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Most of the commercial lease transactions that have taken place over the last decade have included tenant improvements (TI).  Tenant improvements refer to the construction or space transformation that accommodates the specific design needs of a tenant.  TI’s include new installation or relocation of interior walls or partitions, carpeting or other floor covering, shelves, windows, toilets, etc.  The amount of the undertaking is negotiated, along with several other items, in a commercial lease.

Who pays the bill?

Because a landlord owns the building and collects rent from the tenant, often times a landlord will provide a TI allowance.  The allowance is usually in terms of a dollar amount per square-foot.  It is dedicated for the purchase of items that a tenant requires for its business operation.

Typically, a tenant improvement allowance is determined by the amount of rent that is sought.

So, if a tenant is paying below market rent, a landlord feels that the tenant deserves a below market improvement allowance.  In this circumstance, the tenant will have to ‘come out of pocket’ to cover the balance of the construction. If the tenant determines that the rent is too high, they should consider an above standard TI allowance.  But, if the TI allowance is not necessary, than the rent should be lower by the amount of the base rent subtracted by the tenant improvement allowance which would have been amortized over the term of the lease.  This method of negotiation is aggressive, but sound, although it is greatly determined by the specific sector and marketplace.

With regards to TI, some improvements can be as low as $5  per square-foot for carpet and paint or as high as $100+ per square-foot for specialized medical construction.

Who Manages the Construction Phase?

When a landlord makes a determination about the construction of a tenant’s space, the landlord is likely to assemble the construction team from architect, to engineers, to contractors and obtain a fee from their service.  While some tenants are skeptical of not having control of the process, that in some cases they are financially responsible to, the advantages of having a landlord’s in-house team of construction specialists is an enormous benefit to the tenant.  Items such as cost overruns, delays, and contractor liability are common pitfalls when a tenant hires a team.

What is not included in TI?

Office furniture and telecommunications are not considered tenant improvement items when negotiating a commercial lease.  The landlord commonly refers to tenant improvements as those elements that are associated with improving the landlord’s building.  Items that help to maintain or improve the value of the property.

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