Alternatives to a Tenant Improvement Allowance: Build Out and Turn-key

There are alternatives to a TIA that may be better for your business needs.

Don’t be too enamored of a TIA (tenant improvement allowance), which can happen when you focus on “free rent,” or otherwise think of the offer as a present from the landlord. The problem with a TIA is that you, not the landlord, will be responsible for cost overruns. The following three alternatives do not run that risk.

Building Standard Allowance, or “Build-Out”

In this arrangement, the landlord offers you a specified package of improvements and you pay for anything fancier or additional, which puts the risk of overruns on the landlord unless you change the agreed upon improvements. You are likely to encounter this approach in new buildings especially, where the landlord has a construction crew and materials already on site. The deal offered to you—the “building standard”—may include a certain grade of carpeting or vinyl floor covering, a particular type of drop-ceiling, a set number of fluorescent lights per square feet of floor space, and a specified number of feet of drywall partitions with two coats of paint. Basically, it’s like a fixed--price meal in a restaurant—if you want anything fancier, you pay the difference or arrange for your own contractors to come in and do the job.

If the landlord’s offer suits you, this could be the simplest and most economical way to go. Its big advantage is that the landlord, not you, pays for any cost overruns (unless you’ve ordered extra items). And if the work is not done on time, there can be no question as to who is responsible (as long as you’ve not gotten in the way). If you don’t happen to need the entire package the landlord is offering, you can also negotiate for a credit for those items you don’t use. Your landlord may refuse, however, if he has already purchased the materials.

You Pay a Fixed Rate, the Landlord Pays the Rest

This arrangement is the opposite of the TIA, where the landlord paid a fixed sum and you paid the -balance.

Your landlord is not likely to be interested in this method unless you have plans that are clear, firm, and not subject to unexpected cost increases. That way, the landlord can realistically assess what the improvements will cost him and the likelihood of cost overruns. For example, suppose your plans call for the installation of counter-tops made of Italian marble. If the stone is in stock locally, great; but if it must be ordered from the source, your job may get held up. In the meanwhile, the cost of marble or the price of installation or shipping may increase. A savvy landlord may well hesitate to commit to an improvement plan with such contingencies.

A Turn-key” Job—The Landlord Pays All

You may be able to convince the landlord to pay for the entire cost of your improvements, no matter what they end up costing. In leasing lingo, an improvements arrangement like this is known as a “turn-key” job—all the tenant has to do is “turn the key” and open for business.

Naturally, you’ll need to show your landlord completed, specific plans and estimates. A careful landlord may draft the improvements clause so that you will pay for any changes or additions that you are responsible for after the lease is signed. The advantage of this method is that the risk of cost overruns is entirely on the landlord. Don’t immediately decide that this arrangement is the one for you. Unless you secure approval rights (the job isn’t done until you say it is), you may end up with improvements that were hastily or cheaply done. And pay some attention to how much the job will cost. You should understand that a landlord who “pays for everything” is getting it back one way or another, usually by setting a high rent. You’ll want to ask yourself whether the rent being charged actually overcompensates the landlord for the money that’s going into the property at your request. If you suspect that the rent’s being unfairly jacked up, raise the point and press for a -reduction.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman

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