Leasing Office Space - Tenant Improvement

Will the Landlord Pay?

The landlord is usually willing to fund tenant improvement expenditures provided he is confident the tenant has the financial capacity to pay rent for the term of the lease. For large companies with strong balance sheets, landlords will generally spend as much as is requested on tenant improvements. Of course, the cost of the tenant improvements will be reflected in the rental rate.

It's Up to You

If you're a start-up business with no track record and little capital, landlords will be cautious about expenditures for tenant improvements. They will likely want you to fund tenant improvements for your space. The benefit is your rental rate will be lower. However, you'll have to include the cost of preparing your space for occupancy in your initial capitalization.

TI Details

Other issues related to tenant improvements include defining the scope of work, and who has financial responsibility for performing the work. National companies sometimes simply provide the landlord with a detailed set of plans for the space. It is the landlord's responsibility to cost effectively provide the required build out. For smaller firms, the landlord may provide a tenant improvement allowance, and require the tenant to interface with contractors to have the work performed.

How Much TI?

The cost of tenant improvements can range from $0 to $100 per square foot for second-generation office space. If you are not completely rebuilding the space, the cost is often $5 to $30 per square foot. Even if the landlord is willing to provide substantial funds for tenant improvements, be cautious about the scope of work for tenant improvements. The landlord's expenditure for tenant improvements is essentially a loan which will be repaid with your rent during the term of the lease.

Who pays for ADA?

If the space requires tenant improvements which require obtaining a building permit from the city, review whether you'll have to replace any restrooms because of ADA. (ADA is the Americans with Disabilities Act). In most cases, changes to provide ADA compliance are not necessary if you not require a building permit. However, a consequence of obtaining a building permit is typically that the space must be revised to completely comply with ADA. Replacing the bathroom so it is ADA compliant can be expensive.

Occupancy Cost

After obtaining information regarding the cost of tenant improvements, you should be able to estimate the cost of occupancy for your office space. This will include rent, expenses you pay and the amortized cost of tenant improvements.

Amortized TI

The amortized cost of your tenant improvements will be the cost over the term of your lease. To keep matters simple, if you are spending $60,000 to renovate your space, and your lease term is five years (60 months), include $1000 per month for the cost of tenant improvements. The actual cost will be higher to reflect the time value of money.

Condemnation Plans?

Research the possibility of a condemnation proceeding. Visit with the relevant city, county or highway department officials to determine whether there are any plans to widen any of the streets contiguous to the office building. If there are firm plans for roadway expansions, research the details thoroughly.

Allowable Use?

Office space is often subject to rules established by the landlord, deed restrictions and local government restrictions. Research these issues prior to investing much time or money on a space option.

Criminal Activity?

Finally, research criminal activity in the area for the office space you are considering. In many cases, it is apparent whether an area has a low crime rate or a high crime rate. However, considering the investment of time and capital necessary to build out space and move, it would be very disappointing to learn your office space was near a hotbed for criminal or gang activity shortly after moving.

Crime Data Sources

Options for researching criminal activity within an area include online crime reports, discussions with tenants at the property, and discussions with police officers who are active in the area.

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