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When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (aka TI Allowance or TIA) to build out the space custom to your needs. The tenant improvement allowance is the amount of money that landlords are willing to spend or give to a tenant to renovate an office space in the landlords office building. It’s typically offered as a total dollar amount or a dollar per square foot and negotiated up front. The goal of the tenant should be to negotiate enough tenant improvement allowance to cover most (if not all) of the total construction costs. For example say you like a space, however it would be even more perfect if you could have 2 more offices and a break area with plumbing. During the negotiation process you would want to ask for an allowance (MONEY) to build out the space. The amount is typically negotiated and contingent on your credit, length of lease term. rental rate, market you are in, etc… How Do You Get It?It’s handled differently depending on the type and size of commercial space you’re renting. Landlord ControlledAt lease signing you have to write a check for any construction costs that exceed what the TIA will cover. Then the landlord will pay the contractors and all other vendors directly for all construction costs. In most cases with smaller office space (less than 10,000 sf) if the landlord has a construction manager they will want to hire the contractors and oversee the process. This is because they know the building well, have experience with office space build-outs, and have relationships with a lot of different contractors which they can leverage to keep costs to a minimum. When a landlord manages the construction process it’s known as a “Turnkey Build-out”. Having the landlord manage this saves you time however their interests may not line up with yours. They may not seek as many competitive bids or have any incentive to cut costs, and if you make changes after the architectural plans have been approved you will be charged change order fees. Also, if the construction costs end up being less than the TIA you will not receive the difference. For example if the TIA was $25 sf and the construction costs ended up being $20 sf you will lose the $5 sf. If the landlord insists on managing the construction process then make sure to request that you have the ability to be a part of the general contractor approval process and that you are given a detailed work letter that outlines the construction process from beginning to end. Tenant ControlledThe time frame of payment of the TIA is determined during lease contract negotiations. It will either be paid out after the construction has been completed and landlord receives all the receipts, OR be paid in cash at lease signing. You could also negotiate to have it paid a progress payments as work is completed. For larger spaces you or a project manager you hire would want to manage the construction process. This will give you more control over the costs, timing, and details of the project. In addition you have the power to select the contractor that you want. What is the Average Tenant Improvement Allowance?The tenant improvement allowance you receive will depend on a number of factors such as the market, lease term, your credit, type of space, etc. In general if the space is brand new (aka in shell condition) Landlords might offer $25 to $40 sf. If the space is 2nd generation (has been leased occupied before) landlords may offer $20 or less. At the end of the day it’s important for the tenant to have a general idea of how much the construction will cost. During the negotiating process it would be a good idea to get at least 1 or 2 preliminary construction bids. You don’t want to accept a tenant improvement allowance of $15 only to find out that the total costs will be $25 sf. If you are not able to negotiate enough tenant improvement allowance to cover the total costs then you could ask for additional tenant improvement allowance to be amortized. How Do you Calculate the TI Allowance?The tenant improvement allowance is typically given based on the rental square feet (RSF) of the commercial space. To calculate the Tenant improvement allowance simply multiply the RSF by the TI allowance you have negotiated. For example if the square footage is 5,000 RSF and the tenant improvement allowance is $20 RSF. 5,000 x $20 = $100,000 What Does it Cover?The tenant improvement allowance typically covers architectural, engineering and space planning fees as well as the total hard construction costs. In addition, if negotiated such allowance may be used at Tenant’s option for the cost of consultants, legal fees, Tenant Improvement Allowance Must Be NegotiatedAgain the tenant improvement allowance is a negotiated amount that the landlord will spend to customize the space to your particular needs and is typically quoted in dollars per square feet. They won’t always agree to pay for 100% of your ideal layout….especially if you are asking for hardwood floors, granite countertops, and other above standard finishes. Again landlords won’t