Small Business

C. Norman Beckert: Tenant improvements: What’s negotiable?

Idaho district director for SCORE, the Service Corps of Retired ExecutivesNovember 19, 2013 

C. Norman Beckert

This is a question we often get from clients needing office, retail or manufacturing space. I have found it prudent to consult with a commercial real estate agent, and over the years I have consulted with Ray Frechette, a real pro. As Ray has often stated: “Anything and everything is negotiable, however, some ‘norms’ exist.”

Let’s consider existing, previously rented space, and new unfinished space.

Previously occupied space: Most often, the space will be offered “as-is.” This should not stand in the way of the prospective tenant and his agent discussing a tenant improvement allowance.

The TIA will typically include either a lump sum or an allowance stated in dollars per square foot. The owner may insist that any improvements be done using his contractor. If the tenant is able to select the contractor, the owner will want to inspect the improvements before reimbursing the tenant.

New unfinished space: New retail space most often will be offered as a “vanilla shell.” It will, or should, include the sprinkler system, HVAC installed and distributed, lighting, installed ceiling, taped and primed walls, electric power with distributed outlets, floors ready for covering and finished restrooms.

If not finished to include the above, prospective tenants should be wary of accepting an allowance and undertaking the responsibility of selection and management of a contractor and subs.

It is reasonable to negotiate finishing the space to meet the specific needs of the business owner. It helps if the tenant is a “high profile” tenant. The owner may cover the cost if it is a desirable business that will attract other tenants and help fill out the development.

In office spaces, the landlord usually will finish out the space to a predetermined level of quality. If the tenant wants something extra, like a fancy lobby, then the extra expense is usually on the tenant. In industrial spaces, the offering is typically a concrete box with or without restrooms.

In general: Be sure you know specifically what is included in and part of the lease agreement. For instance, are fees such as highway impact, sewer, power, natural gas and water hookup included?

Financial risk plays an important part in the decisions considered by the property owner. The owner will rarely pay for improvements that are specific to one tenant when the tenant is not a rock-solid financial risk.

If the improvements would be generic to all or most tenants, then the risk may be worth it to the owner. If the improvements would be discarded or replaced by the next tenant, then the owner must be sure he is paid back before the end of the lease term.

An experienced commercial real estate agent representing the prospective tenant’s interests can have a significant impact on negotiable benefits to the tenant. Our advice is to talk to a pro.

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