a straight cash incentive?
A: Yes, often where the improvement costs exceed the TI allowance.

Q: Can the tenant do the required work, if the landlord offers a TI incentive?
A: Yes, often where the build-out is a standardized plan.

Q: Can a higher net rental be expected by doing a TI allowance?
A: Possibly, but is based on the competitiveness of your market.

For the most part, landlords dealing with national tenants will find TI allowances to be an upfront expectation and should be viewed as a cost of doing business. Ultimately, whether or not it is good business or not will be determined by the size of the allowance and the details of the lease proposal. This is a market call based on the competitiveness of your area.

We welcome your comments and stories about TI allowances based on your experiences, both landlords and brokers alike. We are a click or call away from discussing our investment opportunities here in Windsor-Essex County!

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