If you just recently leased a space for your business or are looking to lease a space for your business you may have come across the term “tenant improvement allowance” or “TI Allowance”. I wrote this article to give you a little more information about the term and what to look out for when you are finalizing your lease with your landlord.
First of all here is a definition of a tenant improvement:
Tenant improvements, also known as leasehold improvements, are the alterations a building owner makes to rental space as part of a lease agreement to configure the space for the needs of that particular tenant.
Here is the short and sweet definition of tenant improvement allowance:
A tenant improvement allowance (TA, TIA, TI allowance) is an agreement from the landlord to compensate the tenant for all or a portion of the funds required to construct the commercial space to meet the tenant’s needs.
Here is the long explanation of a TI Allowance:
When a landlord is leasing a space out they are typically either leasing out a new “core and shell” that has never previously been occupied by a tenant or a “2nd generation” space that has previously been occupied by a tenant. A huge and sometimes unexpected cost for a tenant – whether the tenant is using the space as an office, retail space, restaurant space, or industrial shop, etc… (the list goes on) is the commercial build out of the space. After you lease the space you are going to need to do SOMETHING in terms of a tenant improvement to the space to prepare it for your use.
That’s where the Tenant Improvement Allowance Comes In
Landlords want you as a tenant, and they know the build out of a space is expensive, so most of them offer a tenant allowance to help their tenants build the space after it is leased out. Don’t get me wrong – you are ultimately paying for this tenant build out through a more expense lease rate. However, landlords understand that it’s a difficult task to try and get financing or capital for a build out of a space that you are leasing and may potentially move out of at any given time. The only company (other than yours) who will benefit from a newly build out space is the landlord, so they are most willing to put the cash up front to get your space built out, in lieu of a bank or financial institute. The bank would need something else as “collateral” if you used financing to built out your tenant space since you don’t actually own any of the finishes or improvements within the landlord’s building.
How much Money is Needed for a Tenant Allowance or Tenant Improvement?
Some clients of ours looking a space to lease will sometimes ask me as a general contractor – how much money do I need for a tenant build out? This question is always a tough one since it is so dependent on what the current space looks like and what you ultimately need the tenant space to look like before you move in. If I gave you an answer without finding more about your space I would just making it up, so if you are really trying to find out how much it would be to build out your office or tenant space here are the 10 questions you will need to answer:
Existing Space
- Is the existing space a new core and shell or second generation?
A new core and shell space is going to be more predictable than a second generation. Normally a new core and shell will hopefully have higher ceilings, better subfloor, and less “surprises” in general such as more modern MEP systems, high efficiency walls, and modern conveniences (i.e. elevator, access control, proper HVAC and ventilation, etc…
A second generation space may contain some challenges such as old, inefficient mechanical, electrical, and plumbing systems, depending on how old it is and how many different remodels have been done within the space. On the other hand, if a second generation tenant space had previously been built out to a similar space that you are looking for, then there is definitely potential that you can save on construction costs if you are able to keep any piece of the original construction.
2. What does the existing space look like?
When taking over an existing space we always run into what we typically call “unforeseen conditions”. These are conditions they are not apparent at the time we start construction, but we can usually try and predict how much of it we believe we will experience based on the history and appearance of the tenant space. We have run into everything “under the sun” when demolishing existing spaces to build out new offices. However, there are typically some common things we run into that we keep an eye out for when walking potential spaces. Some examples of “high dollar” items that would fall onto the tenant’s responsibility to “cure” could potentially include asbestos containing materials (ACM), lead based paint, outdated electrical systems or lighting systems that require replacement or repair, outdated mechanical or plumbing systems that require replacement or repair (e.g. a damaged sanity sewer line), an inadequate fire suppression system, outdated fire alarm system, or a sub-grade or slab that is not in good condition and requires repair before installing new flooring on top, etc… The final question is what do the finishes look like? Is the space still sporting some shag carpet from the 70’s or does it have something you can live with for your own space? Can you keep the break room and restrooms intact or does the sight of the existing rooms make you want to rip everything out and start anew?
3. What is included as “landlord work”, and what is included as “tenant improvement” work? i.e. what is the landlord’s responsibility and what is your responsibility?
