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.
The tenant or tenant’s restaurant real estate advisor will request a tenant improvement allowance in the letter of intent.
“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.
These include:
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.
Illustrate the business model or partnership model proposed and explain the viability of the proposed model on restaurant operations.
4) Explain the value addition/proposition that your participation will bring to BIH Icon Building and the Park.
5) Explain how you intend to manage or operate the restaurant operations and agreement models that you are willing to enter into.
I’m preparing Expression of Interest to lease a restaurant.Please help me with the above questions.
Thank you
Hi Mark, I’m contacting you in regards to a building we are renovating here in Amity Oregon heart of the Willamette Valley wine region. I’m not sure if this is something you do or not. I”m looking for a restaurateur to occupy the space of 2000sq/ft in this 1905 brick building. Currently, the space is gutted out ready for a tenant. Looking forward to hearing back from you if this is something you do.
Respectfully,
Dave
Hi Dave. I referred a broker to you a while back. Please let me know if you met with them.If you still need help let me know.
Hi Mark,
I’m glad I came across your page. I am in the process of doing a letter of intent with my broker to open a quick casual noodle restaurant. The place is a second generation location so it already has a hood, grease trap, sink, walk in fridge men/women restroom. I would like to know if I need anything else in terms of building permit beside the basic appliances, stove, freezer, furniture’s seating. This location has been closed for a little over a year. It was previously a Japanese teriyaki restaurant.
If the restaurant has been closed for more than a year there is a good chance you will need to go through full plan review with city and health department. I would try to have health department take a look and find out what they will require. Negotiate enough free rent to get your permits and construction done.
Thank you for providing this information. It was so helpful.
Hi Mark,
I really like your blog for its rich content and information for all newbie restaurateurs. Thank you for putting up this information. It is very helpful.
I’m trying to do a forecast. Is there a place where I could get industry averages for things like – a typical rent free period for a site, security deposits, lease length and rent escalation?
It’s very market driven and based on supply and demand. I would just try to negotiate a lease that makes sense for your business.
Hi Mark,
I am in the process of negotiating the TIA. The total build out cost is around $160k. How much should I be negotiating for the landlord to help out? I am not sure what is the reasonable rate they can offer. It’s for a 1,400 sqft restaurant. Many thanks in advance for your help and l am looking forward to hearing from you!
I sent you direct email. Let me know if you need additional info.
Best
Mark
I am currently in the same boat as Amanda. Can you send me additional info as well? Thank you!
Very helpful information – thank you for your time in putting it out there. I’m looking for a space for my new food delivery concept and the real estate aspect can be extremely daunting but this helps a lot.
Thanks again!
Hi Mark,
I am in the process of negotiating the TIA. The total cost for buildout is around 120K. How much should the landlord put towards tenant improvements? Right now their offer is 50K plus a free patio area. I also want to have them reimburse me every 1/3 of the job, instead of everything at the end since we don’t have enough money to do it all ourselves without being reimbursed throughout the project. what do you think about that? I planned on telling them that if they don’t spend all of the TIA to put it towards rent, is that wise?
Hi Mark,
I am still in negotiating the TIA before signing the 10 years term lease. The building is 4000 square foot, was a Pizza restaurant before and it closed down for 2 years. The landlord had spending some money to remodel the building, but it does not have grease trap, walk-in cooler, hood is not working, and the restrooms are not code to ADA.
My plan is to convert it to a Teppanyaki(Hibachi) Japanese restaurant with a sushi bar. The total cost for permanent investment (not removable) in the building is about $355K. The question is how much do I ask for TI reimbursement? Please let me know ASAP. Thanks!
I would try for $40-$50.00 per square foot or a combination of TI money and additional free or half rent to offset some of the costs for improvements that should stay if you were to move.
Hi I am looking at a 3000 square foot “white box” with no bathrooms and no utilities for a bar and restaurant. Build out with permanent kitchen appliances will be about 400k and LL is offering 125k in TIA. Area is about 5 years shy of its potential gentrification model. Is LL being reasonable?
It depends on the cost to bring utilities to the space. Are you responsible for connecting to sewer lines and bringing water into the space or just electric and gas? I would ask landlord for a shell letter describing everything they will provide in the shell and then price out the cost prior to accepting. $125,000 sounds reasonable depending on what landlord is actually providing.
Hi Mark,
I’m just entering negotiation for a 2700 sq. ft. space in an office-type environment. I’m not opening a restaurant, but do require some basic walls added/removed, electrical, and plumbing and drain to a single sink. Not too much in TI, I think. (famous last words?)
My question is this — I’ve been told that a LL expects to recoup the TI amount in 1.5 to 2 years. That is, if you take the total rent over that time, it should equal the amount the LL spent on TI. Is that generally accurate?
Thanks!
Landlord will try to recoup TI in the rent. As long as the rent makes sense for you it does not really matter how long it takes landlord to recoup. Best..Mark
Hi, Mark,
We are negotiating for a 1575 sq ft brand new space (200 amp breaker and sprinkler system included) that we want to build out from scratch for a bubble tea/smoothie shop. What should we ask for in TI?
LB
Hi Mark,
We are currently negotiating a lease to fit out a restaurant and the landlord has added a “demolition clause” stating:
Landlord shall have a right to terminate the Lease starting in the Option Period of the Lease (after Year 10). Tenant shall be reimbursed the unamortized amount of TI costs spent by the Tenant minus any TI Allowance provided to the Tenant by Landlord in the Lease – To be outlined further in the Lease.
