Prior to commencing operations from new premises, a tenant may need to build out or otherwise improve the premises to make it suitable for its operations. Of course the tenant would prefer that the landlord bear all of these costs and should try and negotiate the payment of a tenant improvement allowance. The amount of a tenant improvement allowance paid by a landlord will vary from tenant to tenant and will depend on factors such as the length of the lease, the square footage being leased and the reputation/credit worthiness of the tenant.
Rather than have the landlord complete the improvements, the tenant would normally prefer that the landlord pay a dollar amount per square foot to the tenant and the tenant can then determine how this allowance is spent. This will allow the tenant to maintain control over the construction process and also ensure that the improvements meet the tenant’s needs. It is extremely important for the tenant to be aware of the scope of the work it intends to complete and to have a realistic idea of the costs associated with completing such work so that it can negotiate a proper amount for its allowance. If however, the landlord insists on completing the work itself, the tenant should reserve the right to review and approve the design and work as it progresses.
Be wary of the actual costs of tenant improvement allowances. If a landlord is providing an allowance, it often simply increases the base rent payable over the term of the lease to reimburse itself for the value of the improvement allowance paid. Nonetheless, the tenant is still likely to prefer receipt of the tenant improvement allowance because it essentially becomes an interest free loan.
For a discussion of additional items relating to commercial leasing from the tenant’s perspective, please click here.
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