One of the most important issues in a lease negotiation is the financing of tenant improvements by the landlord. Tenant improvement financing is usually provided in one of two ways.
Under the “tenant improvement allowance” approach, the tenant negotiates a cash allowance to be used for construction and related costs. The tenant is responsible for costs that exceed the allowance. If the allowance is properly negotiated, the tenant retains the savings if construction costs are less than the tenant improvement allowance. Construction may be managed by the tenant or the landlord. Since the tenant is financially responsible, the tenant should manage construction under the tenant improvement allowance approach.
The second approach to tenant improvement construction financing is a “turnkey buildout.” In this approach, the landlord, at its sole cost, is responsible for all elements of construction. With a turnkey buildout, the landlord manages the process and bears the financial risk of construction costs going over budget.
In this blog post, we will explore the pros and cons of tenant improvement (TI) allowance provisions. Pros and cons of the turnkey buildout approach will be discussed in a separate post.
There are a number of potential pitfalls tenants should be aware of prior to signing a lease with a tenant improvement allowance provision. Tenants should remember that, even if they are managing construction, the landlord will require approval of vendors (contractors, architects, engineers). Negotiate the approval of important vendors in the lease, before construction starts. Most importantly, engage a tenant representation broker along with qualified project managers and architects as needed to conduct due diligence and identify any potential issues that should be addressed and planned for during lease negotiations. Read more about how to negotiate leasehold improvements.
At Golden Group Real Estate, we specialize in tenant representation real estate services for office space users in the Chicago area, helping local business owners find office space and negotiate lease and purchase agreements. We never represent landlords, so we are prepared to negotiate aggressively on behalf of our tenant clients.
For more on Golden Group Real Estate, read about our real estate services. Let us know if we can help you find office space for rent or buildings for sale. Call us at (630) 805-2463, email us at firstname.lastname@example.org, or enter your office space search criteria below.
June 19, 2019
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