Navigating Tenant Improvements

To Improve or Not to Improve?

Tenant improvements can be a headache but they are often a necessary evil if a property wants to attract qualified tenants. Here are some useful strategies to consider when offering and funding tenant improvements.

First, let’s define….

The official description of tenant improvements, also known as leasehold improvements, is the made-to-order modifications a property manager makes to a rental space in order to configure the space for the needs of a particular tenant. These changes could include adjustments to or the addition of walls, floorings, ceilings, systems or fixtures. The lease agreement should itemize these enhancements as well as address how they will be completed and who is responsible for payment.

When should you?

It’s a given that almost every potential commercial tenant will ask for changes. Whether these alterations are cosmetic or more complex, the first question back to the tenant should be “Is it necessary to operate your business?” If a prospective tenant “needs” a calming blue wall in order to effectively run their new spa or new carpet because they hate the existing carpet color, you may want to push back and offer them an alternative incentive to sign a lease. However, if a prospective tenant plans to install a room full of automated dishwashing equipment to run a new restaurant, then updating the plumbing is probably a good idea.

Of course, the extent of these enhancements may depend more on your building or the space in question than the prospective tenant. If the building’s existing improvements are older or if the prior uses of the space are different than the intended new uses, these changes could be necessary in order to make the space viable for any tenant.

So you’ve agreed to tenant improvements, now what?

As we’ve said, it’s smart to include all improvement details in the official lease. Here are a few important questions to answer:

  • What are the improvements to be made?
  • Who is making the improvements?
  • Who is paying for the improvements?

Let’s address the details for each question.

The “what” sounds easy but it’s best to be as thorough as possible here. Think about the cost differences between laminate and granite countertops. Offering parameters for all planned improvements will set expectations and keep everyone on the same page. Make sure to list all modifications to be made, no matter how small. It will save you time, money and headaches in the long run.

Both “who” questions are important. First, who is doing the work? As the property manager, you can strongly suggest or even require that preferred vendors complete the work. This is especially important for older properties or for spaces that need special amendments such as commercial plumbing or custom wiring. Choose a vendor like Team Cam that is bonded, insured and can show similar previous completed work. Team Cam will also provide itemized budget estimates as well as detailed drawings, plans and blueprints.

There are several ways to handle the payment question. Most property managers give a tenant an allowance for improvements. The property pays up to the allowance amount. Any extra charges are paid by the tenant. This is a good strategy because the property maintains control over the budget yet you don’t have to micromanage the process. A property manager could also give the tenant a rental discount and let the tenant use the savings to manage their improvements. It would be then up to the tenant to make sure the changes are made on budget. This leaves the control completely in the tenant’s hands. This could be perceived as either good or bad, depending on your management style and your property’s best practices.

Property managers who like to have more control should consider offering a “build out” allowance. In this scenario, the property offers a specific list of improvements for a tenant to choose from. The property is responsible for doing and paying for the work. This is best when only limited or cosmetic alterations are needed. It doesn’t make sense to do this if the space needs custom work. Of course, a property manager could always just agree to manage and pay for the work before the tenant moves in, therefore creating a “turn-key” commercial space ready for opening day. You would have complete control with this strategy but it could get expensive and time-consuming.

Get that lease signed

Tenant improvements are a solid business decision when looking to fill your commercial properties with qualified tenants. If you have questions about how to make tenant improvements work for your property, call Team Cam today for fast reliable customer service and reasonable prices.

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