This will come down to the “Landlord Responsibilities” Exhibit in a lease typically that defines everything. The language in a lease can really either save or cost a lot of money depending on how it is written. It would be tough to describe every aspect of tenant or landlord responsibilities to watch out for but some things to keep in mind would be what part of the electrical, plumbing, mechanical system is the landlord responsible for and what are you (as the tenant) responsible for? Unrelated to the tenant buildout but important to note here is that the responsibility of all of the utilities, maintenance, and repair of the space will all be addressed in the lease as well and it is certainly something you should keep in mind while studying a potential lease.
4. Are you happy with the space as a whole or would you prefer to perform any structural modifications to make the space better for your company?
In some past projects I have really seen structural modifications be a “budget buster” before, so this is something that needs to be addressed as well. Do you love the space but want a second stairwell added? Or do you notice that some civil work will have to be done in the parking lot to fit enough cars? Anything that is not related to “finishes” or mechanical, electrical, plumbing for your particular space is really going to start pushing your construction costs over the typical range for a tenant build out. Cutting big holes open in an elevated slab or doing structural modifications for a rooftop deck are all costs that you would hopefully avoid if you are on a budget, because they are really going to cause an increase in construction costs even before we are installing finishes for the space.
Plans for Your New Space (Space Planning)
5. How many and what type of offices are you planning on building out?
Open offices are becoming increasingly popular nowadays, and one positive effect of the “open office” concept is that the buildout of the space is certainly less expensive than an office that has a number of private (drywall wall) offices throughout the space. My basic rule of thumb for traditionally built private offices is to plan on adding around $200 per lineal foot of wall when you are installing new offices. This does not even account for the mechanical and electrical effects of sub-dividing your space into numerous rooms.
6. Conference rooms?
Conference rooms tend to bump your construction costs a little more than a typical private off or standard open office buildout. New conference rooms are increasingly adding teledata equipment, intricate audio/video systems, and the now standard new large flat screen TV’s for the space. In addition, there are addition HVAC and lighting requirements for a conference room compared to a standard office so the number of conference rooms you are planning on adding to your space will definitely affect your office buildout price.
7. Break rooms?
Similar to conference rooms, building out new break rooms in space will certainly increase your construction costs. Plumbing is usually the trade that adds the most expense when adding break rooms.
8. Restrooms (in addition to any landlord provided RR’s)?
Restroom groups cost a higher price per square foot number than a standard office so
9. What level of finishes do you prefer?
This is the most common question that a tenant will need to answer for their new space. Are you looking for high end finishes or are you Ok with standard “carpet and paint” scenarios.
10. What do you need in terms of furniture, fixtures, and equipment (FF&E)?
FFE is also something to keep in mind. Are you bringing all of your existing furniture or planning of purchasing new, or when you saved money by creating offices do you now have to turn around and spend more money on workstations or furniture? FFE is definitely something you are going to want to figure out when agreeing on your lease.
If you can answer these 10 questions above for a general contractor then they should be able to come up with a rough budget for you. The landlord will typically offer up suggestions on how much a buildout will take but please just keep in mind that they are of course trying to finalize a lease for their space so it may be prudent to seek a second opinion. If you are in the Denver, Los Angeles, Arizona, Nashville, or Chicago markets please feel free to contact me as we typically assist our clients in this quick pricing exercise as a free service, with the hopes that we can compete to win the project of course!
If you are NOT in one of those markets and really just want a rough idea of what everything would cost here are some good rough numbers to use. Again, I have to use a disclaimer that these are standard prices for the Denver market, and every space can change depending on existing conditions.
Very Simple Rule of Thumb for Office Build Out Costs:
A very simple and inexpensive buildout of an office or retail space will cost somewhere in the range of $40/square foot (SF) in the low range, to $200/SF in the high range.
What will $40/SF buy in a tenant build? This pricing assumes that you are building very few walls, your ceiling, lights, HVAC, plumbing are already in place for the most part, and you want to buy some new carpet and paint.
What will $200/SF buy in a tenant build? New lights, new ceiling, high end finishes, high end doors and hardware, glazing throughout, new rooms such as conference rooms, break rooms, and potentially some structural modification (think adding a new stairwell, etc…) as needed.
I will write an article in the near future that goes deeper into what trades cost what price per square foot ($/SF) but hopefully this really rough numbers and questions to ask will start point you in the right direction. Again Please feel free to reach out to me directly or enter a comment below with any specific comments or questions about your space.
Thanks!
Dan