just give you a tenant improvement allowance. You must know the market and negotiate well. When evaluating spaces make sure to take note of your needs such as the ideal # of offices, break area, conference rooms, etc. If you need a more customized layout make sure you ask for it before signing a commercial lease. You want to compare how much allowance each landlord is willing to give. Ideally you want them to pay for 100% of your build-out costs, however it all depends on your credit, length of lease term, the rental rate, and on whether it’s a tenant or landlord market. Who Gets To Keep the Improvements?The landlord is giving you a tenant allowance in return for your tenancy, and you may end up spending additional money out of your own pocket above and beyond the TIA however all the leasehold improvements will convey with the landlord. Tenant improvements-allowance. Example of TIA in Commercial Lease AgreementConstruction Allowance. Provided Tenant is not in default on the lease contract, Landlord agrees to give up to $300,680.00 (the “Construction Allowance”) to the cost of Landlord’s Work. Any costs of finishing Landlord’s Work above the Construction Allowance shall be Excess Costs (as defined below). Tenant shall pay Landlord a construction management fee equal to 4% of the cost of Landlord’s Work to compensate for its construction management services in connection with Landlord’s Work. Landlord shall deduct such fee from the Construction Allowance. The Construction Allowance is available for Tenant’s use from the date of this Lease through the last day of the twelfth (12th) full calendar month following the Commencement Date, after which Tenants right to same will expire and be of no further force and effect. 1.3 Additional Allowance. If the total construction costs exceed the Construction Allowance, Tenant may, before Landlord’s Work has been completed, ask that the Landlord increase the Construction Allowance by the amount of the excess, up to $60,420.00 (the actual amount of the increase being the “Additional Allowance”). If Tenant asks for the increase in the Construction Allowance, then Landlord shall raise the Construction Allowance by the amount of the Additional Allowance. Landlord shall prepare, and Landlord and Tenant shall promptly execute an amendment to the Lease increasing the Base Rent by the amount needed to amortize the Additional Allowance over the Lease Term at 9% per annum, with the increased payments starting with the first Base Rent payment due under this Lease. via Blogger What is a Tenant Improvement Allowance? When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (aka TI Allowance or TIA) to build out the space custom to your needs. The tenant improvement allowance is the amount of money that landlords are willing to spend or give to a tenant to renovate an office space in the landlords office building. It’s typically offered as a total dollar amount or a dollar per square foot and negotiated up front. The goal of the tenant should be to negotiate enough tenant improvement allowance to cover most (if not all) of the total construction costs. For example say you like a space, however it would be even more perfect if you could have 2 more offices and a break area with plumbing. During the negotiation process you would want to ask for an allowance (MONEY) to build out the space. The amount is typically negotiated and contingent on your credit, length of lease term. rental rate, market you are in, etc… How Do You Get It?It’s handled differently depending on the type and size of commercial space you’re renting. Landlord ControlledAt lease signing you have to write a check for any construction costs that exceed what the TIA will cover. Then the landlord will pay the contractors and all other vendors directly for all construction costs. In most cases with smaller office space (less than 10,000 sf) if the landlord has a construction manager they will want to hire the contractors and oversee the process. This is because they know the building well, have experience with office space build-outs, and have relationships with a lot of different contractors which they can leverage to keep costs to a minimum. When a landlord manages the construction process it’s known as a “Turnkey Build-out”. Having the landlord manage this saves you time however their interests may not line up with yours. They may not seek as many competitive bids or have any incentive to cut costs, and if you make changes after the architectural plans have been approved you will be charged change order fees. Also, if the construction costs end up being less than the TIA you will not receive the difference. For example if the TIA was $25 sf and the construction costs ended up being $20 sf you will lose the $5 sf. If the landlord insists on managing the construction process then make sure to request that you have the ability to be a part of the general contractor approval process and that you are given a detailed work letter that outlines the construction process from beginning to end. Tenant ControlledThe time frame of payment of the TIA