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Leasing Office Space – Funding Tenant Improvements
| Guest post by: Patrick Oconnor |
Article Overview: 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.
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Leasing Office Space – Funding Tenant Improvements
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.
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About the Author: Patrick Oconnor RSS for Patrick's articles - Visit Patrick's website Patrick C. O'Connor has been president of O'Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also an registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction. Check Patrick O Connor at Google Plus 
Click here to visit Patrick's website   Real Estate Feasibility Studies Evaluation of Restaurants Leasing Office Space Part 15 of 23 Lease Negotiations Tax Deferral or Tax Reduction Cost Segregation Commercial Real Estate Appraisal Sales Comparison Approach |
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