Explanation of a Tenant Improvement Allowance

When you are renting a commercial space to a business, they may need to have your space be customized in order for their needs to be met. As a landlord, you have the ability to negotiate who does all of this build-out work, when it gets done, and who needs to pay for it. Found under the improvements and alterations section of most commercial leases, the tenant improvement allowance [TIA] is a sum of cash that you're willing to spend for a new lease holder to modify your property to meet their needs.

Do You Pay a Tenant Improvement Allowance To a Tenant?

For most negotiated leases, the TIA is not paid directly to the tenant. A landlord would instead pay contractors directly for work being done or pay supplier invoices. In some instances, a landlord may agree to a period of free rent instead of a TIA because that will give a tenant a brief period of time where they can pay for improvements instead of paying a monthly rent.

For a tenant that has negotiated a direct payment from their landlord for their improvements, there may be tax liability. In most jurisdictions, this is considered income.

How Much Should the Tenant Improvement Allowance Be?

If there are a number of improvements that need to be made on a property to make it usable, then a potential tenant has a good bargaining position for a substantial TIA. This becomes a stronger position if the amount of the improvements required for a business to move in is known already. Otherwise there is no set amount or percentage that is a common amount to have in a lease. It is something that is negotiated.

Unless specifically negotiated to be otherwise, a tenant is responsible for any costs related to construction overruns. The tenant is generally the party who will be assuming all of the risk for the build out of the improvements as well. For this reason, it is a good idea for a tenant to not allow the landlord to make the improvements.

Can Fees Be Charged On a Tenant Improvement Allowance?

Yes. It is common practice for a landlord to charge fees on the distribution of a TIA. There are administrative costs associated with receiving, reviewing, and then paying contractor invoice. These fees may also be charged by the contractor doing the work and is purely a profit source because the more the TIA is reduced by fees, the less there is to spend on actual product.

A tenant improvement allowance is not a concession or a gift. It is a negotiated payment that is intended to help improve the property for the future. If it isn't utilized in full, then the balance can be applied to future rental payments. It can be used in any way to improve the building. For some landlord/tenant relationships, it is a good first step toward a journey that is mutually profitable for everyone.
Posted on Jul 15, 2014


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