Five (5) Tips to Avoiding Tenant Improvement Construction Traps

We’ve seen many tenants recently lose time and money due to their lack of understanding of tenant improvement and construction project terminology.  In our ongoing mission to eliminate the opacity of commercial real estate jargon, we will tackle some of the jargon associated with construction and/or tenant improvements.  That said, here are five things every tenant needs to know:

  1. Never accept space in “as-is” condition! - By accepting the terminology “as-is” condition, the tenant indemnifies the landlord for any existing conditions, which the tenant may or may not be aware of.  Every space requires some kind of representation by the landlord that the sytems are in working order, that the space will be delivered in “broom-clean” condition and that any broken or malfunctioning items will be restored to working condition;

  2. Tenant improvements (or “TI’s”) can be performed by the landlord! - Although the term tenant improvements implies that the burden falls on the tenant, in reality, for small tenants and smaller renovation jobs, the landlord is better equipped to perform the improvements.  Additionally, by shifting the burden of construction to the landlord, the tenant’s free rent period is protected from construction delays and the landlord becomes motivated to complete construction quickly;

  3. A “cash allowance” involves no cash! - A cash allowance from the landlord is a huge misnomer as there is not a cash transaction involved.  Instead, what really takes place is a reimbursement for monies spent by the tenant to construct their space.  Typically, the reimbursement takes place once a month over the length of the construction project, with receipts required for reimbursement and 10% of the total withheld subject to final satisfaction of any liens on the project;

  4. “Pre-Built” space is not in “move-in” condition! - While a landlord prebuilt (or spec) unit is newly constructed and has never been occupied, it is still not in move-in condition.  In most cases, cabling for a tenant’s phone/internet service must be completed at tenant’s expense and of course, furniture must be provided and installed;

  5. “Build-to-Suit”, “New Building Installation” and “Turnkey” conceptually mean the same thing! - That is, the landlord builds the space to tenant’s desired layout at landlord’s expense and limited to tenant’s existing building standard (for prebuilt spaces).

Hope this helps to clarify some of the terminology associated with tenant improvements.  For additional info on some related topics, see:

What are unamortized costs?

How is a tenant billed for electricity charges?