Tuesday, 06 April 2010 07:14

Leasing Office Space - Part 11 of 23 Funding Tenant Improvements

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Will the Landlord Pay?
The landlord is usually willing to fund tenant improvement expenditures provided he is confident the tenant has the financial capacity to pay rent for the term of the lease. For large companies with strong balance sheets, landlords will generally spend as much as is requested on tenant improvements. Of course, the cost of the tenant improvements will be reflected in the rental rate.

It's Up to You
If you're a start-up business with no track record and little capital, landlords will be cautious about expenditures for tenant improvements. They will likely want you to fund tenant improvements for your space. The benefit is your rental rate will be lower. However, you'll have to include the cost of preparing your space for occupancy in your initial capitalization.

TI Details
Other issues related to tenant improvements include defining the scope of work, and who has financial responsibility for performing the work. National companies sometimes simply provide the landlord with a detailed set of plans for the space. It is the landlord's responsibility to cost effectively provide the required build out. For smaller firms, the landlord may provide a tenant improvement allowance, and require the tenant to interface with contractors to have the work performed.

How Much TI?
The cost of tenant improvements can range from $0 to $100 per square foot for second-generation office space. If you are not completely rebuilding the space, the cost is often $5 to $30 per square foot. Even if the landlord is willing to provide substantial funds for tenant improvements, be cautious about the scope of work for tenant improvements. The landlord's expenditure for tenant improvements is essentially a loan which will be repaid with your rent during the term of the lease.

Who pays for ADA?
If the space requires tenant improvements which require obtaining a building permit from the city, review whether you'll have to replace any restrooms because of ADA. (ADA is the Americans with Disabilities Act). In most cases, changes to provide ADA compliance are not necessary if you not require a building permit. However, a consequence of obtaining a building permit is typically that the space must be revised to completely comply with ADA. Replacing the bathroom so it is ADA compliant can be expensive.

Occupancy Cost
After obtaining information regarding the cost of tenant improvements, you should be able to estimate the cost of occupancy for your office space. This will include rent, expenses you pay and the amortized cost of tenant improvements.

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