During lease negotiation, the tenant improvement portion is often complex, but successful negotiation key to getting the most of your tenant improvement allowance. Your allowance negotiation determines the landlord’s agreement to fund the buildout partially or fully from simple improvements to complete reconfiguration to ensure the space meets your company’s needs. Improvements can range from new paint and flooring to the construction or removal of walls and complete electrical upgrades. It is important to specify all your needs including items like data cabling which could result in unwanted expenses for your business.
Tenant improvement allowances are complex because of their impact on the negotiated terms of your lease which can often make the deal or break it. In addition, a savvy landlord can fund the buildout in unique ways with an assortment of controls from cash allowances to free rent. There is no ‘one-size-fits-all” because tenant improvement allowances can change because of fluctuating market environments as well as tenant needs, landlord preferences, financial circumstances, and the existing building conditions. Of course, this means the needs and goals of each party control the terms agreed on in the tenant improvement allowance – turnkey buildout or tenant-controlled.
The Turnkey Buildout
With the turnkey buildout, the landlord not only covers the cost of the build-out but also manages the construction project. Tenants who don’t want to take on a big construction project often prefer the turnkey buildout. Even so, as a tenant, it is important to understand the potential problems which include not getting exactly what you wanted from the buildout to the use of low-quality materials and losing money on the deal.
Tenant Improvement Allowance – Tenant Controlled versus Landlord Controlled
With this type of tenant improvement allowance, either party of the lease can control the project. If the tenant is in control, he or she is responsible for the construction project and progress. This scenario is best for tenants who plan to stay in the property for the long term or those who have a detailed buildout project, because the tenant makes the necessary financial decisions to insure both quality and cost savings. If the landlord controls the process, he or she controls the construction project and progress. Most landlords, as the property owners, prefer to control the buildout. Tenants can exercise some measure of control in this scenario by requesting the landlord obtain bids from multiple contractors and allow the tenant to view those estimates. In addition, tenants can negotiate to be provided a detailed timeline and list of material used in the buildout.
Negotiating the Best Tenant Improvement Allowance
As stated, there are a number of factors which influence tenant improvement allowance negotiation from market conditions to financial situations, but you can still improve your negotiations with these tips:
- Know your goals for your space, what will benefit your business, your staff, your brand. The space should be able to support your business goals as well as meet the needs of your business into the future.
- Everyone has a “wish list” but you need to determine your “must haves” for the new space. Negotiate the must haves and if you can’t, know when to walk away.
- Do your due diligence and know the buildout cost for the space which will allow you to leverage negotiations in your favor.
- If the improvements you want to make are large and detailed, you’ll want to negotiate for project control. If they are smaller, you may be able to negotiate a better deal with the landlord in control.
- Always know what you are willing to compromise on, to get the improvement you want and need for your company.
When negotiations are done and you are ready to begin your buildout, the Perillo Construction team is ready to help you meet your improvement goals.