What is a Tenant Improvement Allowance?
A Tenant Improvement Allowance is a contribution of money towards the build-out cost of your restaurant.
Often referred to as ( TIA or TI ) in a letter of intent or lease agreement, the tenant improvement allowance is typically a dollar amount multiplied by the square footage or the rental space’s size.
“Landlord shall provide a Tenant Improvement Allowance (“TI Allowance”) in the amount of ($35.00 per square foot) for the construction of tenant’s improvements in the Premises.”
How much Tenant Improvement Allowance can you expect?
Many factors determine if a landlord will provide an improvement allowance.
The credit strength of the tenant
Your credit strength is the most critical consideration for the landlord.
The landlord will factor the TI allowance into their return on investment.
The landlord needs to recoup its investment over a certain number of years. The less credit or operating history of the tenant, the more risk they will not be repaid.
Demand in the marketplace
In a scorching market with multiple offers, many landlords will offer the space in as-is condition and refuse to provide a tenant improvement allowance.
In a prolonged real estate market, a desperate landlord may provide a substantial tenant improvement allowance to secure a tenant.
Condition of property
Developers often offer a substantial improvement allowance for new construction projects. They have factored the cost of the contribution to the overall cost of the project and projected rents.
Warning. An improvement allowance of $30.00 per square foot may seem very generous, but the devil is in the details.
Why Restaurateurs Misunderstand Tenant Improvement Allowances
Be sure to understand the landlord’s scope of work before signing a lease.
Developers often provide a “dark shell” and the tenant improvement allowance may only cover your cost to complete work is provided in an existing property such as bringing the utilities to your space or providing concrete floors.
Many first time restaurateurs do not budget enough money for their construction based on the landlord’s contribution to a TI allowance.
For example, if the total cost to build out the restaurant is $300,000.00, and the landlord is contributing $60,000.00, the restaurateur will often only budget $260,000.00.
The lack of budget can create a severe cash crunch or halt construction.
A TI allowance is not a cash advance. The landlord agrees to reimburse the tenant a certain amount of money upon completion.
Example of Tenant Improvement Allowance in Lease Agreement
Provided (a) Tenant has paid landlord all amounts owing to the landlord pursuant to this Lease as of the date reimbursement is to be made,
(b) Tenant is not otherwise in default of any other term or condition of this Lease as of such date, and no event has occurred which, given the passage of time or the giving of notice or both, could be declared a default under this Lease,
(c) the Premises are lien-free and sixty (60) days have expired from the recordation of the Notice of Completion, and
(d) The landlord has approved, in advance, the scope of work and terms of any negotiated contract for Tenant’s Work, then within thirty (30) business days following the month next following the date after requirements 1 through 8 below are satisfied, the landlord will reimburse to the tenant the lesser of
(i) the total amount of out-of-pocket costs paid by Tenant for Tenant’s Work (specifically excluding floor coverings, signs, movable fixtures, permit fees and plan review fees), and
(ii) Twenty Dollars ($20.00) per square foot of the Floor Area of the Premises (“Tenant Improvement Allowance”):
As you can see, there are many conditions to be met and a minimum of 90 days after completion of Tenants’ work before the landlord is required to reimburse you the allowance.
How to negotiate a TI Allowance
Like most things in life, the more experience you have the better prepared you will be to succeed.
If you are negotiating a restaurant lease experience matters. The right team members can mean the difference between failure and success. Your team should include:
- Restaurant real estate advisor experienced with both lease agreements and restaurant construction.
- An attorney specializing in commercial lease agreements.
- The architect is knowledgeable about restaurant permitting and design needs.
- A contractor experienced in restaurant construction.