If you've recently moved into a new office space or are planning to, you probably have a list of renovations you'd like to make. To help pay for those renovations, your tenant representation broker likely advised you on the importance of negotiating a tenant improvement (TI) allowance into your lease.
But what exactly is a TI allowance and what does it cover? In this article, we'll delve into the details and answer all your questions.
What is a TI Allowance?
A tenant improvement allowance is money given from a landlord to a tenant to help pay for improvements to an office space or other expenses associated with moving into a new space. The specific amount of this allowance is negotiated into the lease, along with a detailed outline of what it can be spent on.
A TI allowance is typically measured in dollars per square foot. For example, your lease may specify something like:
Tenant’s actual "Tenant Improvement Costs" (i) the sum of $1,000,000.00 (based on $50.00 per rentable square foot of the Premises), to be used toward Building Improvement Costs with respect to the Premises.
Because a TI allowance usually doesn't have to be repaid, it can be a significant incentive for tenants to sign a lease. If you have plans for renovations in your new space, securing a TI allowance is an important negotiation point.
Why Doesn’t TI Cover Everything?
While a TI allowance can be beneficial, it's important to recognize that it doesn't cover all costs associated with a space. For instance, costs like data cabling, furniture, and decorations are typically not covered by the allowance. Landlords are primarily concerned with improvements that will increase the value of the building, such as new walls and doors that leave a lasting impact.
What Does TI Cover?
Landlords usually allow the TI allowance to be spent on both hard and soft costs associated with the project.
Hard costs refer to improvements that will be left behind once the tenant leaves, providing a direct benefit to the landlord. Soft costs, on the other hand, may not directly benefit the landlord but are necessary for the build-out process.
Some examples of hard costs covered by a TI allowance are:
- Framing and walls
- HVAC, electric, and plumbing
- Doors and windows
- Paint and carpet
To learn more about the hard and soft costs to consider when budgeting for an office build-out, check out our article on the Cost to Build Out Office Space: How to Plan and Budget.
What Does TI Not Cover?
While a TI allowance can be used for various improvements, landlords are unlikely to allow its use on miscellaneous expenses specific to the tenant's needs. If an improvement won't be useful or appealing to the next tenant or can be easily removed, the landlord won't benefit from paying for it.
Some examples of costs not typically covered by a TI allowance include:
- Furniture, fixtures, and equipment
- Electronic equipment
- Data cabling
- Moving expenses
More TI Questions?
Securing a TI allowance can be highly beneficial for tenants, but it's essential to understand that it's not intended to cover 100% of your all-in costs. Various factors can influence the size of the TI allowance you can secure, so it's a good idea to sit down with one of our project managers to get a budget estimate before signing a lease. This can ultimately save you money in the long run.
If you'd like to delve deeper into the topic of TI allowances, check out some of our other popular articles:
- What is an Amortized Tenant Improvement Allowance & How Can It Help Pay for My Office Build-Out?
- Cost to Build Out Office Space: How to Plan and Budget
- Cost to Hire a Project Manager for an Office Build-Out or Renovation (Fees/Rates)
Remember, a well-negotiated TI allowance can make a significant difference in your office space renovation plans.