Tenant Improvements in Commercial Leases

Filed under: Real Estate Law

In order to find the right commercial space for a business, tenants will consider a number of factors such as location, lease terms, and of course, price. But if a space doesn’t adequately provide for the business’s needs, daily operations could be difficult, or clientele response could be impacted.

That’s why, in many cases, tenant improvements to commercial spaces are allowed by most landlords. In fact, many will offer a “tenant improvement allowance”, or a sum of money that the landlord agrees to spend in order to complete improvements and modifications, so that the space will work well for the tenant.

Negotiating those improvements, however, is not often a simple matter. Business owners need to understand these basic concepts before moving forward with tenant improvement negotiations. Seeking advice from a real estate attorney can also aid in these discussions.

Obtaining correct measurements. Carpenters and construction workers use a common phrase: Measure twice, cut once. The idea is that measurements must be precise before any work is done, or else time and expense will increase (along with frustration).

Tenant improvement allowances are often figured according to a set dollar amount per square foot. Ensuring that the rentable square footage is correctly measured will result in a more accurate tenant improvement allowance.

Who does the work? Should the business owner ask for a specific dollar amount, and then hire their own contractor? Or, should they take the landlord’s offer to build out the space for them? Either can work, but landlords often offer the turnkey option because they expect it will save them money. When opting to allow the landlord to complete the modifications, all specifications should be discussed and agreed upon in precise detail before the work begins.

A realistic perspective. Landlords have a bottom line, just like anyone else. So when a tenant improvement allowance is offered, tenants should keep that in mind. Every dollar of tenant improvement allowance must be balanced elsewhere, whether through higher rent or rent increase schedules. This is all part of the deal; improvements may be necessary in order for the business to succeed, but nothing is free. The tenant should examine the deal as a whole, before getting carried away with a generous tenant improvement allowance.

Consult our real estate attorneys for more information on tenant improvements, and understanding the terms of a commercial lease. With skill and experience on their side, tenants can negotiate a deal that works best for their business.

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