An important part of any lease negotiation process is the tenant improvement allowance that is given by the landlord so that the space in the picture can be built or retrofitted for the tenant’s own use. The amount of money that is given by the landlord as the tenant improvement allowance along with the total duration of the lease period are the two main factors which have a great say on the final negotiated rental price. On top of having an amount that you would feel adequate with as your tenant improvement allowance, it is important to also gain and maintain your control over the whole process.
How tenant improvement allowances work
Tenant improvement allowances can be basically classified to two types. The first type is called Turn Key Build Out. In this form of tenant improvement allowance, your landlord would cover the entire cost of all the construction that you would need to do in the space as a tenant. Your landlord would need to review your plans and agree to them while you rent and take the space to customize it as your own.
Your landlord would also need to sign documents that he or she has agreed to carry out and finance for this construction given that he or she is fully informed about all the building plans that you are about to do. At least a general outline of the whole building process should be covered in the agreement and discussion with your landlord.
The second type of tenant improvement allowance is called Stated Dollar Amount. This outline requires the landlord to give you a specific amount of money as your tenant improvement allowance so that you can modify, build up and renovate your space that you are about to rent out from your landlord. Usually this would mean that you would need to plan out all your intended construction and works and estimate a budget to cover all of it and then use that number to be your stated dollar amount.
In this, you can include any fees for engineering or architecture that you think you might be going for in your build up process. The landlord would then give you the money and would allow you to carry out the building and construction in the amount that you stated to him.
When there is a lease negotiation going on, the tenants usually prefer not to take money out of their own pocket for any expenditure related to the construction and building up process for the area to be rented. This way, tenant representative brokers often use a term called Turn-Key build out, where they are telling the landlord that the tenants are not keen to pay their own money for the development of the space.
The ultimate aim is to reduce as much as money that is coming from the tenant as possible for the build out process to occur. It is also important to efficiently maximise the amount of money given by the landlord as the tenant improvement allowance so that after that the rental rate does not become too affected by the initial allowance value.
The Turn-Key method
One big problem with the turn-key method is that your landlord has to put in a large amount of money as a backup for your construction process in the space to be rented. They put in an amount of money as backup in the estimated amount of money to be spent for construction so that this avoids the actual cost in the end to exceed the estimate. This backup money can get up to 25 to 30 percent of the total price for construction and build out and since the landlords would not want to put in so much of extra money in, they try to take shortcuts to reduce the amount of money spent for construction so that they get some extra profit along that line.
The effect that the backup money has on the eventual rent also plays out well for the landlords as if they put in more money into the backup, then their eventual rent goes up as well. Such pockets of money could be put into building up the space instead compared to ending up in the hands of the landlord.
Taking control over the build out process
Industry professionals advise that having a stated dollar amount would be a good way to start on taking control over your tenant improvement allowance and your construction process. This way you decide how much of money you would need for the process and you work within your own budget. Your construction plans and build out process is individual to you and your landlord would not be budging in for much say.
You can also give your landlord perks by asking them to waiver their construction management fee if you can find your own project manager to help you out in this process. You can take more control out of the whole process and that way your landlord needs to pay you less, and your eventual rent would be lesser as well.
If you need further advice on anything pertaining to industrial space for lease in Vaughan, we will be happy to assist you. We specialize in commercial space for both sale and lease, and can be a valuable partner to guide you in all matters of commercial real estate.