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What is the tenant improvement allowance?

Residential rental properties will often get a fresh coat of paint before new tenants move in. Commercial spaces, however, will often need more work to accommodate the unique needs of the business tenants. This is generally paid for through a tenant improvement allowance, which is one of the most significant issues negotiated for a rental agreement. It not only dictates what will be done in preparation for the new tenant, but it also impacts how much the landlord charges in rent.

Two kinds of allowances

There are generally two types of allowances that are negotiated:

  • Turnkey build-out: The landlord pays for the cost of the work, sometimes to land a longer or more lucrative contract.
  • Stated dollar amount: This essentially creates a budget the landlord will pay to cover the work, which will include engineering and architecture fees.

When negotiating the tenant improvement allowance, commercial real estate experts generally believe that tenants best interests are served if they can maximize the value of the improvement while minimizing the amount of out-of-pocket expense based on the amount of rent paid. This is often done with a stated dollar amount, which allows the tenant to be more hands on about the work rather than trusting the landlord to do it up to specifications.

Differing objectives

It is important to realize that the priorities of the landlord and tenant are not always in agreement, particularly when it comes to the work being done. It is in the best interests of the tenants to get control of the work so that it is done to the specifications of the company, which should be clearly outlined in the rental agreement. Control of work also enables the tenant to better ensure the space will be ready when their lease for the old space expires.

Legal disputes are common

It is commonplace for tenants and landlords to have disagreements over the years. An attorney can help minimize these by drafting a rental agreement that addresses all foreseeable issues, including those listed above as well as ones unique to the circumstances of the arrangement.

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