Print/Save as PDF
In our latest Trepp 101 blog, we seek to define tenant improvement allowances, how it impacts the rental rate and how tenants and landlords can leverage Trepp data to negotiate TI allowances in accordance with benchmark levels across property types and geographical regions. A tenant improvement allowance is a sum of money provided by the landlord to pay for improvements to the leased space. The specific amount of this allowance is negotiated during the origination of the lease, along with a detailed outline of what it can be spent on. How is a Tenant Improvement Allowance Calculated?
Tenant Improvement Allowances are an essential component of leasing agreements in Commercial Real Estate (CRE) and in some cases just as important as rental rates or term lengths.What is a Tenant Improvement Allowance?
Landlords typically permit tenant improvement allowances for construction costs that improve the long-term value of the property. This can include hard costs such as walling, flooring, HVAC, electrical costs, plumbing, etc. Costs that may not be included under typical TI allowances are items such as furniture, electronics, and moving costs.
Tenant improvement allowances are given based on the rental square feet of the commercial space. To calculate the Tenant improvement allowance, you must multiply the rental square feet by the TI allowance that was negotiated. For example, if the square footage is 2,000 RSF and the tenant improvement allowance is $10 RSF, 2,000 x $10 = $20,000.
How do Tenant Improvement Allowances Affect Rental Rates?
Tenant improvement allowances can have a sizable effect on the rental rate of a property. When negotiating a lease, tenants should determine whether the rental rate on a property accounts for any potential TI allowance, because any negotiation of TI allowance that occurs after the rental rate is settled will increase the base rent owed on the commercial property.
For example, if the Landlord has agreed to a TI allowance of $150,000 and the initial lease term is 5-years on a 2,000 square foot lease, $15 per square foot would be added to the quoted rent [(150,000/5)/2000]. If rent was originally quoted at $18 per square foot, with the TI allowance added, rent would now be $33 per square foot.
Additionally, most landlords that offer TI allowances will not oversee the improvements to the space. Turn-key agreements, where the landlord is the sole overseer of the construction process and delivers the completed space to the tenant, has become a rare occurrence in CRE. Tenants are responsible for finding affordable contractors and keeping costs within the bounds of the TI allowance. Landlords are not liable to fund any costs to construction projects that exceed the TI allowance.
Can Current Economic Conditions Affect TI Allowances?
According to Globe Street, tenant improvement projects are currently being impacted significantly by supply chain constraints and labor shortages. "On average, these projects, which are typically six months, are now taking three months longer to complete, complicating landlord-tenant agreements on the construction project and commencement of the rent.' In the current environment, tenants are asking for longer build out periods and forms of rent abatement.
In an interview with REBusinessOnline, a Texas tenant rep described the conditions in regards to restaurant construction projects. "The average cost of building out a restaurant space from shell condition in Houston is up 40 percent from pre-pandemic levels. As tenant reps, we’re requesting more in TI allowances, but there’s only so much landlords can give."
How to Leverage Trepp Data to Adequately Negotiate TI Allowances
Trepp is home to a vast amount of property-level financial data that tenant representatives and landlords can use to leverage against TI proposals in lease negotiations. In our Trepploan platform, users can search any property within the Trepp dataset and obtain property financial statements detailing TI allowance amount, amount per square foot, and TI amount as a percentage of revenue generated by the property. Using the TreppLoan comps feature, users can compare the property of the subject with similar properties in the area to determine an adequate TI allowance in lease negotiations.
Trepp has also partnered with Compstak to provide benchmark TI per square foot rates at both county and metro area level. Below, we’ve included a snapshot of tenant improvement rates and rental rates across all property types, for some of the largest metropolitan areas in the country.
Trepp and Compstak TI rates per sq/ft across Metro Areas
TI allowances are a vital aspect of lease negotiations and understanding standard TI allowance rates across the CRE market can help maximize value for both tenants and landlords. For full access to Trepp datasets on tenant improvement allowances and rental rates, request a demo for TreppLoan Today.
Trepp is closely monitoring cap rates amid recent market volatility. If you are looking for income and expense data to stay on top of cap rate changes, request more information here.
Questions or comments? Send Trepp a note toinfo@trepp.com. If you are looking to see our CRE solutions in action, click here.
Disclaimer: The information provided is based on information generally available to the public from sources believed to be reliable.
