Often times, commercial leases require a bit of negotiation to make both sides happy. Contributing to tenant improvements, or TI’s, are a signing incentive that can benefit both tenant and landlord. TI’s refer to any upgrades done to a space that better equips it to meet a tenant’s needs. When it comes to tenant improvements for your own properties, be sure to keep these tips in mind.
Factors to Base Your Tenant Improvements Around
The amount that landlords contribute to tenant improvements is largely a case-by-case basis that depends upon several factors. Remember, amortizing TI’s over the life of a lease as additional rent places the risk of their cost on the landlord.
When negotiating your tenant improvements, be sure to consider tenant credit, the urgency of filling the vacancy, current funds available to make the improvements, the length of the lease, the reliability of the tenant and the current/ forecasted economy. Each of these qualifiers should be at the forefront of your mind when negotiating your tenant improvements.
Tenant Improvements in 2020
In their latest Real Estate Investor Survey, PwC reported that we can expect more TI dollars to be spent than usual throughout 2020. They used the office sector as a microcosm to represent the current state of many real estate sectors. Essentially, there is currently a large emphasis on signing long leases, but a diminished leasing demand from office tenants has made this a challenge. Budgeting for increased tenant improvements is a great way to combat this and the upfront cost will be worth it as we face the uncertainties of the current crisis.
Timing for Tenant Improvements
Tenant improvements can take anywhere from a few weeks to several months to complete. For smoothest operation, you will be best off using a trusted contractor who can reliably wrap up the additions within the agreed upon schedule. The key is to ensure the upgrades are completed just as the recurring rental payments begin. Otherwise, you will risk missing rental payments and potentially cause friction with your newest tenant.
Tenant Improvements in New Spaces vs Existing Spaces
What you are able to accomplish with your tenant improvement budget heavily depends on the current state of the space and your tenants needs. Frequently, new spaces can serve as a blank canvas that will allow you to maximize the budget to tailor the improvements to the new tenant’s exact needs. Existing spaces can allow customization of current fit-out in order to tailor it to the needs of a new tenant. The cost of reconfiguring an existing space will add up quickly, so you will want to be sure you factor this in when agreeing on a budget.
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