It is no surprise that when signing a lease on an office space a tenant would prefer to not come out of pocket for renovation expenses. In lieu of this, tenant improvement allowances are typically offered by the landlord during lease negotiations in order to attract potential tenants and assist in the burden of capital investment needed to lease a commercial property. They are designed so that the tenant can renovate or add to an office space.
There are various causes that can make a landlord hesitate in increasing the allowance. Does your company project a good ROI (return on investment), are you credit worthy (will they be getting their money back), and how long is the projected likelihood of that return?
If you can understand what factors play into your landlord’s hesitation, then it may be possible to take steps to ease their fears and begin to negotiate the allowance.
Signing a longer-term lease
It is often seen as favorable by landlords when a tenant signs a longer lease because it means that there will be stable income and they don’t have to immediately worry about re-leasing the commercial property.
Check your credit
As with any investment, the investor will be expecting their money back in an agreed-upon fashion. Before the investment they will be sure to request financial statements or even tax returns. Since the improvement allowance is not only an investment in the landlords building, but also in your business, they want to be sure that they will receive their money back. Smaller businesses may want to consider acquiring a letter of credit from their financial institution on their behalf so the landlord knows that even if you default on your agreement, they will still be able to recoup their investment.
Though you will likely be required by the financial institution to have the line of credit amount available in your account and may cost anywhere from 1%-2% (or more) of the LOC face-value, meaning an overall increase of occupancy cost in your office space, but less of initial out-of-pocket expenses going from you to your business.
Tenant Improvement Allowances are sometimes seen as a burden to tenants. Where the turnkey approach puts the landlord in charge of renovations, a TI allowance means that the tenant must secure the contractors and vendors. While it may be more work it is still seen as more viable to go with this approach rather than a turnkey. With a Tenant improvement allowance the tenant could hire a project manager to be a liaison between their desires and the contractors. Project managers require an additional fee, however they are usually able to negotiate prices with vendors and contractors, which puts more money in the tenant pockets.