is determined during lease contract negotiations. It will either be paid out after the construction has been completed and landlord receives all the receipts, OR be paid in cash at lease signing. You could also negotiate to have it paid a progress payments as work is completed. For larger spaces you or a project manager you hire would want to manage the construction process. This will give you more control over the costs, timing, and details of the project. In addition you have the power to select the contractor that you want. What is the Average Tenant Improvement Allowance?The tenant improvement allowance you receive will depend on a number of factors such as the market, lease term, your credit, type of space, etc. In general if the space is brand new (aka in shell condition) Landlords might offer $25 to $40 sf. If the space is 2nd generation (has been leased occupied before) landlords may offer $20 or less. At the end of the day it’s important for the tenant to have a general idea of how much the construction will cost. During the negotiating process it would be a good idea to get at least 1 or 2 preliminary construction bids. You don’t want to accept a tenant improvement allowance of $15 only to find out that the total costs will be $25 sf. If you are not able to negotiate enough tenant improvement allowance to cover the total costs then you could ask for additional tenant improvement allowance to be amortized. How Do you Calculate the TI Allowance?The tenant improvement allowance is typically given based on the rental square feet (RSF) of the commercial space. To calculate the Tenant improvement allowance simply multiply the RSF by the TI allowance you have negotiated. For example if the square footage is 5,000 RSF and the tenant improvement allowance is $20 RSF. 5,000 x $20 = $100,000 What Does it Cover?The tenant improvement allowance typically covers architectural, engineering and space planning fees as well as the total hard construction costs. In addition, if negotiated such allowance may be used at Tenant’s option for the cost of consultants, legal fees, Tenant Improvement Allowance Must Be NegotiatedAgain the tenant improvement allowance is a negotiated amount that the landlord will spend to customize the space to your particular needs and is typically quoted in dollars per square feet. They won’t always agree to pay for 100% of your ideal layout….especially if you are asking for hardwood floors, granite countertops, and other above standard finishes. Again landlords won’t just give you a tenant improvement allowance. You must know the market and negotiate well. When evaluating spaces make sure to take note of your needs such as the ideal # of offices, break area, conference rooms, etc. If you need a more customized layout make sure you ask for it before signing a commercial lease. You want to compare how much allowance each landlord is willing to give. Ideally you want them to pay for 100% of your build-out costs, however it all depends on your credit, length of lease term, the rental rate, and on whether it’s a tenant or landlord market. Who Gets To Keep the Improvements?The landlord is giving you a tenant allowance in return for your tenancy, and you may end up spending additional money out of your own pocket above and beyond the TIA however all the leasehold improvements will convey with the landlord. Tenant improvements-allowance. Example of TIA in Commercial Lease AgreementConstruction Allowance. Provided Tenant is not in default on the lease contract, Landlord agrees to give up to $300,680.00 (the “Construction Allowance”) to the cost of Landlord’s Work. Any costs of finishing Landlord’s Work above the Construction Allowance shall be Excess Costs (as defined below). Tenant shall pay Landlord a construction management fee equal to 4% of the cost of Landlord’s Work to compensate for its construction management services in connection with Landlord’s Work. Landlord shall deduct such fee from the Construction Allowance. The Construction Allowance is available for Tenant’s use from the date of this Lease through the last day of the twelfth (12th) full calendar month following the Commencement Date, after which Tenants right to same will expire and be of no further force and effect. 1.3 Additional Allowance. If the total construction costs exceed the Construction Allowance, Tenant may, before Landlord’s Work has been completed, ask that the Landlord increase the Construction Allowance by the amount of the excess, up to $60,420.00 (the actual amount of the increase being the “Additional Allowance”). If Tenant asks for the increase in the Construction Allowance, then Landlord shall raise the Construction Allowance by the amount of the Additional Allowance. Landlord shall prepare, and Landlord and Tenant shall promptly execute an amendment to the Lease increasing the Base Rent by the amount needed to amortize the Additional Allowance over the Lease Term at 9% per annum, with the increased payments starting with the first Base Rent payment due under this Lease. via Tumblr What is a Tenant Improvement Allowance?
