Commercial Real Estate: Know What Is A Tenant Improvement Allowance?

With the change in the commercial leasing market, a ‘tenant improvement allowance’ is a new method that provides concession to the tenants from the landlords. Popularly known as a ‘leasehold improvement allowance’ or ‘cash allowance’, the requisite grant can be for any small or big renovation in the commercial space that includes the cost of raw material and labour charges.

A ‘tenant improvement allowance’ can either be given for the complete renovation cost or a fraction of work in the leased space.

How a ‘tenant improvement allowance’ is offered?

It is usually paid as reimbursement by the landlord on the total cost which is incurred during any renovation in the rented space by the tenant. It means that at first, the tenant has to put in their own money to make all the necessary changes in the space and then it will be completely or partially reimbursed by the landlord. However, it’s the landlord discretion to pay it once or over the lease term

When to Negotiate?

As said above, the tenant improvement allowance is reimbursed to the tenant after the completion of renovation or repair activity, but a tenant can negotiate on the amount of the allowance at the time of signing lease agreement too. Because of this, a tenant improvement allowance is becoming quite popular among those tenants who wish to lease office space.

While leasing space, a tenant must have a fair idea about how much he/she needs to spend on the renovation. This gives them a clear idea about how much they have to ask the landlord for the allowance. So, if a landlord is eager to lease out space, he/she may agree with the allowance asked.

At the same time, there are many factors on which a tenant improvement allowance is decided and based upon:

Type and Brand of Business

The first and foremost factor which a landlord takes into consideration is the type and brand image of the business of the tenant. They also take note of whether the tenant will be able to pay the rent or not. Both of these factors play a crucial role in deciding the tenant improvement allowance. Higher the creditworthiness of the tenant; more will be the tenant improvement allowance. For instance, many leading banks and some of the global retail chains enjoy higher tenant improvement allowance, as compared to others.

Demand and Supply of Space

The demand and supply rate in the micro-market again plays a deciding factor in the tenant improvement allowance. Suppose, If there is a high demand for property and less supply of rentable space, the landlord may not give a high tenant improvement allowance. On the other hand, if the supply of space is higher and demand is lower, the landlord may be able to give a higher tenant improvement allowance.

Condition of the Property

In case the condition of the property is not good and a tenant has to spend a lot on renovation, then a landlord has to offer a decent allowance to the tenant.