If you’re checking out a commercial space for rent, you’ve probably bumped into terms like "tenant improvement" and "leasehold improvement." Although these terms might seem similar and are sometimes used interchangeably, each term has its own nuances and implications. Knowing the difference is key for both landlords and tenants to navigate lease agreements smoothly.
In this guide, we'll clarify the distinctions and relevance between “tenant improvements," and "leasehold improvements" so you’ll be fluent in real estate lingo and ready to navigate lease agreements like a pro.
What Are Tenant Improvement (TI)
Tenant Improvements (TI) are changes typically funded by the tenant to a leased space. They adapt the space to fit the tenant’s specific operational requirements and aesthetic preferences. These updates are often essential for businesses with particular needs, like a restaurant that requires a full commercial kitchen or an office that needs several workstations and meeting rooms.
For example, imagine a restaurant tenant who wants to set up a new kitchen and dining space. The Tenant Improvement project might include installing partition walls to create dining areas, updating lighting fixtures to enhance the ambiance, laying down new flooring suitable for high-traffic areas, painting walls with a fresh color scheme, and adjusting the HVAC system to meet the requirements for a commercial kitchen.
Essentially, these are all updates that allow the tenant to create an inviting and functional environment that is tailored to meet the unique needs of the tenant.
What Are Leasehold Improvements
Unlike Tenant Improvements (TI), which is tailored to customize a specific unit for the tenants unique business needs, leasehold improvements involve broader upgrades or renovations that enhance the overall appeal and functionality of the space.
These changes are paid for by the landlord/owner and are for both the current and future tenants.
For example, when a restaurant is moving into a leased unit, leasehold improvements might involve upgrading the unit’s main water line or increasing the electrical capacity to support kitchen operations. These improvements are aimed at boosting the unit's appeal by addressing key requirements that tenants need upfront. By preemptively handling these essential requirements, the unit becomes more attractive and ready for new tenants.
However, it's important to note that leasehold improvements primarily benefit the tenant of the specific unit and do not typically impact the building as a whole. When a lease ends, the improvements typically become the property of the landlord, unless the lease agreement specifies otherwise. If the tenant is allowed to take the improvements with them, they must do so without causing any damage to the property.
Negotiating With Your Landlord for Improvements
When it comes to financing commercial improvements, landlords have four primary methods at their disposal. Each method offers a different way to handle the costs associated with upgrading or customizing a commercial space.
Tenant Improvement Allowance (TIA)
In this approach, the landlord provides the tenant with a set amount of money specifically allocated for making improvements to the leased space. The tenant then manages and oversees the work. This allowance is typically calculated based on the square footage of the space and can range depending on various factors such as location and project scope.
Rent Discounts
Some landlords offer rent discounts or even free rent for a specified period as a way to offset the costs of improvements. For instance, a tenant might receive 3 months of free rent during a five-year lease term. The tenant uses these savings to fund the necessary upgrades and handles the improvement process themselves.
Build-out/Building Standard Allowance
Some landlords provide a pre-set package of improvements, such as standard flooring and fixtures. The tenant can select items from this package but must pay for any additional upgrades or customizations beyond what is offered. The landlord generally oversees the scope of these improvements.
Turnkey Projects
With turnkey projects, the tenant submits a detailed improvement plan and cost estimate to the landlord. The landlord then covers all expenses and manages the entire design and renovation process. This option ensures that the tenant's vision is executed as planned without the tenant needing to handle the project management.
These methods allow landlords and tenants to collaborate on creating or upgrading commercial spaces in ways that align with both parties' needs and expectations.
Whether you're negotiating allowances or making tenant improvements, understanding these concepts will help you navigate the lease agreement process smoothly and set up a space that supports a successful and thriving business.
