"TI" "TIA" "TA" or Tenant Improvement Allowances are provisions in commercial leases where the landlord compensates the tenant or directly disburses funds to the tenant to improve or build out the premises, bases on the tenant's business needs.
TI may be calculated by square footage of the premises and stay with the premises, meaning whatever improvements the tenant makes in the premises, stay there after the tenant's lease ends or terminates.
Why would a landlord want to give a tenant money to improve the space according to tenant's specifications?
Ideally, the premises will become more valuable for future leasing/sale while simultaneously increasing value for the current tenant and bring more business to the premises. A stable business means a stable, rent-paying tenant.
How does a commercial landlord pay for TI?
A turnkey build-out: The landlord pays for the cost of the build-out based on an agreed plan and delivers to the tenant the premises in "turnkey" condition, meaning ready to go with no further improvements needed. In this situation, a tenant is not involved in the process.
Fixed dollar amount: The landlord reimburses the tenant a fixed dollar amount for TIs. The tenant has more control over the improvements but may pay out of pocket until landlord reimburses or if the improvements exceed the agreed upon fixed dollar amount. There is a risk that the IRS will consider the landlords disbursement for TIs as income and tax the tenant accordingly. If a landlord pays the contractors and suppliers, a tenant may potentially avoid this.
What's not covered in TI?
Furniture, fixtures (including light fixtures) and equipment
Window coverings
Phone line installation and data cabling
Tenant moving expenses
Other Costs in TI to consider
The total tenant improvement allowance may include the following costs:
Landlord supervision fees and overhead fees frequently make up 3%-5% of the total TI.
Using Landlord's contractors if landlord has an approved list of contractors. The landlord's contractors pay charge higher prices than the tenant's choice of contractors.
Unionized labor (if the landlord is required to use unionized labor)
Other costs such as makegood fees and sales tax.
Disclaimer — This content is for general information only. The information contained herein is not legal advice for any specific matter, nor does it create an attorney-client relationship. Laws vary from one state to another. For legal advice, consult an attorney.
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