For landlords and property managers, making sure your tenants are as happy as possible is extremely important.
This is especially true when the tenant is first moving in.
So, landlords and property managers must make sure that tenants are as happy as possible with the property as soon as they move into the new space.
When a landlord makes changes to a property before a tenant moves in, they are known as tenant improvements.
In this article, we will discuss everything about tenant improvements, including exactly what they are and what constitutes them.
So, to begin, let's go over the general definition of a tenant improvement.
What Are Tenant Improvements?
In real estate, tenant improvements, or leasehold improvements, are any changes or repairs that a landlord makes to the property as a part of the lease agreement.
These changes are typically made in order to configure the space for any particular tenant. The tenant is also the one who will usually request these changes, especially in a commercial space, such as an office.
However, there are some technicalities around tenant improvements that might make them difficult to understand. For example, for commercial real estate, there are various things that do and do not count as tenant improvements, which we will discuss below.
What Counts As A Tenant Improvement?
Some of the things that count as tenant improvements include:
- Changes to the walls
…and anything else that is a permanent or semi-permanent change.
It's important to note that all of these, as was just mentioned, are changes that cannot be easily removed or taken away. They are also all changes that can benefit the landlord as well as the tenant by adding value to the property.
What Doesn't Count As A Tenant Improvement?
More importantly than knowing everything that counts as a tenant improvement, landlords should also know what doesn't.
Some examples of things that do not count as tenant improvements include:
- Outdoor upgrades
- Moving expenses
…and anything else that can be removed when the tenant moves out.
The reason that these aren't tenant improvements is because they are not permanent changes that can benefit the landlord.
So, now that we know what does and doesn't count as a tenant improvement, let's dive into the importance of tenant improvements.
Why Are Tenant Improvements Important?
When a company is moving into a commercial property, they need some basic facilities to be able to correctly run their business. Thus, it is vital to a company to be able to make changes to their new building space to be able to better accommodate the business.
Some of these alterations including adding partitions or rooms to create the office that the business requires. All the desired changes should always be included in the lease agreements to be covered by the tenant improvement allowance, which we'll discuss further below.
This not only benefits the tenants, however.
Since most of the changes made for tenant improvements are structural and permanent, they can actually benefit the landlord in the long run. This is because, since it's the landlord's property, they can save all the costs of the improvements when other tenants come.
However, depending on how the lease market is performing, the landlord may or may not find it beneficial to provide tenant improvements. That's why it's crucial to negotiate all the terms of the lease agreement with the landlord before moving into the property.
Above, we mentioned something about a tenant improvement allowance, but we don't quite know what that is. Below, we will be explaining who and how the tenant improvements are paid for.
Who Pays For Tenant Improvement Construction?
One of the most common questions surrounding tenant improvements is about who pays for the improvements.
The answer to this question is actually another term related to tenant improvements - the tenant improvement allowance.
The tenant improvement allowance can be a little tricky, so below, we'll give a detailed outline of what the allowance is and how it works.
Tenant Improvement Allowance
Tenant improvement allowances, or tenant allowances, are an agreed-upon sum of money that the landlord pays the tenant for covering the construction costs of the tenant improvements. Sometimes, this money isn't given up front, but is amortized through the rent payments.
This figure is typically expressed as tenant improvement dollars per square foot of the space that is being occupied. With this money, the the landlord is covering the cost of the initial tenant improvements, including the hard and soft costs of the projects.
However, it is important to remember that any furniture or decorations are not part of the tenant improvement costs and will not be covered by the allowance. Only applicable improvements and repairs to commercial spaces will apply.
And, if the costs of the improvements exceed that of the agreed-upon allowance, the tenant pays the difference.