Tenant Improvement, also known as TI, is essential, especially if you want to ensure that your business or office space is tailored to meet the needs of your brand. Thus tenant improvements allow landlords to make customized modifications as part of the lease agreement, to design the space in a manner that meets the needs of their tenant.
Typically, the landlord pays for the tenant improvement using a tenant improvement (TI) allowance. However, in case the cost of the tenant improvement surfaces the set TI allowance, the tenant will pay the difference. But, did you know that as a tenant, you can negotiate with your tenant build-out company to get what you want? Here’s how you can do it.
Tenant control
In most cases, particularly when the project is huge, tenants will need to supervise the construction. Although this is a big responsibility for the tenant, it’s very beneficial for them since they will choose their contractor, change the details of the project to suit their preferences or budget, and upgrade finishes and materials when needed. Besides, when the tenant chooses to oversee the construction, they will be in control of the timing, which can help to avert holdover fees when vacating from the space.
When you manage the construction process, you get a clear picture of the costs and have better control over the costs. And, in case there are any cost overruns, you will be more willing to cover the extra costs since you will know that you did all you could to manage the cost—instead of being slapped with a bill by your landlord.
At times, both the landlord and tenant can negotiate for a compromise, where each party controls some part of the construction. The landlord can supervise the project, but the tenant receives reports of cost outlays, progress, and suggests an upgrade of materials when needed. At the end of the day, the goal is to ensure that both parties are satisfied with the entire process.
Landlord control
Now, if your landlord doesn’t want to give you total control of the project, you can still negotiate a few important things to get the best out of your TI allowance. Some of these things include:
- Asking your landlord to undertake a competitive bidding process, which should allow sealed bids to be opened in your presence. This will ensure that you get quality work for the best price.
- At times, a landlord can charge you administrative and overhead fees for supervising the construction. However, it’s important to find out more about these charges and if they are industry standards—this should allow you to negotiate for deductions or changes in these fees when applicable.
- Give specific instructions to the landlord outlining the work that you need to be done and materials you want to be used—this will help to prevent unwanted surprises in case of changes or substitutions when the landlord is turning over space to you.
Tips for negotiating with your landlord
The tenant build-outs experts from AFS General agree that most tenants have a challenge when it comes to choosing the right approach for negotiating with their landlords because of several factors like the current market situation, condition of the building, as well as the financial situation of the tenant. However, this shouldn’t deter you from pushing for the deal that you want. Here are a few things to help you during the negotiation process:
- Understand your goals before you start the negotiations—then you can start from the end goal in your mind, and start negotiating from that front.
- Have a clear picture of what you need to accomplish with your space—at the end of the project, the space should support all your business strategies and goals.
- Check whether you have ‘must have’ items or wish-list items. Ensure that you negotiate for your ‘must have’ items before signing the lease.
- Get more details about the total cost for the build-out project—and then leverage your skills to negotiate for the best possible deal with your landlord.
- Find out the size of the improvement project—this should assist you to determine which party to control the tenant build-out project. Generally, the larger the project, you will want more control of the project.
- Use the give-and-take strategy when negotiating with the landlord. Know which areas you are willing to compromise, such as certain features and designs to get the improvement you want.
- Understand the model that your landlord uses for their TI allowance—what motivates your landlord will help you determine what you should negotiate.
- Know how to best utilize the available capital—whether the landlord provides you with a TI allowance or you use your capital, there’s always capital required for a TI project.
Bottom Line
Negotiating to get the best TI deal is not an easy job. You not only need to understand the current market conditions of the real estate market, but you will understand the market conditions of the construction industry, as well as the construction permits, required by your city or county. However, establishing your goals and what you need to improve will help you get what you want. At the end of the day, having a professional commercial real estate advisor to help you negotiate for the best deal can assist you to make the negotiation process easier.
