Purpose: To learn more about how tenant improvement allowance works.

Highlights:

• Who pays for tenant improvements?
• What are the types of tenant improvement allowances are available?
• What are the pros and cons to each type of allowance?

Tenant improvements are a necessary part of a business moving into a new facility.

Whether the improvements be as small as adding desks to an open office space, or as big as adding rooms with new HVAC and fire sprinklers, it needs to be completed and someone needs to pay for it.

So, who pays for tenant improvements?

The answer is usually the landlord in one way or another. There are four different ways landlords pay for tenant improvements, according to fitsmallbusiness.com.

1) Tenant Improvement Allowance

With a tenant improvement allowance, the landlord will give an allowance to the tenant based on the square footage of the building. In Chicago, the average tenant improvement allowance is $6.23 a square foot. The tenant oversees the work and is in charge of the budget. While overseeing the work takes time away from the business, it allows the tenant the opportunity to make quality decisions and avoid going over budget.

2) Rent Discounts

The landlord will offer a rent discount for the tenant improvement. Generally, a tenant will get one month free for each year of the lease. The money that would have gone toward rent now gets redirected to the tenant improvement project. The tenant will oversee the project, making it easier to manage the budget and schedule.

3) Building Standard Allowance (Build Out)

With a build-out, the landlord has a package of improvements you can choose from. Anything off the list is an additional cost to the tenant. In this type of project, the landlord oversees the project. This saves tenants time and money; however, it makes the actual tenant build out somewhat generic.

4) Turn Key

Turn key is when the tenant submits plans, and the landlord oversees and pays for the work. The tenant doesn’t have to find a contractor, can customize the project, and doesn’t need to spend time overseeing the project. On the other hand, the tenant is putting all of their faith in the landlord, and the project may not meet expectations.

In Conclusion

When starting a business and renting a new space, the tenant improvement is paid for by the landlord in most circumstances. As a business owner, you need to determine the best way to negotiate tenant improvements. What type is the best tenant improvement allowance for you?