Tenant Improvement Allowances: What You Need to Know
If your business is planning to move into a rented commercial space, it’s likely that a build-out will be necessary to transform this space so that it meets all of your needs. However, many companies resign themselves to make do with what they have because they’re concerned about the potential costs of renovation or new construction. When this situation arises, there’s a cost-effective solution that tenants and landlords can both benefit from: a tenant improvement allowance (or “TIA” for short). Keep reading to learn everything you need to know about tenant improvement allowances and how they can help your business in the Twin Cities metro area.
How Do Tenant Improvements Work?
Essentially, a tenant improvement allowance is a sum of money that a landlord agrees to pay a tenant as reimbursement for construction costs on the landlord’s property. Unlike a typical renovation project, tenant improvement is specifically focused on altering a commercial space so that it can fully satisfy the needs of the current tenants. In most cases, the tenant will still have to pay the upfront cost of construction, and the landlord will agree to reimburse them for either all of their construction costs or a portion of these costs after tenant improvement construction has been completed.
A landlord will often – but not always – offer a tenant improvement allowance to tenants leasing their space. While tenant improvement construction is often beneficial for both tenants and landlords, the venture is still a financial risk, and some landlords may be reluctant to provide this allowance as a result. Usually, a landlord will want to review the financial history of a tenant before setting the terms of the TIA. The better a tenant’s financial history, the likelier they are to receive a more favorable tenant improvement allowance.
Depending on the nature of the agreement between the landlord and the tenant, there are a few different ways in which a tenant improvement allowance may be calculated:
- Oftentimes, tenant improvement allowance is calculated on a per-square-foot basis. This will result in landlords agreeing to reimburse tenants for tenant improvement construction projects by an exact amount based on the size of the commercial space being leased. As an example, if a tenant rents 1,000 sq. feet of space and a landlord offers a TIA of $20 per sq. foot, this allows tenants a reimbursement of up to $20,000 for construction services.
- In other cases, landlords may offer their tenants a fixed TIA amount that is often based on the price of renting the landlord’s commercial space. The fixed amount can vary greatly, but will usually range from 25% to 150% of the rent a tenant pays to lease a property for one year. In example, if a tenant’s total rent payments for a year will amount to $50,000, their tenant improvement allowance may range from $12,500 to $75,000.
- A third option is for a landlord to agree to pay a particular percentage of the total costs of tenant improvement construction. For example, a landlord may agree to reimburse a tenant for exactly 50% of construction costs, regardless of the final total. Often, this percentage will be limited to eligible expenses that improve a commercial property, such as new walls, HVAC installation or improved lighting fixtures.
Who Completes the Build-Out?
When it comes to tenant improvement construction, the landlord will reimburse the tenant for expenses, but rarely takes responsibility for the actual build-out. In the vast majority of cases, the tenant is responsible for hiring a general contractor to complete any desired construction services. However, depending on the circumstances, the landlord may recommend a reputable Twin Cities construction company to the tenant, possibly even the same construction team that built the initial structure where the tenant is renting space.
If you’re a tenant seeking a tenant improvement construction company in the Minneapolis-St. Paul area, it’s important to do your research and compare bids from different local contractors. Working with an experienced and trustworthy construction team will make sure your project is completed successfully without extending far over budget or timeline expectations.
Trusted Tenant Improvement Construction Contractor in the Twin Cities Metro
At Heritage Construction, we aim to provide the most dependable and highest quality construction services to our clients. Get in touch with us today if you’re looking for the best tenant improvement construction services in the greater Twin Cities area!