A new office space is a chance to create the work environment of your dreams. And you don’t have to bear the costs if you make the most of your Tenant Improvement (TI) Allowance Package.
To attract new tenants, especially in a soft market, landlords offer TI to make their spaces more desirable. Landlords may pay, or offer discounts on rent to fix up an office, or even provide a full build-out to match a space to a new tenant’s needs.
TI is basically an incentive to switch – much as your cell-phone company offers to pay your cancellation fees, or car companies offer rebates. And like these other incentives, TI is a unique opportunity in the life of a lease that won’t come again, so it’s important to negotiate it well.
The first step in a successful TI negotiation is to know what’s covered. Does it cover hard construction – office partitions, electricity wiring, kitchen, and bathrooms? In a standard building installation package, which varies from one landlord to another as to what their standard finishes are, these are costs that the landlord will cover. Such add-ons like interior design, furniture and cable wiring are not typically part of the TI allowance, although it is not a crime to try to negotiate it into the work letter of the lease.
Consult with a team of architect, space planner, real estate broker, and even an interior designer to help you formulate a plan/wishlist of how you want your space to look, and that will be the starting point in the negotiations of what can be covered in the TI allowance.
Landlords may also offer to “turnkey” TI, which mean they take on the costs of office space improvements, and manage construction.
As a new tenant, turnkey may sound attractive, especially as you’re juggling the other costs of your business. But it’s generally unwise, as it turns over too much control to the landlord.
Under a turnkey arrangement, the landlord may agree to a TI Allowance – say, $10 or $20 per square foot – which sounds great on paper. But since the landlord manages all of the costs, they may pay contractors substantially less, and then absorb the difference back into their own management fees. Or they may claw back on price down the road, asserting that a tenant’s requirements have led to cost overruns.
To be fair, a landlord does know the build-out requirements of his property, and has experience with contractors, so it’s reasonable for them to have a say in this process. However, it’s unwise for tenants to hand all control of TI back to the owner.
In almost all cases, the best approach for a new tenant is to negotiate a dollar amount up front that will be covered by the TI Allowance. It’s also important to specify in the lease what is and is not covered, so both parties know what to expect.
This agreement should be explicit not only about price, but also about the timeline for each phase of the project. For this agreement to be successful, it’s important for both sides to have a realistic understanding of the cost and scope of planned improvements.
What if you don’t get as much as you think you need in your TI Allowance? Negotiate. Landlords can offer other incentives, such as lowered rent or rent abatement, to offset out-of-pocket costs from the construction of a new space. But it’s important to be clear-eyed about alternative incentives as well.
So make the most of your new space – make it your own. And make the most of an opportunity that won’t come again, to build out the space as you best see fit at the lowest possible cost to you.