Article

Negotiating for leasehold improvements on your commercial lease or renewal

Commercial tenants may build out or renovate the property in whatever manner they wish, with the landlord’s permission. It is the allowance which is negotiable.

November 18, 2015

By Jeff Grandfield and Dale Willerton — The Lease Coach

Among the many factors to consider when it comes time to negotiating your commercial lease or renewal is the leasehold allowance (otherwise known as a tenant inducement, tenant incentive or TI money) — the amount of money a landlord may provide to a tenant for improvements. Commercial tenants may build out or renovate the property in whatever manner they wish, with the landlord’s permission. It is the allowance which is negotiable.

Consider these points:

• Tenant Allowance — A tenant allowance is inducement money paid by the landlord to the tenant (which does not have to be repaid to the landlord). The tenant uses this money to offset the cost of building walls, painting and completing any required leasehold improvements. Tenant allowance does not include any money the tenant spends on fixtures or equipment. Landlords often use the allowance and free rent as incentives for the tenant to accept the landlord’s face rental rate but offer a lower allowance than what could be achieved. The Lease Coach often negotiates for an increased tenant allowance with the rental rate remaining the same. When one exceeds a certain point however, the more allowance provided normally equates to higher rent.
• Landlord's Work — Rather than accept a tenant allowance from al landlord it is not uncommon for the landlord to use his own money to at least partially renovate the premises for the restaurant tenant. The landlord may own a construction company or has staff on salary capable of that type of work. Whether negotiating for a leasehold improvement allowance or landlord’s work, remember the following:

1. The more money you want the landlord to kick in, the more prepared you need to be. At The Lease Coach, we will frequently recommend a tenant get a preliminary design and construction cost quote prepared so we can show this to the landlord and negotiate for the maximum allowance we can get. Legitimate quotes on contractor letterhead go a long way with landlords who will see and understand your requirements.
2. The store buildout always costs more than initially expected. You do not want to come up $30-40,000 short because you did not get your ducks in a row. Get multiple quotes.   
3. Before getting too far into the leasing process, it makes sense to ask the landlord or their leasing rep what their inducement package includes. Some landlords have a standard allowance that they give to almost any tenant while others may prefer to complete more landlord’s  work. The Lease Coach utilizes several strategies and can frequently, effectively, double that allowance for a tenant — the key is to try to keep the rental rate down while increasing the allowance.
4. Landlords vary; some are flush with money and can contribute 100 percent of your leasehold improvements while others may provide a more limited amount of tenant allowance money or capital available to complete landlord’s work. If you are not afraid of a slightly higher rental rate, it is possible to get the landlord to pay totally for your leasehold improvements.

Warning: It’s also important to understand how the landlord pays you the tenant allowance. Restaurant tenants often mistakenly assume the landlord pays that money as soon as the deal is signed and before construction is started. This, however, is rarely the case! In most cases, you are reimbursed after you meet a number of conditions, including opening for business and paying contractors. To play things safe, have some short-term financing in place to carry you through if you’re relying on the landlord’s contribution to your build out. It’s also possible to negotiate for some of the allowance up front in certain cases, but you must get this in writing. 

Dale Willerton and Jeff Grandfield — The Lease Coach are commercial lease consultants, professional speakers and co-authors of "Negotiating Commercial Leases & Renewals For Dummies." (Wiley, 2013).