A tenant improvement allowance is an attractive incentive that a commercial property owner may use in order to help an interested party move forward with a lease agreement. In essence, a TIA is a set amount of money that a landlord will set aside for a leaseholder in order to improve the property or customize the space to the business. For example, an IT company looking to lease a space may need an infrastructure upgrade if that lease space is going to have potential, or a pizza business may need upgrades to the kitchen or HVAC units. Instead of sinking all that money into a leased space on their own, the landlord provides the money for these upgrades.
This may not seem like a very wise move for the landlord, especially because these allowances are not typically considered to be a loan. In other words, the tenant is not expected to pay back this allowance to the landlord, so why would a property owner ever agree to one?
For starters, as we mentioned above, offering this allowance is attractive to businesses. Many companies run on rather small margins, and if the business is going to have to sink too much money into the leased space just to get up and running, it may not make financial sense to sign the lease. This way, the landlord gets a tenant and has passive income coming in each month instead of sitting on an otherwise empty space.
Also, TIAs are helpful to a landlord because it improves the property, making it more attractive to certain businesses in the future if the original tenant opts to eventually end their lease. It also means that the landlord can potentially charge more for rent once the space is upgraded. This is all spelled out in the lease agreement, but if you’re willing to help a business get off the ground and become profitable, then you should be able to reap some benefits on the back end with a rent escalation clause. Even if you don’t work in a rent increase, you may be able to get the tenant to sign a longer lease if you offer a TIA. Instead of only knowing you’ll have a tenant for 12 months, you may be able to offer a tenant improvement allowance in exchange for your tenant signing a three-year lease.
Protect Yourself With A Title Service Company
Now that you understand how a tenant improvement allowance can benefit both parties, let us explain our role in the situation. At Commercial Partners, we act as the intermediary between landlord and tenant when it comes time to provide this allowance. For example, you wouldn’t just want to hand $10,000 to a tenant who has explained what he plans to do with the money, as they could just bolt and leave you high and dry. Conversely, a tenant may need the money to pay for supplies or to settle up with contractors, and having to continually wait on the landlord to make payments can slow everything down, unless you work with us.
There are a lot of complex details that go into writing a tenant agreement allowance and distribution contract, but we can sit down with both parties and hash out a plan that both groups are excited about. Let us work this incentive to get a tenant into your property so that you can have money coming in each month. For more information about tenant improvement allowance and distribution plans, connect with your full service title team at Commercial Partners by calling (612) 337-2470.