When negotiating office space leases many landlords will offer to give you a tenant improvement allowance (aka TI allowance). While this may seem generous you need to understand that they will expect things in return. Building owners are in the business to make money not just give free money away so it’s important that you understand this. It also depends on a number of factors such as existing market conditions, the particular building, owner investment objective, etc.
- If a landlord gives you a tenant improvement allowance they will typically want more lease term. The more TI allowance they give you the more lease term they will want to recoup their costs. In Austin Tx for example if you are expecting them to install new carpet, paint, and build several new offices and a break area with a sink THEY WILL expect you to sign at LEAST a 3-5 year lease.
- They will ask that you securitize a certain percentage of the allowance in the event you default. On large TI allowances landlords typically ask that you provide a letter of credit, larger security deposit, or have outstanding financials. They want to ensure that you have the ability to compensate them in the event you default on your lease since they would be paying the TI allowance up front.
- They typically will require that you use the allowance within a given time frame
- On small spaces they will typically not allow you to use the allowance for your furniture, trade fixtures, phone or data cabling.
Don’t just assume that all landlords are willing to give you unlimited amounts of money to build out the space as you want. If they see you as a credit risk they will be very hesitant to do so and would require you to come to the table with money. So it’s important to get your financial situation in order before starting negotiations so that you increase your changes of scoring the best tenant improvement allowance package possible.
