Does a tenant improvement allowance always favor the landlord? No, this is absolutely a myth and it’s one of many.
There are still quite a few myths floating around in the commercial real estate world about these improvements. Some are half-truths, some are misunderstandings, and some are simple falsehoods.
To help you sort out the facts from the fiction, consider this your guide to tenant improvement allowance and your myth-buster cheat sheet.
1. Tenant Improvement Allowance Always Favors the Owner/Landlord
Let’s start by getting to the bottom of the myth we mentioned above.
The thinking here is likely that your improvements will only add value to their building. You’re making your space better, which means they can turn around and rent it for more money after you leave, which improves the value of the whole building.
This scenario presupposes that the changes you make to the space are universally appealing and the next tenant won’t want to rip out what you’ve done and start over. If this happens, the next renter now needs their own tenant improvement allowance to undo your decorative touches and the building owner is out more money.
Who the tenant improvement allowance favours is entirely situational, with a fair share of both win-wins and lose-loses.
2. You Have to Pay for Everything Up Front
This could be true, but it all depends on what type of arrangement and terms you agree to in your lease.
It is entirely possible to negotiate for progress payments, which would ensure that your business’ cash flow is not 100% tied up and bottlenecked during the renovation process.
3. You Have to Work With Owner-Approved Contractors and Retailers
This is not a steadfast rule or law, but it may certainly behoove you to work with someone that your building owner or landlord chooses.
This takes the responsibility of choosing a contractor completely off of your plate, as you can fast track directly to someone your owner/landlord knows and trusts.
At the same time, when these improvements go over price, things can get tense between you and your landlord. If this happens, it is best if you’re not the one who vouched for this contractor/ retailer.
4. The Rate is About $40.00 a Square Foot
We have no idea where that number came from, but we can tell you that no such magic number exists in the world of tenant improvement allowance.
Again this is highly variable and will depend on things like:
- Do you have to demolish or “gut” anything
- What is the current state of the electrical and plumbing
- Are you looking for common or private amenities such as bathrooms
There are simply too many factors in play for a nice, round number.
Misunderstandings in commercial leases lead to missed opportunities. Be sure to always work with a trained professional who has a history of working on commercial leases, even if your landlord says it will cost you more to do so.
In fact, if they say that, this may be a red flag that says you definitely should have someone look at this lease.