Commercially leased space may have to be personalized to fit an occupant's needs. You and the proprietor will have to reach an agreement about these modifications and choose:

- who'll create the customizations
- who is accountable for finishing or hiring the customization work
- when the task will get done, and
- who should spend for it.

What Is an Occupant Improvement Allowance?

Negotiating the Payment Method for Your TIA

Negotiating the Size of Your TIA

Negotiating Protections for Your TIA

Negotiating How You Can Use Your TIA

Alternatives to a TIA: Build-Out and Turnkey

Talk to a Lawyer


What Is an Occupant Improvement Allowance?

The most typical method for property managers and renters to designate the expenditure of enhancing business space is for the proprietor to offer you what's referred to as a renter improvement allowance (TIA). The TIA represents the amount of money that the landlord is willing to invest in your improvements. It's stated either as a per-foot amount or an overall dollar sum. Generally, if the improvements cost more than the agreed-upon sum, you pay the additional.

The lease clause that deals with these problems is generally entitled "Improvements and Alterations."

Negotiating the Payment Method for Your TIA

You typically do not get the TIA straight. Instead, the landlord pays the specialists and providers approximately the TIA limit-after that, you pay. Or, the property manager might choose to give you a month or 2 of "free" rent, which means that you need to achieve all that you wish to make with the money you've "saved" by not having to pay the lease.

If you have a choice, press for the previous arrangement. If the proprietor gives you the TIA and you pay the bills, you run the threat that the IRS will consider that income, and tax you appropriately. When the landlord physically keeps the cash and foots the bill, you can potentially prevent this outcome.

Negotiating the Size of Your TIA

You'll remain in a great position to deal for a sufficient TIA if you currently know what your improvements are likely to cost. You'll need to depend on your space coordinators or designers for their recommendations. If the landlord isn't ready to give you a TIA that'll satisfy the spending plan, you could still choose that it's worth your while to hand over some of your own cash to get the look and setup you desire.

Because you'll be accountable for any costs above the TIA, you'll presume the risk (and expenditure) of construction overruns. The danger will increase if the property owner, rather than you and your specialist, does the construction. After all, the property manager has little incentive to keep costs within the TIA quantity since the property manager won't spend for any excess. For this reason, it may be more effective for you to suggest another method to handle enhancements (as described later).

Negotiating Protections for Your TIA

One way to control the ultimate expense of your enhancements is to insist in the lease clause that the proprietor need to look for out competitive quotes if the property owner does the work. Specify that the landlord needs to ask for sealed bids and that the bids be opened in your existence. That method, the chances that the property owner will pick an unnecessarily costly contractor-or one with whom they have a cozy relationship-are reduced.

Besides controlling building overruns, you'll desire to limit the fees that come out of your TIA. Landlords typically charge overhead and "administrative" charges for tenant improvement work, even if the property manager doesn't organize the work.

These fees (which could likewise be charged by the property owner's specialist, if they're included) will come out of your TIA, which the property manager is merely using as a profit source. The more your TIA is diminished by costs, the less you need to invest on the real work.

During lease settlements, ensure you discover:

- what these charges are going to be and
- whether they're consistent with the leasing practice in your location.

Contact your broker or other educated company renters.

Negotiating How You Can Use Your TIA

Don't let your property manager tell you that your TIA is a concession or a gift. Landlords are usually responsible for the expenses of capital enhancements (enhancing the building in such a way that will benefit any future tenant). If the work under your TIA is a capital enhancement, then the landlord should most likely spend for it anyway.

But even if the work is truly specific-in reaction to your tastes or unusual organization requirements-and the landlord has nevertheless ponied up some cash, the property owner isn't even worse off. You can be sure that property owners peg their rent requires high enough to compensate them at least in part for the TIA they're paying you.

