Many tenants confuse the tenant improvement allowance with a present from the landlord. But it’s a gift with strings attached – any cost overruns will come out of your pocket, and not your landlord’s. So is there a safer alternative? There are three, actually, that may be a wiser course of action.
Build Out, or Building Standard Allowance
With this option, your landlord will offer you a package of specified improvements and you pay for anything above and beyond. Any risk of overruns will be the responsibility of the landlord unless you, as the tenant, change the improvements upon which you’ve mutually agreed. This type of arrangement is often seen in new construction. The deal presented to you, also known as the “building standard,” may have certain features (lighting, ceiling height and type, etc.) and you’ll have the flexibility to alter them somewhat.
If your landlord’s offer works for you, this is often the simplest and least expensive road. There’s also room to negotiate a credit in the event that you don’t want or need the entire package being offered (although be prepared for a refusal). And again, the big benefit with a build out is that any overrun – in cost or time – is the responsibility of the landlord.
Fixed Rate
This is the opposite scenario of the tenant improvement allowance (in which the landlord pays a set sum and the tenant pays the balance). Be clear, your landlord will likely turn up his nose at this offer unless your plans are realistic, clear and unlikely to bring about surprise fees. When you present a clear plan, your landlord can assess what these improvements are most likely to cost him, as well as the likelihood of any overruns.
Turn-Key
In certain instances, you can convince a landlord to pay for all costs associated with your improvement, to the extent that you “turn the key” and you’re ready for business. Again, you’ll need complete and specific plans, including estimates. Savvy landlords will likely draft the improvements clause themselves to include the fact that you will pay for changes or additions after the lease is signed. Again, with this arrangement, the landlord is responsible for overruns. But don’t assume this is the best option for you. It’s entirely possible that you end up with a finished product with cheap and/or sloppy improvements – and no real recourse. And you’ll need to keep on eye on the bottom line. Be clear – your landlord will most certainly be getting that money back in some form (likely with a high rent). Consider whether the rent is overcompensating for what’s being spent on improvements at your request.
Speak with your agent about which of these options makes the most sense for you and your business. And if you find that you’re left wanting more, we’re happy to offer direction navigating this or a similar situation with your industrial or commercial lease.
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