Friday, October 14, 2016

Real Estate & Related Terms Explained: Tenant Improvements

Continuing on in our series of explaining real estate and related terms, now that you understand the types of commercial leases we are going to touch on some terms you will often come across. Today we are going to be talking about a subject that many potential tenants find confusing: Tenant Improvements.

What are Tenant Improvements?
Tenant Improvements are alterations made to a commercial or industrial premises in order to customize it for the specific need of a tenant. Examples of Tenant Improvements would include walls, flooring, ceilings, lighting, kitchens, paint, etc. Many people in the industry use the short form "T.I.s" when referring to Tenant Improvements.

Who Pays for the Tenant Improvements?
Every situation is different and often it depends on what you are able to negotiate. On one end of the spectrum the Tenant pays for all their own tenant improvements. On the other end the Landlord pays for all the Tenant Improvements (often referred to as a “turn-key”). Often they meet somewhere in the middle. Landlords will sometimes quote a base rent that includes a Tenant improvement allowance built in when leasing over a long term ($15/ft base rent, includes a $25/ft Tenant Improvements allowance on a 10 year term).

What Else Should I Know About Tenant Improvements?
Often times as a Tenant you can make your best deal taking the space as-is and pay for the Tenant improvements yourself. This better deal can result in lower rent over the long term and generous rent free periods at the beginning of the lease. On the flip side, it's possible as a Tenant that you don’t have the capital to fund all your own Tenant improvements or don’t have the time or skill to manage the project.

As a Landlord, there are also pros and cons to participating in the cost of Tenant Improvements. The pros include you can usually command a higher rent and longer terms. This can make your rent roll look good and increase the potential sale price should you plan to sell in the near future. The cons are obviously that you need to come up with the capital and also that you need to be sure to qualify the Tenant and their creditworthiness. Essentially, you're loaning them the money for Tenant Improvements that you will recoup over the term of the lease.

With the cost of construction increasing all over the place, it's important to factor in Tenant Improvement costs and who will be responsible for paying what. A knowledgeable commercial real estate specialist should be able to educate you on the dynamics of your market and how best to position yourself.

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