Negotiating A Higher Tenant Improvement Allowance

In many of our blogs we’ve discussed the power and necessity of negotiation. You have the power to acquire what you want and more importantly what you need.
In big cities there are a plethora of options available. As leverage in attracting potential tenants, landlords may use a Tenant Improvement Allowance. However enticing this may seem, often landlords will not provide the amount of money necessary for a proper build-out.
Why would (s)he do this? What can be done to remedy this? Let’ look at a few possibilities.

  1. Return on Investment
    • The landlord’ main concern will always be to increase the return on the original investment. Frequently, this value is determined by rental rates in the current market. When a landlord suggests a certain dollar amount it is not arbitrary, but rather based upon the market.
  2. Return of Investment–probability of repayment
    • The landlord may be hesitant if repayment contains any element of uncertainty. Factors affecting this could be inconsistency of business, financial history (credit history), and length of lease.
  3. Tenant History
    • As a tenant, if your operating history is minimal the landlord may be reluctant to increase your improvement allowance. This is due to the high cost of capital had by the landlord, or perhaps no capital at all.
    • If the term you are willing to commit to is too short this deal presents a higher risk by amortizing the costs over a shorter period of time.
  4. Cash resources
    • The landlord can only offer up capital (s)he has access to. To determine this amount, most times, this will be based on an educated guess. The best way to have success is to research the landlord and understand his/her financial wherewithal.

Awareness of these concerns will give you the upper hand and ability to remedy the problematic variables. But, how can this be done?

  1. Offer to amortize a portion of the allowance
    • This functions as a structured method to formally repay the allowance, thereby increasing the return of and return on investment. One factor to consider is that, as a tenant, this will increase the occupancy cost. However, it offers a reduction of the cost upfront.
  2. Sign a long-term lease
    • The longer your lease is the more your landlord is likely to offer. A long-term lease offers consistency and more-or-less secures the return of investment.
  3. Evaluate various credit enhancement options
    • Lease guarantee–the more backing you have the more confident the landlord will feel about doling out the upfront cash.
    • Letter of credit–this is a document pledged by the bank or other financial institution, that should the tenant fail to pay they will assume the cost owed. Consider, however, that should you request this backing the financial institution may require you to maintain a minimum balance for the amount they are backing.
  4. Free Rent
    • The tenant can offer to receive TI in the form of free rent. (S)he can ask her/his broker to accept the commission at a later date.
  5. Financial Proof
    • Providing financial information is a definite plus. Additionally, an SBA 7a loan from a bank can assist in subsidizing the tenant improvements.

These are just a few items to considering before requesting a tenant improvement allowance. For more information on improvement allowance and securing a lease, check out our blog:The Definitive Guide to Finding Your Perfect Office Lease.