from Twitter https://twitter.com/AustinTenantAdv via Blogger Dan Saltman thanks for following me on Twitter! https://t.co/bYLuG0SNPi Renegotiating a commercial lease is possible if your business or the market changes and you are unsatisfied with your current situation. There are no guarantees that the landlord will agree to your requests however you will never know if you don’t ask. Business climates and markets can change which at some time or another will require you to make some changes to what you are doing. You have many things to consider and one of those could be making changes to your commercial lease. You might be in a situation where you need to try and renegotiate a commercial lease with your landlord. For example:
It doesn’t matter if you are only in year 1 or 3 of a 5 year lease, contracts can be renegotiated, however knowing how to renegotiate a commercial lease is key to your success. How to Renegotiate a Commercial Lease
If you have any questions or need help renegotiating a commercial lease in Austin Tx give us a call.
via Tumblr Can You Renegotiate a Commercial Lease? Renegotiating a commercial lease is possible if your business or the market changes and you are unsatisfied with your current situation. There are no guarantees that the landlord will agree to your requests however you will never know if you don’t ask. Business climates and markets can change which at some time or another will require you to make some changes to what you are doing. You have many things to consider and one of those could be making changes to your commercial lease. You might be in a situation where you need to try and renegotiate a commercial lease with your landlord. For example:
It doesn’t matter if you are only in year 1 or 3 of a 5 year lease, contracts can be renegotiated, however knowing how to renegotiate a commercial lease is key to your success. How to Renegotiate a Commercial Lease
If you have any questions or need help renegotiating a commercial lease in Austin Tx give us a call.
via Blogger Can You Renegotiate a Commercial Lease?
from Twitter https://twitter.com/AustinTenantAdv via Blogger The Manual thanks for following me on Twitter! https://t.co/vTui7mOzwz Rent abatement in a commercial lease means that the tenant does NOT have to pay rent for a certain time period during one of the following scenarios:
Rent abatement is a negotiable item in a commercial lease that must not be overlooked. To ensure that you negotiate rent abatement effectively it’s important that you consult with a real estate attorney and your commercial real estate agent because once the terms are finalized the clauses will be outlined in the lease contract and set in stone. Whatever happens after that will all be handled according to how the language is set forth in the contract. Rent Abatement During Initial Tenant ImprovementsSometimes when you lease commercial real estate (e.g. retail space) the space is either in shell condition (brand new) or is 2nd generation space that needs a lot reconfiguration and improvements. Depending on the size of space, existing condition, and if a construction permit is required it could take anywhere from a few weeks to 6-9 months for any improvements to be completed. It would not make sense to pay rent during the construction period so it’s important that you negotiate to have rental payments not start until substantial completion of all the tenant improvements. Rent Abatement as a ConcessionWhen negotiating commercial leases you ask for all kinds of concessions such as tenant improvement allowance, lower rate, expansion options, etc. Rent abatement (aka Free Rent) is also something that you can negotiate for. Investors that own buildings can have different investment objectives. Some prefer to cash flow a property and more likely to offer a lower rate. Others maybe trying to sell or refinance the building and more likely to offer free rent instead of a lower rate. You see the rents the landlords collects on a commercial property dictate the market value. The lower the rates the lower the potential value. It’s important to understand the investment objective of each building owner. Anytime you can negotiate to get rent abatement in addition to a tenant improvement allowance and other concessions you will be better off in the long run. What happens if you get abated rent and default on the lease?Getting rent abatement can help you lower your overall monthly rent costs or help you pay for tenant improvements that are above and beyond what the landlord is willing to give an allowance for. However keep in mind in most cases if you default or don’t fulfill the entire lease term you will be required to pay back all or a portion of any free rent given. This is also known as a clawback provision. During negotiations if a landlord is going to demand a clawback in the event you default or break the lease try to negotiate to where you only pay for unamortized free rent. For example if you were given $12,000 in rent abatement and the lease term was 3 years it would be amortized over 36 months ($4,000 per year or $333 per month). If you broke the lease after the 12th month you would have to pay back the rent abatement for the remaining 24 months or $8,000……..which is the unamortized