There's no doubt it - commercial leasing is not for the faint of heart. Buying a commercial building is a risky investment as it is, while leasing it out to complete strangers is an even bigger risk.
This is why it's up to you, as a commercial property owner, to make commercial leasing as seamless and enticing as possible. This is where tenant improvement projects come into play.
If you want to learn more about how tenant improvement projects can help shape your relationship and enhance property value, this blog is for you.
What Are Tenant Improvement Projects?
A tenant improvement project essentially allows property tenants to make customizations to leased spaces.
In short, a landlord offers their tenants a tenant improvement allowance (TI allowance) which gives them the chance to improve the space to meet their business requirements.
Here's how it works:
- Landlords offer a financial provision in the form of a fixed sum or per-square-foot allowance
- The scope of the allowance covers hard costs: i.e. construction, HVAC, flooring, lighting, plumbing, and electrical work
- It also covers soft costs, i.e. architectural or engineering fees
- This allows tenants to tailor the space according to their needs/vision
- It fosters longer-term leases, benefiting both landlord and tenant
- It also fosters a better landlord-tenant relationship
The TI allowance does not cover the costs of furniture, furnishings, decor items, business-specific fixtures, or removable alternations.
Leasehold vs. Building Improvements
There are certain improvements that do not qualify under the tenant allowance. It's important for landlords and tenants to be aware of what these are so that there are no disagreements within the lease or the relationship.
What are leasehold improvements?
- Mechanical upgrades
- Enhancements to lighting
- Cosmetic upgrades
- Interior changes, i.e. a new layout
These are upgrades tailored to meet a tenant's specific requirements. These are not covered in the TI allowance.
However, building improvements that actually enhance the structure of the property are funded. This might include repaving walkways or updating the lobby, for example.
TI Allowances, Rental Rates and Leases
What's important to note about tenant improvement projects is that they affect the leasing process, as well as rental rates.
Basically, it gives landlords the opportunity to charge higher rent. Most of the time, commercial tenants are happy to pay this type of rent because of the TI allowance they're offered.
The opportunity to tailor and customize the space according to their business needs justifies the cost of the rent. TI allowances also impact the terms of the lease.
The allowance is incorporated into the lease as a loan from the landlord. The tenant then repays this loan over the term of the lease, via rental payments.
Need Help Managing Your Commercial Property?
Tenant improvement projects are a great opportunity for landlords to get the most out of their rental space while fostering a good relationship with tenants.
But commercial leasing is tricky. If you need assistance navigating the ins and outs of TI allowances, this is where PMI management is here for you.
Want to learn more about how we can help you manage your San Francisco commercial property, tenants, and leases? Explore here for more.