Once you comprehend that the TIA is rightfully yours (you've spent for it, one method or the other), you'll desire to have some freedom when it comes to spending it. Consider bargaining for the following two contracts in the enhancements stipulation:

You can utilize the TIA for a large range of expenditures. Especially if the property manager has actually protected the right to keep any unused TIA, be sure that you have broad discretion as to how you can invest it. For instance, you need to be able to apply your TIA to designers' and lawyers' charges, allow charges, moving expenses, and even your own time invested securing zoning variances or permits.
If you don't use the whole TIA, you'll get a setoff versus lease. In the not likely occasion that the final expenses are less than the TIA, the balance ought to be credited versus your rent. Returning it to the property manager, in essence, denies you of the advantage of all your difficult bargaining over who pays for improvements.

Alternatives to a TIA: Build-Out and Turnkey

While working out a tenant-friendly enhancements and changes stipulation might appear more suitable, don't be too enamored of a TIA. It isn't "totally free lease" or a present from the property manager, and it's not without its downsides. The problem with a TIA is that you, not the landlord, will be accountable for expense overruns. The following three alternatives do not run that danger.

Building Standard Allowance, or "Build-Out"

In this plan, the property manager offers you a defined package of improvements and you spend for anything fancier or extra. This alternative puts the danger of overruns on the property manager unless you alter the agreed-upon improvements. You're likely to experience this technique in new buildings particularly, where the property owner has a building and construction team and materials currently on site.

The offer used to you (the "structure standard") might include:

- a specific grade of carpets or vinyl floor covering
- a specific type of drop-ceiling
- a set variety of fluorescent lights per square feet of floor space, and
- a specified number of feet of drywall partitions with 2 coats of paint.

Basically, it's like a fixed-price meal in a restaurant-if you desire anything fancier, you pay the difference or set up for your own specialists to come in and get the job done.

If the property manager's deal matches you, the building standard might be the simplest and most economical method to go. Its big advantage is that the property manager, not you, pays for any cost overruns (unless you've bought extra items). And if the work isn't done on time, there can be no concern regarding who's accountable (as long as you have actually not obstructed).

If you do not occur to require the whole package the landlord is providing, you can also work out for a credit for those items you do not utilize. Your property owner might refuse, nevertheless, if they've already acquired the products.

You Pay a Fixed Rate, the Landlord Pays the Rest

This arrangement is the opposite of the TIA, where the property owner pays a fixed amount and you pay the balance.

Your landlord isn't most likely to be interested in this method unless you have plans that are clear, firm, and exempt to unexpected cost increases. That method, the property owner can realistically evaluate what the enhancements will cost them and the likelihood of cost overruns.

For instance, suppose your plans require the setup of counter tops made from Italian marble. If the stone is in stock in your area, great; however if it should be purchased from the source, your job could get held up. In the meantime, the cost of marble or the cost of setup or shipping might increase. A smart landlord might think twice to dedicate to an improvement plan with such contingencies.

A "Turnkey" Job: The Landlord Pays All

You may be able to convince the property manager to spend for the entire cost of your improvements, no matter what they wind up costing. In leasing lingo, an enhancements arrangement like this is understood as a "turnkey" job-all the tenant has to do is "turn the key" and open for business.

Naturally, you'll need to reveal your landlord completed, specific plans and quotes. A careful proprietor could draft the enhancements provision so that you'll pay for any changes or additions that you make after the lease is signed.

The advantage of this approach is that the threat of cost overruns is entirely on the landlord. Don't right away choose that this plan is the one for you. Unless you protect approval rights -instructing that the task isn't done till you say it is-you might end up with enhancements that were quickly or cheaply done.

And pay some attention to how much the task will cost. You need to comprehend that a property manager who spends for everything is getting it back one method or another, normally by setting a high rent. You'll wish to ask yourself whether the lease being charged really overcompensates the landlord for the money that's entering into the residential or commercial property at your demand. If you think that the rent's being unjustly boosted, raise the point and press for a reduction.

Speak With a Lawyer

If you're not sure if a TIA or its options are right for you, consider talking to a property or business legal representative with commercial lease experience. They can assist you pick the plan that best fits your scenarios and help you negotiate a useful enhancements and changes provision.