Tenant Improvements Explained

Posted by on Mar 20, 2013 in Commercial Real Estate Tips | 0 comments

Tenant improvements explained

Rarely in the case of commercial real estate does a tenant find a space layout that has a floor plan that matches exactly what a tenant wants. Tenant improvements also work a bit differently depending on the type of space you are looking at and is related usage.  Here is a snapshot of what you would looking at for office space, retail space and warehouse space.

Office and Warehouse tenant improvements

Office space allowances

Office space will usually have a tenant improvement allowance involved, landlords know that the last tenant’s layout does not mean it meets your requirements.  A good commercial real estate broker will know what is reasonable and customary to ask for and will be able to negotiate the improvements on your behalf. Since office is primarily office and usage doesn’t change too much , you don’t have to get a certificate of occupancy, however you may need to have the build out permitted by the city.  When you are given an allowance typically the landlord will use their contractors and build out the space to meet your needs. It is a fairly straight forward process.

Warehouse space is the same as office space, again what we have to question is , is the intended usage outside the norm for that space? If so, you may have to get a certificate of occupancy.

Certificate of occupancy is  defined as: a person may not use, occupy, or change the existing use or occupancy of a structure unless the building official has issued a certificate of occupancy for the structure.

Zoning does play a role for properties such as warehouse space because some zoning is more liberal with the usage allowed by the tenant.

Retail tenant improvements

When it comes to Retail, it becomes a bit of a different story especially for new space or space that has not been occupied yet.

There are so many different uses for Retail as you know. Let’s take for example , you want to lease a space that is in a new project. You will most likely be delivered a “white box” which means the framing is up but there is no restrooms , no offices , no HVAC duct work etc.. and all of this has to be done . This is the most expensive  avenue to improve space,  a tenant will still get an improvement allowance however with most projects, the landlord will not reimburse you until you complete the improvements on your own ticket , then receive a Certificate of Occupancy from the city. You also will be looking at permitting from the city of Austin.

Once you have your certificate of occupancy (also called C of O) , and you have no mechanics liens in place whatsoever meaning your contractors have been paid, the landlord will reimburse you for the tenant  improvement allowance that was negotiated within your lease . An example would be $40/ SF for a 2000 SF pace is $80,000. If you have decided to go over the negotiated allowance, then the overage would be the tenant’s responsibility.

You want to make sure you have a knowledgeable broker on your side to help you negotiate and take you through the necessary steps to make sure you are clear about what is involved in the process. Yes, there are many cases where the tenant improvements drag out due to contractor issues, permitting lag times etc.. keep in mind the landlord is not going to give a tenant an infinite amount of time to get things done before you rent is due or at lease your expenses.

Austin Warehouse Space for Lease or Sale