portion. Rent abatement on the base rent and nnn or just the base rent?Rent abatement is negotiable. If the landlord agrees to it they would rather just give you free base rent and you pay the operating expenses (taxes, insurance, maintenance). That way they are at least covering their operating costs. As a tenant you would rather receive free gross rent (not pay base rent or the operating expenses). Do your best to negotiate this. In the end free base rent is better than nothing. Rent Abatement Due to Commercial Space Being UntenantableIn most commercial leases there is a Casualty clause (like in the example below) that talks about rent abatement in the event the tenant is not able to occupy or access a space because of fire or other casualty. It could be a partial rent abatement or full abatement depending on the scope of damage and what portion of the space the tenant has access to. Potential scenarios could be fire or flooding, natural disasters such as earthquakes, tornadoes, and hurricanes, or condemnation by the city or government. Rationale Behind Rent AbatementCommercial property owners typically have business liability insurance on their building. The insurance would cover any damages to the property in addition to the abatement of rent. Personal property of a tenant that is damaged would be covered by the tenant’s own insurance. It’s a good idea for the tenant to have business interruption insurance as well to cover any potential financial losses. Since both parties have insurance – the tenant on personal property and the landlord on the property – the abatement puts the lease contract between landlord and tenant on hold until the property can be occupied again. How Long Does the Abatement of Rent Continue?The abatement last from the date of the casualty until the date the landlord has substantially completed the repairs and restoration. Rather than just let tenants out of a commercial lease when a casualty occurs Landlords want the ability to try to cure the defects first within a certain time period (which is negotiated). The restoration could take weeks or months however at some point if the insurance company or contractors determine that the repairs will take longer than the negotiated time frame then the tenant or landlord could terminate the lease. Tenants Must Negotiate to Not Let Rent Abatement Be NullifiedTenants need to negotiate to require that no matter who caused the casualty the abatement provision will still exist. For example some landlords have language in the lease that says if the tenant or tenants employee causes the casualty then the abatement clause is nullified and the tenant must continue paying rent while repairs and restoration is being conducted. Commercial rent is income for a landlord which is paid for by tenants. Part of the rent a tenant pays includes the building insurance coverage. If the abatement clause is nullified then the landlord is able to double dip by getting rent from the tenant and file the claim with their insurance company. Sample Rent Abatement Clause in Commercial LeaseTo see an example of a rent abatement clause in a commercial real estate lease or if you are looking for commercial space for rent in Austin Tx feel free to give us a call at 512-861-0525
via Blogger What is Rent Abatement in Commercial Leases & How To Get It? Rent abatement in a commercial lease means that the tenant does NOT have to pay rent for a certain time period during one of the following scenarios:
Rent abatement is a negotiable item in a commercial lease that must not be overlooked. To ensure that you negotiate rent abatement effectively it’s important that you consult with a real estate attorney and your commercial real estate agent because once the terms are finalized the clauses will be outlined in the lease contract and set in stone. Whatever happens after that will all be handled according to how the language is set forth in the contract. Rent Abatement During Initial Tenant ImprovementsSometimes when you lease commercial real estate (e.g. retail space) the space is either in shell condition (brand new) or is 2nd generation space that needs a lot reconfiguration and improvements. Depending on the size of space, existing condition, and if a construction permit is required it could take anywhere from a few weeks to 6-9 months for any improvements to be completed. It would not make sense to pay rent during the construction period so it’s important that you negotiate to have rental payments not start until substantial completion of all the tenant improvements. Rent Abatement as a ConcessionWhen negotiating commercial leases you ask for all kinds of concessions such as tenant improvement allowance, lower rate, expansion options, etc. Rent abatement (aka Free Rent) is also something that you can negotiate for. Investors that own buildings can have different investment objectives. Some prefer to cash flow a property and more likely to offer a lower rate. Others maybe trying to sell or refinance the building and more likely to offer free rent instead of a lower rate. You see the rents the landlords collects on a commercial property dictate the market value. The lower the rates the lower the potential value. It’s important to understand the investment