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What is a ‘tenant improvement allowance’ in commercial realty? written by D Goel, published in Housing.com. September 27, 2019

We examine what a &lsquotenant improvement allowance&rsquo refers to when it comes to leasing commercial real estate, the basis on which it is calculated and how tenants and landlords can negotiate on the same

 

In commercial real estate lease negotiations, a &lsquotenant improvement allowance&rsquo is a grant or a concession given by a landlord to the tenant, for making renovations or doing additional construction in the premises, which may be required by the tenant to carry on business from the premises. It is a compensation provided by the landlord to the tenant, for all or a fraction of the total cost of renovation of the leased space. It is usually expressed on a per sq ft basis and includes the raw material costs, as well as labour charges in the renovation. It does not include furniture or relocation costs.

 

The tenant improvement allowance is also referred to as a &lsquoleasehold improvement allowance&rsquo or &lsquocash allowance&rsquo.

 

How is the tenant improvement allowance paid?

 

The tenant improvement allowance is usually paid as a reimbursement towards the cost incurred by the tenant, in making the necessary changes/renovations of the rented space. This means that the tenant has to make the expenses out of his own funds first and the reimbursement will be given by the landlord later. The reimbursement can be given as a lump sum, immediately after the renovation is carried out, or spread over the term of the lease.

 

When is the tenant improvement allowance negotiated?

 

Although the tenant improvement allowance is given to the tenant after making the renovation, the amount of the allowance is decided at the time of negotiating the lease agreement. The tenant should have a fair idea about how much the renovation is likely to cost, before asking the landlord for the allowance. A landlord who is eager to lease out the space, may be willing to give a higher tenant improvement allowance, to lease out the premises.

 

How much tenant improvement allowance should the tenant ask for?

 

While a tenant may wish for the entire cost of the renovation to be reimbursed, the landlord may agree to pay for only a part of the cost. The amount of tenant improvement allowance that a tenant can get, will depends on the following factors:

 

1. Creditworthiness of the tenant: The brand image and the type of the business of the tenant, as well as the ability of the tenant to pay the rent for the entire lease period, play a big role in deciding the tenant improvement allowance.

 

The higher the creditworthiness, the higher will be the tenant improvement allowance. Large banks and some global retail chains, often enjoy higher tenant improvement allowance, as compared to other tenants.

 

2. Real estate demand-supply in the micro-market: If there is good demand for a property from tenants and less supply of rentable real estate stock, the landlord may not be give a high tenant improvement allowance. On the other hand, if the supply of space is higher and there is relatively lower demand, the landlord may be willing to give higher tenant improvement allowance.

 

3. Condition of the commercial property: If the condition of the space that the tenant is about to take on rent is not good, the landlord may be forced to offer a decent tenant improvement allowance to the tenant.