How Tenant Improvement Dollars Affect Commercial Real Estate Transactions

When selecting a new or additional location, work may need to be done to the property in order to complete it for the new tenant or owners needs. For instance, offices, conference rooms, or bathrooms may need to be added to the space, or different end furnishing such as carpet and trim are opted to be changed. If this is the case, the owner or landlord of the space may offer the prospect tenant improvement dollars to complete some or all of the work. The tenant improvement dollars differ based on a number of variables including motivation of the landlord or owner, other monetary negotiations such as sale price or rental rate, and other concessions the landlord or owner have made for this particular real estate transaction.

In the occasion that the owner has high vacancy within his real estate portfolio, they may tend to offer more money in tenant improvements so that the prospect is likely to purchase or lease space from them. Furthermore, many times owners are working closely with their bank to finance their real estate projects and thus if the bank is pressuring them to complete real estate transactions, a landlord will become more aggressive with their tenant improvement money. On the other hand, should an owner not be in such need of a prospect, they may not give any or very little tenant improvements.

Other monetary negotiations such as the final sale price, the rental rate, any moving allowance, free rent, or other concessions the owner has made throughout the real estate process will also factor into how much tenant improvement money is given. When evaluating sites, prospects need to weigh out the benefits of paying less for rent or mortgage versus paying more in up front costs to pay for their own tenant improvements. Although owners will negotiate on price as well as offer some tenant improvement money, many times one will have to outweigh the other.

Lastly, certain other factors may play a part in the amount of tenant improvement money. If the real estate transaction has a timeline of a year out versus a prospect looking to move more immediately, an owner may be less willing to put forth money with the hope they will sell or lease the space to another prospect sooner. Also, an owner may think the market is rebounding and that a year from now they may not have to make such high concessions for tenant improvement dollars, and will therefore not commit to a deal that will tie up their money.