A DISCUSSION ON TENANT IMPROVEMENTS

Have you ever walked into an office and were immediately impressed? The image of the space; the floors, ceilings, lights, reception area and maybe a glass walled conference room…what about a great looking restaurant or high end warehouse showroom? Tenant improvements (TI’s) play an important part in establishing a company’s image. They’re also one of the most important terms to be negotiated in a lease transaction. Why is that? Primarily because TI’s can be expensive so, who pays for them? Also, the construction phase can be time consuming and potentially impacts lease commencement dates. Whether it’s an office, retail shop or industrial building the costs of construction may be different but discussion about what TI’s are and how much they cost are the same.

What are tenant improvements and how much do they cost?

Tenant improvements can be as minor as new paint and carpet, all the way to constructing a brand new office suite. Design styles and materials vary greatly in price as does the cost of construction from builder to builder. Typically when discussing TI’s the cost is stated in a per square foot basis. For example, someone is getting $20 per square foot of TI allowance for a 2,000 square foot office suite, would have an allowance equaling $40,000. A clean, rather generic office space with basic materials will cost much less than a high image law firm or doctor’s office which may require well above $100/sf.

Knowing roughly your design requirements and having an initial cost estimate is important because who pays the cost of the TI’s comes up very early in the lease negotiation. Generally speaking the TI’s can be paid by the landlord, by the tenant, or a combination of both, so let’s briefly discuss all three

Landlord pays for the improvements

Landlords can do this two ways; one, build the space out themselves, per a mutually agreed to space plan, and provide the tenant with a “turn-key” space, meaning the landlord is responsible for the entire construction project and once complete gives the keys to the tenant to move in. Continue reading