One of the fundamental economic facets of a commercial lease is the value of the tenant improvements that that are constructed for the new tenancy. Whether it is an office building, shopping center or an industrial property, paying for the construction of needed improvements or upgrades is a major consideration for both the landlord and the tenant. In the case of a tenant improvement allowance, the landlord contributes a stipulated amount and the tenant pays for any cost overruns. A good understanding of the logic behind these improvements can go a long way toward getting a little more for the tenant. The key is to look at the nature of the improvements.
First the landlord’s point of view. Every time a tenant leaves an office building, the landlord knows he may need to reconfigure the space for the next tenant, tearing out perfectly good flooring, walls, doors, glass, and electrical wiring. This is a significant capital expense that the landlord invests in each tenant and is a significant reason why landlords are so concerned with the tenant’s financial strength before signing the lease. It’s not just to underwrite the rent stream promised in the lease but their investment in improvements as well. If the tenant exits prematurely, the building owner will be facing those costs all over again.
From the tenant’s point of view, the tenant improvement allowance never seems to be enough. But there are ways to get more. Let’s say a tenant is interested in leasing an office suite but wants a kitchenette with a sink and cabinetry built in the space. This is a common and very popular amenity to most tenants. Is this improvement only useful to this tenant? No, it will help the landlord release the suite in the future. A good broker will therefore argue that this is not really a tenant improvement, but a landlord improvement and that the cost of the kitchenette should not be charged against the tenant’s allowance. The same might be argued for an upgrade in overhead lighting from fluorescent to LED fixtures or the installation or replacement of window coverings.
When you can negotiate better economic terms for the tenant while simultaneously addressing the landlord’s best interests, you are bound to strike a good deal for both.