Does the unamortized amount described refer to our fit-out cost less depreciation over the life of our lease? Or does this have another meaning?
Thanks in advance
Evan
Hi Mark, my question is a bit unusual. We are planning to sell our restaurant that is profitable (to take care of aging parents that live in a different state). We have had a great landlord for the last 11 years, who signed the “First Right Of Refusal” if he should sell his building(which he intends to do in a couple of years). Currently we pay 4% rent based on the sales we have..we build the restaurant from ground up and negotiated well when we started. Our first right of refusal will stand still even if we sell the restaurant. We have two questions. 1. Should we sell the restaurant at the market lease rate (rent) so when we purchase it we are able to cover the mortgage, as commercial building will not come cheap?
2. The building is zoned for mixed use, meaning we will be able to build a couple of apartments. How are such long term plans written when a lease is signed to the new restaurant owners? Meaning how do you negotiate that there will /might be construction for a period of time…for example no weekend or night or even lunch time construction to be done? what is a fair way for both parties?
Hi Mark,
I’m being offered $45psf TIA in a brand new development, they are doing construction next month. With rent being $27psf (2% increase) +$6.65 TICAM for 1,800sq space. Location is good with college and airport nearby and hotel behind. A sister development is adjacent (same parking lot) with this new retail shops. Given 5 months to build, but rent starts if open prior. My concept is fast casual restaurant, but I will still need to get grease trap & hood. My question is, do you think that is reasonable? They said No to more TIA or lower rent.
Hi Mark,
I’m being offered $45psf TIA in a brand new development, they are doing construction next month. With rent being $27psf (2% increase) +$6.65 TICAM for 1,800sq space. Location is good with college and airport nearby and hotel behind. A sister development is adjacent (same parking lot) with this new retail shops. Given 5 months to build, but rent starts if open prior. My concept is fast casual restaurant, but I will still need to get grease trap & hood. My question is, do you think that is reasonable? They said No to more TIA or lower rent.
About to open a restaurant and receiving 15k tia with 6 month free rent for build out. It’s costing me about 55k to make it happen ? Is 15k enough or should I ask landlord for more?
Client of mine purchased a former restaurant 3 years ago where she use to lease a part of it as a fitness trainer.
Her plans were to expand her fitness center into the restaurant and she did the build out for the expansion.
I called out of the blue to see how things were going and she expressed they are not going as well and had considered renting out the expansion to a guy who wanted to open a restaurant but it never happened. I asked if she was still interested and she is very motivated.
It looks like I have to pay for the build out, she is buying the building on a 10 yr LC Paging 3k a month.
How should I negotiate TIA? And which improvements can not be removed if I leave.
Hello Mark,
I have found your article very useful. However, I signed a terrible lease for my cafe. This lease has been vacant with many other units. I did not receive any free rent. i got a break for 3 months but had to pay 3k for TMI. Now i have received my permits and construction has started. Starting from this month i am paying $6700 per month and the duration of my construction is 1.5 months to complete.
I have requested the landlord to pay for sprinkler, HVAC, electric and plumbing as it should be the responsibility of the landlord. I have been told by the landlord that it is not the landlord’s problem. In fact, its the tenant’s problem. This statement does not sit with me very well.
Can you please let me know what i should do in this situation?
Thank you,
hi mark i am trying to rent a second generation restaurant 2500 sq feet . it has grease straps and bathroom but needs hood replacement, walk in fridge and some updates. LL is asking 17.50/sq feet , would it be reasonable to ask for 30$/ sq feet TIA for 5 yr lease. the place has not been rented for over 2 yrs. do u think that i have leverage over LL because of this. also can i ask LL for progressive payments at completion of construction work rather than waiting for letter of occupancy.
hi Mark
i am in the process of signing a TIA for a restaurant space of 1500Sq ft. Currently it just have 4 walls and the property manager told they will give cash allowance for the floor. We still have to put the chimney and other stuff required for the restaurant. They also gave 120 for building the restaurant out and start of business. Rent is 40$ and they can give us 2$ credit for the first year. Need your advice before i sign this deal
Thanks
I have completed construction and fully opened as stated in condition to receive the T.A allowance lease and paid all the contractors but since covid hit and malls had to close, the landlord is not paying the T.A as stated in the contract and says that the landlord can pay or not pay the T.A and it is their decision, can a landlord do that? even if the lease clearly states that T.A is due in 60 days.
It sounds like you held up your side of the contract. Based on what you have described you should have a legal right to the money. I would contact a real estate attorney that specializes in commercial lease agreements.
Hi Mark,
We are looking at a restaurant build out from scratch. The space is a warm shell. We need to add a 10ft hood, grease trap, plumbing under the kitchen space. The space has partial HVAC and ada code restrooms. The rent is $ 14 per sq ft not including triple net. Space is about 1885 sq ft. What would a decent TI ask be for something like this? I am trying to negotiate terms without a broker so we may be able to get better terms and free rent. Any advice will help greatly! thank you
It probably depends on where the property is located and the demand for space. $25 per square foot is probably realistic but you can always start higher if the other conditions warrant. It will also depend on your financial strength and the landlord’s motivation to get it leased. If you need help drafting a letter of intent let me know. Best of luck!