What is tenant improvement?
Updated: Aug 29, 2019
Have you noticed that the commercial and retail facilities are worn out and in poor condition for your tenants?. Before making a major expense, ask yourself the following questions: What are you trying to achieve? Is it just to make things a little more pleasant for employees or guests? Or is it a renewal and total update? Or expand for more offices for increase the production to industrial centers? Does it enhance the flow of what you’re trying to accomplish in your facility?
This article will help answer some questions about the tenant improvement.
What is a tenant improvement?
Tenant improvement are the changes made in the interior of a commercial or industrial property by its owner to meet the needs of a tenant, such as floor and wall coverings, ceilings, partitions, air conditioning, fire protection and security. The costs of TI costs are negotiated between the landlord and the tenant, and is usually documented in the lease agreement.
Pro and cons in detail
The most common way landlords pay for commercial lease improvements is with a tenant improvement Allowance (TIA). A TIA is a certain amount of money (a fixed amount or an amount per square foot) that the owner gives you to make improvements. If the cost of the improvements exceeds the TIA, you pay the extra. In more concrete words, the owner assigns a budget for the improvement of the tenant and if these exceed the budget the tenant is responsible for paying the surplus.
The advantage of a TIA is that, in most cases, it maintains control over the renewal process. Choose carefully a good contractor that will complete the improvements and choose the materials. If you are in charge, you do not have to worry about the owner's cuts, this also fosters a good relationship with the tenant by keeping him fully informed about the improvements being made to his property.
On the downside, getting a TIA means that you have to spend time finding qualified contractors that fit the budget. If the contractors are slow to do things or charge more than they estimated, those extra costs will fall into their responsibility.
Your contractors must carry worker's compensation insurance and a bond in case the money runs out before the job is finished. In addition, you should take the time to familiarize yourself with your lease and the building and carry out proper construction planning since a delay in planning would cost you time and money. If your team performs a renovation, for example, that ruins the pipes of all tenants in the building, the owner will not be happy and may charge you for the repairs.
Tenant improvement negotiation and construction
Some elements that should be taken into account when analyzing and negotiating an TI agreement among which will be:
Profitable versus usable: the number of tenants per square foot that can be granted for improvements is analyzed and how it relates to the profitable space, including the common area and usable space.
What is included? Does the TI allocation include materials, repainting of walls, doors, air conditioning, architecture, permits, project management, etc.? How is the subsidy disbursed? Some TI may include furniture. It is also possible that part of the assignment may be used at a later time in the lease if it is not used immediately.
Substantial completion: it is important to ensure that the synchronization of the end and the rental space utility coincide with the start of rental payments by the tenant. Many factors can influence this timeline, including permits, architecture, construction, etc.
Additional costs: there may be cost overruns in the improvements. It is important to have a mutually agreed upon approach and plan for this contingency. Is there a buildout allocation limit? Are there associated fees for project management, etc.?
Once you have discussed and negotiated, the tenant improves his time to begin planning the construction and management of the project.
The planning, design and estimation of construction costs will depend on the size and scope of the improvements. It is important to make sure that you have an experienced and licensed team that is familiar with the construction codes and regulations of the area where the work will be done to ensure that it meets the requirements of the municipalities for design and permits.
An experienced architect will help manage the design and planning aspects and can guide you through the process of satisfying all building codes and ADA requirements. If you do not have an architect yet and you are working on a project in the Southern California area, we can help you and we have experienced architects.
The next step is the estimation of construction costs and the selection of contractors. When you begin the process of finding a commercial construction contractor to complete the improvements to your tenants, there are some specific elements you should look for or request:
Is the contractor licensed?
Are they insured?
Can they give you references?
Examples of similar tenant improvement projects that you have completed in the past?
How long have they been in the business?
AEC Moreno Corp can provide a preliminary cost estimate based on your specifications. However, it is important to realize that, until the projects are ready to be sent to the city for final approval and everything has been detailed and aligned with the final plans and specifications, it is not possible to give a completely accurate estimate of the final cost.