Everything You Need to Know About Tenant Improvement
A functional and attractive physical space is essential to your business. You need your space to emphasize your brand, feel unique, and meet your company’s needs as you expand and evolve.
Virtually every company needs tenant improvement services at some point, whether it’s for a small repair or a larger commercial remodel. If you want to make your commercial space function at its best for your employees and customers, here’s what you need to know.
What is tenant improvement?
Tenant improvements are physical alterations to rented spaces on the tenant’s benefit. These include enhancements like creating an office out of unfinished floor space, installing energy efficient lighting, building a dramatic staircase between floors, adding new electrical outlets, or even a complete interior renovation.
Tenant improvements generally revert to the landlord’s ownership once the lease ends, even if the tenant paid for the change. However, tenants may be able to keep some improvements if they can remove them without damaging the rented property.
Accountants often refer to tenant improvements as “leasehold improvements.”
Types of tenant improvement
There are many different ways to improve your rented commercial space. Here are a few common types of tenant improvements:
- Constructing interior walls and ceilings
- Changing the flooring
- Building cabinetry
- Adding electrical lines and plumbing
- Installing air conditioning
- Adding fire protection measures
- Improving security
Who pays for tenant improvements?
Some leasehold improvements are fully or partially paid for by the landlord, while others are paid for by the tenant. In most cases, costs are shared. There are several common setups for paying for tenant improvements:
Tenant improvement allowance (TIA)
The tenant improvement allowance is the amount of money a landlord is willing to spend on leasehold improvements for you. This amount is usually stated in the lease and may be either a fixed sum or a per-foot amount.
If the improvements cost more than the TIA, you’ll have to pay the amount that goes over. It’s a good idea for tenants to supervise improvements or at least negotiate some control over how the TIA is spent to ensure costs aren’t higher than necessary.
Note that the IRS might consider a TIA taxable income if the landlord directly gives you the money.
Building Standard Allowance (BSA)
Many landlords offer a BSA, or package of specified leasehold improvements, that they are willing to pay for their tenants. With a BSA, the landlord is responsible for any cost overruns rather than the tenant.
If your business requires any tenant services that aren’t included in the BSA, you’ll need to pay for them yourself. However, you may be able to get a rebate on rent if your business asks the landlord for less than the allowance in the BIA.
A turnkey job is a situation where the landlord pays all of the costs for tenant improvements, usually before the tenant moves in. The landlord is in complete control of the work.
Turnkey jobs allow you to avoid paying additional money to customize your space. However, they may lead to poorer quality work if the landlord is willing to sacrifice quality to save money.
If you choose to go the turnkey route to improve your business, consider adding a final clause to your lease that includes final approval of the turnkey job. This will protect you from poor workmanship or materials.
Some landlords give their tenants reduced or even free rent while leasehold improvement expenses rack up. The tenant typically still pays for any extra cost and controls the project.
Keep in mind that the landlord can still dramatically raise the rent when the lease expires. Make sure your lease is longterm before committing to any costly improvements.
Create the best commercial space for your business
The specific tenant improvements you choose and how you choose to have them done depend on the unique needs of your business. You may want more control over the quality of your improvements, or you may only need a couple of minor improvements that you’re willing to entrust to your landlord.
CPM offers comprehensive tenant services, including facility maintenance, services, and repairs. Our highly skilled technicians offer years of experience to help your business meet its lease improvement needs.