Tenant Improvement Allowance (TIA) is money that a commercial landlord gives their tenant to cover a portion of the costs of renovating the space to suit their needs in what’s called a finish-out project. That includes adding new flooring, new features, and generally making the space your own. Understanding and calculating your Tenant Improvement Allowance is important to keep your construction project under budget. Here’s what you need to know about TIA.
The Initial TIA Amount
During lease negotiations, you and your landlord will settle on a TIA amount. This will either be a lump sum or an amount per square foot. Either way, the TIA is usually intended to cover the full amount of the renovations you will need to incur as an incentive for renting the space. At least, that is often the case in competitive spaces. In markets with higher demand from commercial tenants, the initial TIA amount may be as low as ten dollars per square foot.
The lease should also state if the TIA is paid to the tenant after renovations are complete or paid directly to the vendors who perform the renovation.
What happens if your build-out costs go over the TIA amount agreed upon in your lease? You may have to cover these costs yourself, or you could negotiate an increased allowance, often in the form of a loan, from your landlord. If they agree, they will often agree for this to be an amortized amount which you pay back slowly over a longer period of time. It is common for a portion of the TIA to be taken from the rent payment, which overall increases the amount you pay in rent during the amortization period.
Amortized tenant improvements are essentially loans from your landlord. You can calculate what you’ll be paying towards it with the following information:
- The amount of your loan
- The annual interest rate
- The term of the loan
- The payments per year
If you owe $90,000 at a 7.5% interest rate and you pay it with a monthly rent payment over a five-year period, you end up adding $1803.42 to your monthly payment.
As a construction company, we often have clients who make the mistake of taking their TIA amount out of their renovation or construction budget. This is a mistake. While the TIA amount will cover its portion of your costs down the road, it won’t be available to you until after the renovations are completed. This means that if you need to make payments to vendors beforehand, and you likely do, you will need to have the cash to cover those costs. We suggest that you plan to cover the full amount of your build-out costs, especially if the landlord will be paying you with the TIA directly.
In fact, we also recommend that start-ups and new businesses which are not sure they will be able to cover build-out costs in the event that they go over pre-negotiate additional TIA from the landlord to ensure they can get up and running.