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What Is a Tenant Improvement Allowance and What Does It Cover?

  When you’re looking to lease a new office space or a commercial building, likely, renovations will also be in order. Being prepared, having a good understanding of the work involved and your goals will make a big difference in your project and experience. As for the costs involved, that’s where learning about tenant improvement allowances is essential. Here’s what you need to know about tenant improvement allowances and what they cover.

What is tenant improvement allowance?

First things first: what is a tenant improvement allowance or TI allowance? As its name suggests, a TI allowance is a sum of money, typically pre-negotiated with the landlord, given to the tenant to cover construction expenses. Often, the tenant have to renovate the space to accommodate their business best. The actual construction work can mean a build-out or specific renovations within the space handled by Edmonton commercial contractors. Negotiations with the landlord will help dictate what work is necessary. It will also decide whether the approved sum of money will cover all or just a portion of the work. In Edmonton, negotiating for a TI allowance may also include negotiating a base rental rate. The landlord should base the rental rate on the rent amount the space would earn once fully renovated, not in the current state. That’s important to know when considering what renovations or updates are needed to boost rental value. TI allowance contracts will also dictate whether the landlord pays the allowance directly or will reimburse the tenant when the contractor finishes the job.

Cost breakdown

Typically, you calculate a TI allowance per square foot. For example, say the landlord approves a $20 per square foot allowance for renovations for a 2,500 square foot space. That would mean that the tenant would have $50,000 of the construction costs covered for the upgrades. Knowing the estimated budget and what work is needed is key to getting a suitable allowance.

Who handles the renovations?

Negotiations happen between the tenants and landlords, but the actual work and management should be separate. For example, once you agree on an allowance amount, third-party Edmonton commercial contractors are the best choice to handle the actual construction work. Typically, the tenant will be in charge of overseeing and arranging for the renovation. However, there are cases when the landlord will take over instead. In that case, the process is called a “turnkey build-out” and means that the landlord has complete control and the final say in the expenses and designs. While a landlord-controlled process can work sometimes, it’s often best to ensure that the TI allowance and project control stay with the tenant. The problem with a turnkey-build-out is that the landlord may cut costs or eliminate specific designs to save money. So, while the tenant may have approval for a large sum, they could still lose dollars per square footage that the landlord chooses not to renovate. The tenant might also lose control of design elements and the power to decide when and where to spend the allowance throughout the project.

Where do you start?

Negotiations are where to start when are handling a TI allowance and tenant improvement project. Once the paperwork is signed, you cannot add more money to cover any renovation or build-out work. Negotiating early on lets you develop an accurate and detailed plan for the renovation cost and work involved. If you’re not sure what or how much to negotiate for, then hire experienced Edmonton commercial contractors like Invicta Construction right away. We have experience working with TI allowances and can help both landlords and tenants. We’ll guide you through the process, so you always know about changes and costs throughout the project. Keep in mind that TI allowances may not cover the entire cost of the work needed. So, while negotiating for a large sum is beneficial, narrow down what needs doing first. For example, structural improvements and changes will have a longer-lasting value than quick updates like new paint or doors. Setting proper timelines is the other big thing to tackle right away. All the work needs to be complete by the time the rental period begins. Creating a detailed schedule as soon as possible is vital since various factors like permits, design process, and construction work can affect the timeline. Start by talking with your contractor or construction company to see how long the job will take. Attention to timelines will also help ensure the project succeeds and adds value without cost overruns and extra expenses.

What are valuable commercial renovations to consider?

If you’re a building owner or landlord, don’t get so caught up in renovations that add value that you forget to design based on the tenant’s needs. Unlike residential renovations, commercial renovations are always a two-factor approach. For example, in an office space, renovations should improve the work environment for employees and appeal to clients and new customers. In service-based commercial buildings, the work should reflect the company itself while still attracting new business. Commercial build-outs are a great way to add more space or add efficiency back into a poorly designed space. As a landlord, it allows you to attract new tenants whose needs differ from the old occupancy. With a build-out, think about how the area will be used and, therefore, what additions or changes will be most functional. In an office, for example, would adding a kitchen space be useful? On the other hand, perhaps extra rooms for meetings or a waiting room for clients would be better. Don’t forget the simple upgrades that can transform a space—for example, changing the paint colours, adding new floors, or installing new windows. Once you have that broad overview and clear distinction of priorities, it’ll be easier to put together a plan for the TI allowance negotiation.

Work with a trusted company

Like any renovation, finding trusted and qualified Edmonton commercial contractors to help with the work is essential. In some ways, the process is similar to finding a residential contractor. First of all, check that the company offers the type of work you are looking to do. Then, make sure that they are qualified, properly insured and have extensive experience. Don’t hesitate to get multiple estimates either, to make sure you get the right fit for your allowance. A company like Invicta Construction is a commercial renovations company that is qualified for the job. We handle TI allowances, have 40 years of experience in commercial construction, and offer comprehensive services from project management to construction. We will work with you to ensure your meet your goals, and that the renovation is valuable and long-lasting. Contact us today!