What’s the Best Way to Get Paid for Improvements?
How landlords offer to pay for improvements will depend on a number of factors:
The location, type, and age of the property
The number of potential tenants who are interested in the property
What has worked well for the landlord and tenants in the past
Tenant Improvement Allowance – Pros and Cons In Detail
The most common way that landlords pay for commercial leasehold improvements is with a Tenant Improvement Allowance (TIA). A TIA is a certain amount of money (a fixed amount or an amount per square foot) that the landlord gives you to make improvements. If the cost of improvements exceeds the TIA, you pay the extra.
The advantage of a TIA is that, in most cases, you retain control over the renovation process. You choose a crew that will complete the improvements, and you choose the materials. If you’re in charge, you don’t have to worry about the landlord cutting corners.
On the downside, getting a TIA means you have to put in the time to find skilled contractors. If the contractors are slow to get things done or charge more than they estimated, that will be on your dime.
Your contractors will need to carry worker’s compensation insurance and a bond in case the money runs out before the work is finished. In addition, you need to take the time to become familiar with your lease and the building. If your crew makes a renovation, for instance, that screws up plumbing for all the tenants in the building, your landlord isn’t going to be happy and may charge you for repairs.
Rental Discounts – Pros and Cons In Detail
A rental discount is similar to a tenant improvement allowance because you get a fixed amount of money to make improvements, and you’re in charge of the improvements. The difference is that, instead of getting a fixed amount upfront, you get a savings on rent. For instance, the landlord may offer “two months free rent.” With the savings, you can make necessary improvements.
This has the same pros and cons of the tenant improvement allowance. While you get more control over making the modifications, you have to pay for cost overruns and avoid any renovations that could damage the property’s structural integrity. In addition, to make up for the rent discount, a landlord may raise the rent later on, so be sure to compare the rent against the rent for equivalent properties in the area.
Building Standard Allowance – Pros and Cons In Detail
With Building Standard Allowances (BSAs) or “build outs,” landlords will offer an array of improvements which you can choose from. These are common in newer buildings. For example, the landlord may offer you recessed lighting, wooden flooring, or a certain paint color. If these options are agreeable to you, it’s one of the most economical ways to go. The landlord’s crew does all the work, and the landlord pays for everything.
The downside is limited choice. If you want custom modifications or have complex renovations in mind, then the landlord’s standard build out may not meet your needs. There’s also the risk that the landlord’s crew will do a shoddy job or use cheap materials. You (and your customers) may not be so happy with the result.
Turn Key – Pros and Cons In Detail
In some rare cases, the landlord may offer to pay for everything and give you a “turn key” commercial space.
This is similar to the BSA approach, but in this case, you can request custom improvements. You provide the landlord with blueprints and specifications showing the improvements you would like. The landlord then undertakes the work with his or her own crew and pays for everything.
If a turn key approach seems to good to be true, it might be because it is. The landlord may charge a higher rent than equivalent properties in exchange for doing a turn key renovation. The landlord may do a shoddy job or use cheap materials. If you go with the turn key approach, it’s helpful to have a contract clearly specifying what materials should be used, what substitutions are allowed, and what timelines will be followed to keep the work on track.