Tenant Improvements for Commercial Leases – Who Pays What?

Not every commercial space is perfect. Seldom can a company lease a property and it is turnkey for their business. Most properties check the majority of the boxes on your checklist but there is still some renovation work to be completed before its ready for you to open your doors. You will want to add your own design to ensure they are in alignment with your company vision. This situation happens all the time. 

Then the question becomes, who should pay for the improvements? Does the landlord or the tenant carry the burden to pay for the project? It is a very important question to get clarity about before signing a lease agreement. 

Here we will answer the question about who pays and the different types of payment agreements that can be created between landlords and tenants.

So, Who Pays For The Improvements?

It depends. Just like any other real estate deal, most things are negotiable. All improvements that need to be made to the property should be discussed and written into your lease agreement. Depending on the situation the landlord may take on the costs, the tenant may be required to pay, or you split the cost of the improvements. Determining the party that pays is part of the negotiation process. Landlords understand that commercial space improvements by a tenant can help increase their property value, so there is incentive for them to work with tenants to come to an amicable agreement.

Commercial Build Out Scenarios

There are a number of different scenarios when it comes to determine who pays for the property improvements. Each has their advantages and potential drawbacks. The key is to come to an agreement that makes sense for your business. Here are some scenarios to consider:

The Landlord Pays

When a tenant moves into a commercial space, its inevitable that some modifications will be made. To secure a good tenant, landlords will often offer to pay for the commercial lease improvements. This is great for the tenant because they do not necessarily want to invest significant money into a space they do not own. But the landlord will have control over the process. They may be tempted to opt for cheaper alternatives to keep costs down. Make sure you agree on a budget, materials, and level of quality as part of your agreement. 

There are a couple of other ways landlords may offer to fund the project:

  • Tenant improvement allowance: The landlord offers a certain amount of money per square foot for improvements. For example, they will pay $20 per square foot. So, if you have a 1000 square foot location, they will contribute $20,000 to the project.
  • Tenant inducement: The landlord offers a reduced rental rate to offset the costs of the improvements. In some situations, you could operate rent free for a few months.

The Tenant Pays

This option gives you the most control over the improvements, but you are also flipping the bill. Even if you are paying, you will still need to have an agreement in place with the landlord about what you can do to the space. You also have control over the contractors, design, timeline, and all other elements of the project execution.

Landlord and Tenant Share Costs

Making improvements to a commercial space can be mutually beneficial to the landlord and tenant. So, its common for both parties to share the costs. The agreement does not have to be 50-50. In some cases, the landlord may pay a higher portion and in others the tenant may pay most of the bill. 

Overall, it is about coming to an agreement that all parties find satisfactory. If you are looking for a new commercial space or want to improve your current location, work with the landlord to find common ground. If you cannot come to an agreement, then you may need to explore options for other locations for your business.

Get A Free Commercial Building Consultation

If you are planning a commercial building renovation, we want to hear from you. At Fuhrmann, we provide all in one commercial building solutions. Learn more about our Commercial Building Renovations services by requesting a free consultation with our design experts.

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