Tenant improvements (TIs) – also known as leasehold improvements or build-outs – are changes you make to a leased commercial space to make it ready for you to do business. The cost of these improvements will typically be partially or fully defrayed by your landlord through a tenant improvement allowance (TIA) you negotiate during the leasing process. Depending on the choices you make about your space and what you and your landlord agree on, the TI process can be expensive and frustrating or smooth and cost-effective.
As a commercial architect with three decades of experience, I’ve learned a few key lessons for making sure clients come through the tenant improvement process with what they need for their businesses without breaking their budget or losing their minds.
Tip 1: Choose Your Space Wisely
One of the most common mistakes I see clients make is falling in love with a space without considering the costs and time needed for tenant improvements. The condition of the potential space is probably the number-one factor in determining the time and money it will take to make it suitable for your particular business.
Broadly speaking, you’ll encounter three types of spaces:
“Shell Condition”
These are unfinished spaces that have typically not been leased before. They usually have no finished walls, ceilings or flooring, no fixtures and limited or no plumbing, electrics or lighting – basically, they’re four walls with a roof and floor.
Pros:
- Blank canvas for your ideas
- Highly customizable
- May get higher tenant improvement allowance
Cons:
- May be expensive to build out
- Tenant improvements may take more time
- May be few available in your market
2nd-Generation Space – Same Industry
These are commercial spaces that have been leased before to businesses in the same or a similar industry as yours. They’re typically completely finished with paint, flooring, ceilings, electrical, plumbing and other fixtures. It’s worth seeking these out because they are often the least expensive option.
Pros:
- Less expensive to build out than shell-condition or different-industry spaces
- Shorter time needed for tenant improvements
- Challenges with space are easily identified
Cons:
- Less customizable
- Significant changes can be expensive
- May be few available in your market
2nd-Generation – Different Industry
These are spaces that have previously been leased to other businesses in a different industry from yours.
Pros
- Lots of options in most markets
- May be able to make use of some existing features
- May be in an established business location
Cons
- May be expensive to convert to your business
- May take extra time to convert
A good commercial Realtor with knowledge of your region and industry can be invaluable as you start to look for space for your business.
Tip 2: Negotiate Tenant Improvements Up Front
You and your landlord will need to agree on what tenant improvements will be made, how they will be paid for and how long they’ll take to complete. They should be part of your lease agreement. The rule of thumb is: “get it in writing, or it won’t happen.”
Questions to answer during negotiations include:
How will tenant improvements be paid for, and how much is the tenant improvement allowance?
Unless your landlord agrees to provide a cash allowance for tenant improvements at execution of your lease, you will need to pay for TIs up front with the landlord reimbursing you according to your agreement. Typical arrangements include TIA payment as construction milestones are reached, and getting TIA payment at the completion of construction. Some landlords will negotiate the TIA as a reduction in rent.
What improvements are covered by the TIA?
Not all tenant improvements may be covered by a TIA, meaning you’ll have to foot the bill for them yourself. These typically include anything you can take with you when your lease ends or elements specific to your business, such as furniture, signage or industry-specific fixtures. Also, any upgrades beyond the basics to things like paint, fixtures or window treatments may not be covered.
Who will do the work?
Some landlords will want to hire their own contractors or approve the contractors you hire.
What standards must the tenant improvements meet?
Make sure you and your landlord agree on the specifics of the TI plans and any standards that must be met, either to fulfill building regulations or the needs of your business. Make sure you agree on who will obtain all necessary permits.
How long will tenant improvements take?
Include a schedule in your lease agreement, particularly if your landlord will be hiring the contractors or otherwise managing the TI process.
When can you begin using your space?
Make sure your lease agreement specifies when you can occupy the space, when construction can begin and when you must begin paying rent.
Tip 3: Tenant Improvements to Consider
The improvements you need to make your space work for your business will depend on your industry, the condition of the building you lease and a host of other factors, but there are a few improvements I recommend business owners consider as they begin planning for and negotiating tenant improvements.
Green Building Improvements
Any changes that will increase your space’s energy efficiency, water efficiency or the health of your building will benefit you, your customers/clients and your workers. They may also make your landlord’s building more attractive to future tenants.
Accessible/Universal Design
Certainly, you must ensure any changes meet federal and local requirements for accessibility, but also consider universal design improvements that will improve access to your business for your clients, customers and workers.
Wired and Wireless Computing
Make sure your space has adequate wiring for high-speed internet connections and that there are enough connections where you need them. Consider where you’ll need to use wireless devices and ensure none of the space’s walls or other elements will interfere with Wi-Fi signals.
Tip 4: Include your architect as early as possible
The earlier you bring your architect or designer into the process, the more likely you will get the improvements you need at a price you can afford. Ask your architect to look at the spaces you’re considering renting and talk to her about the improvements you’d need to make for each. Ask her to review the sections in your lease regarding tenant improvements for any red flags or possible problems.
With a little planning, a bit of negotiation and some imagination, you can turn that rental space into the store/restaurant/dispensary – whatever – of your dreams.