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Posted: 06/21/17 07:58am  Reply with quote
Office Tenant Improvement Allowance Basics

Most office landlords offer prospective tenants a “Tenant Improvement (TI) Allowance,” a certain amount of money per square foot that can be utilized to improve the space per the tenant’s specific requirements.  In major California cities, TI allowances typically range anywhere from $10 per square foot for something as minor as new carpet and paint to $45 per square foot for a complete build-out of existing shell space.  Many landlords will offer a “turnkey” deal in a soft market, meaning they’ll build out the space per the tenant’s requirements without limiting the tenant to a specific dollar amount.  In a turnkey deal, the tenant’s requirements, usually by a proposed space plan, are referenced in the lease.  Even in this scenario, however, the project costs are usually no more than about $45 per square foot.  Typically, a landlord only allows the use of TI dollars to fund items that are part of the landlord’s building, and not furniture or cabling.

The TI allowance offered is not free money, but is essentially a loan that is ammortized over the life of the lease via rent payments.  A higher TI allowance usually translates to higher rent.  Taking a space “as is” will usually translate to a lower rent payment.  The overall deal, both the rent payment and TI allowance, are determined by the vacancy rate of the city and building itself, the tenant’s credit, and the length of the lease.  The shorter the lease, the higher the rent and lower the TI allowance.

The tenant may hire it’s own architect and contractor and take on the responsibility of managing the design and construction of the office space.  If this is the case, the tenant should hire an architect or project manager who is an expert in office tenant improvements to assist them with the process.  A project manager is a professional that oversees the entire project including the architect and the contractor.  Garcia Architects provides expertise in both design and project management.  This is important so that tenants unfamiliar with timeframes and costs  do not end up wasting money in rent before their office space is ready to move into, or end up paying for items that landlords would typically cover.  Design and construction of a new office space is a complex process for tenants unfamiliar with it.  It is very timeconsuming for a tenant, and can be a full-time job for one of the tenant’s employees for several months.   Changes made during or after construction can be very expensive.  A project manager can be hired to assist a tenant, and their fees are offset by saving the tenant thousands of dollars in both project costs as well as the tenant’s productivity costs.

Often large landlords take responsibility for the entire project process, and have their own architect, contractor, and project manager.  A landlord’s team will typically complete the process more quickly than a tenant’s team, because the landlord’s team is highly motivated for the rent to start as soon as possible, and this cannot happen until the space is ready for the tenant to move into it.  This approach is less risky for the tenant.  On the other hand, when the landlord  runs the process, the tenant has less control over design and construction, and the landlord’s architect and contractor are representing the landlord’s interests, not the tenants.  Just because a landlord has a pre-established team does not mean the tenant cannot negotiate to utilize their own team.  If the tenant hires an architect or project manager who understands how to negotiate with large landlords, the tenant can get the best of both worlds.  And in either scenario, the landlord will usually contribute the same amount of dollars to the project, whether or not the tenant hires their own team or the landlord does.  All the tenant has to do is ask.

Landlords will not typically proceed with signing a lease that is contingent upon a build-out until they understand the cost of the project.  The tenant should do the same if they plan to take responsibility for the design and construction.  It’s important to know what the cost of the project and the construction timeframe will be before a lease is signed and the rent commencement date is determined.

Elisa Garcia, RA
Garcia Architects
elisa@garciaarchitects.com.
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