objective of each building owner. Anytime you can negotiate to get rent abatement in addition to a tenant improvement allowance and other concessions you will be better off in the long run. What happens if you get abated rent and default on the lease?Getting rent abatement can help you lower your overall monthly rent costs or help you pay for tenant improvements that are above and beyond what the landlord is willing to give an allowance for. However keep in mind in most cases if you default or don’t fulfill the entire lease term you will be required to pay back all or a portion of any free rent given. This is also known as a clawback provision. During negotiations if a landlord is going to demand a clawback in the event you default or break the lease try to negotiate to where you only pay for unamortized free rent. For example if you were given $12,000 in rent abatement and the lease term was 3 years it would be amortized over 36 months ($4,000 per year or $333 per month). If you broke the lease after the 12th month you would have to pay back the rent abatement for the remaining 24 months or $8,000……..which is the unamortized portion. Rent abatement on the base rent and nnn or just the base rent?Rent abatement is negotiable. If the landlord agrees to it they would rather just give you free base rent and you pay the operating expenses (taxes, insurance, maintenance). That way they are at least covering their operating costs. As a tenant you would rather receive free gross rent (not pay base rent or the operating expenses). Do your best to negotiate this. In the end free base rent is better than nothing. Rent Abatement Due to Commercial Space Being UntenantableIn most commercial leases there is a Casualty clause (like in the example below) that talks about rent abatement in the event the tenant is not able to occupy or access a space because of fire or other casualty. It could be a partial rent abatement or full abatement depending on the scope of damage and what portion of the space the tenant has access to. Potential scenarios could be fire or flooding, natural disasters such as earthquakes, tornadoes, and hurricanes, or condemnation by the city or government. Rationale Behind Rent AbatementCommercial property owners typically have business liability insurance on their building. The insurance would cover any damages to the property in addition to the abatement of rent. Personal property of a tenant that is damaged would be covered by the tenant’s own insurance. It’s a good idea for the tenant to have business interruption insurance as well to cover any potential financial losses. Since both parties have insurance – the tenant on personal property and the landlord on the property – the abatement puts the lease contract between landlord and tenant on hold until the property can be occupied again. How Long Does the Abatement of Rent Continue?The abatement last from the date of the casualty until the date the landlord has substantially completed the repairs and restoration. Rather than just let tenants out of a commercial lease when a casualty occurs Landlords want the ability to try to cure the defects first within a certain time period (which is negotiated). The restoration could take weeks or months however at some point if the insurance company or contractors determine that the repairs will take longer than the negotiated time frame then the tenant or landlord could terminate the lease. Tenants Must Negotiate to Not Let Rent Abatement Be NullifiedTenants need to negotiate to require that no matter who caused the casualty the abatement provision will still exist. For example some landlords have language in the lease that says if the tenant or tenants employee causes the casualty then the abatement clause is nullified and the tenant must continue paying rent while repairs and restoration is being conducted. Commercial rent is income for a landlord which is paid for by tenants. Part of the rent a tenant pays includes the building insurance coverage. If the abatement clause is nullified then the landlord is able to double dip by getting rent from the tenant and file the claim with their insurance company. Sample Rent Abatement Clause in Commercial LeaseTo see an example of a rent abatement clause in a commercial real estate lease or if you are looking for commercial space for rent in Austin Tx feel free to give us a call at 512-861-0525
via Tumblr What is Rent Abatement in Commercial Leases & How To Get It?
from Twitter https://twitter.com/AustinTenantAdv via Blogger Josh Daspit thanks for following me on Twitter! https://t.co/Qoncn6tern |
AuthorThe experienced commercial realtors at Austin Tenant Advisors specialize in representing the best interests of buyers and tenants in the Search, Selection, Negotiation, and Occupancy of Office, Retail, Industrial & Warehouse Space for lease, rent, or sale in and around Travis, Williamson, Hays, Bastrop, & Burnet Counties, which are the 5 largest counties in Central Texas. We serve the surrounding cities such as Pflugerville, Round Rock, Georgetown, Leander, Cedar Park, Lakeway, Bee Cave, Sunset Valley, Dripping Springs, Buda, Kyle, San Marcos, Burnet, Marble Falls, and more. Archives
November 2020
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