Real Estate

Tenant Improvement Allowance-One of the most misunderstood real estate terms

What is a Tenant Improvement Allowance?

A Tenant Improvement Allowance is a contribution of money towards the build-out cost of your restaurant.

Often referred to as ( TIA or TI ) in a letter of intent or lease agreement, the tenant improvement allowance is typically a dollar amount multiplied by the square footage or size of the rental space.

The tenant or tenant’s restaurant real estate advisor will request a tenant improvement allowance in the letter of intent.

“Landlord shall provide a Tenant Improvement Allowance (“TI Allowance”) in the amount of ($35.00 per square foot) for the construction of Tenant’s improvements in the Premises.”

How much Tenant Improvement Allowance can you expect? There are many factors that determine if a landlord will provide a tenant improvement allowance. These include:

 

Credit strength of tenant

Your credit strength is the most important consideration for the landlord. The landlord will factor the tenant improvement allowance into their return on investment. The landlord needs to recoup their investment over a certain number of years. The less credit or operating history of the tenant, the more risk they will not be repaid.

 

Demand in the marketplace

In a very hot market with multiple offers many landlords will offer the space in as-is condition and refuse to provide a tenant improvement allowance. In a very slow market, a desperate landlord may offer a substantial tenant improvement allowance to secure a tenant.

 

Condition of property

Developers often offer a substantial tenant improvement allowance for new construction projects. They have already factored in the cost of the tenant improvement allowance into the overall cost of the project and projected rents.

 

Warning!! A tenant improvement allowance of $30.00 per square foot may seem very generous but the devil is in the details. Developers often provide a “dark shell” and the tenant improvement allowance may only cover your cost to complete work that would have been provided in an existing property such as bringing the utilities to your space or providing concrete floors. Be sure to understand the landlord’s scope of work before signing a lease.

 

Why Tenant Improvement allowances are so misunderstood

Many first time restaurateurs do not budget enough money for their construction based on the landlords contribution of a tenant improvement allowance. For example, if the total cost to build out the restaurant is $300,000.00 and the landlord is contributing $60,000.00, the restaurateur will often only budget $260,000.00. This can create a serious cash crunch or halt construction.

A Tenant Improvement allowance is not a cash advance. The landlord is agreeing to reimburse the Tenant a certain amount of money upon certain conditions being met.

 

Example of Tenant Improvement Allowance in Lease Agreement

Provided (a) Tenant has paid to Landlord all amounts owing to Landlord pursuant to this Lease as of the date reimbursement is to be made, (b) Tenant is not otherwise in Default of any other term or condition of this Lease as of such date, and no event has occurred which, given the passage of time or the giving of notice or both, could be declared a Default under this Lease, (c) the Premises are lien-free and sixty (60) days have expired from the recordation of the Notice of Completion, and (d) Landlord has approved, in advance, the scope of work and terms of any negotiated contract for Tenant’s Work, then within thirty (30) business days following the month next following the date after requirements 1 through 8 below are satisfied, Landlord will reimburse to Tenant the lesser of (i) the total amount of out-of-pocket costs paid by Tenant for Tenant’s Work (specifically excluding floor coverings, signs, movable fixtures, permit fees and plan review fees), and (ii) Twenty Dollars ($20.00) per square foot of the Floor Area of the Premises (“Tenant Improvement Allowance”):

As you can see there are many conditions to be met and a minimum of 90 days after completion of Tenants work before the landlord is required to reimburse you the tenant improvement allowance.

 

How to negotiate a Tenant Improvement Allowance

Like most things in life, the more experience you have, the better prepared you will be to succeed.

If you are negotiating a restaurant lease experience matters. The right team members can mean the difference between failure and success. Your team should include:

  • Restaurant real estate advisor experienced with both lease agreements and restaurant construction.
  • Attorney specializing in commercial lease agreements.
  • Architect knowledgeable about restaurant permitting and design needs.
  • Contractor experienced in restaurant construction.

 

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