One of the biggest concerns of a business seeking to lease office space is the type of improvements that can be made – and who will pay for them. It is customary for building owners to allow tenants to modify a space to fit their needs; however, it usually requires good tenant representatives to work out the details. Before signing a commercial lease, a business should determine what changes can be made and agree in advance with the landlord about an improvement allowance to avoid any future issues.
Although there is a certain standard in commercial real estate as to what constitutes an allowable or necessary improvement, a tenant must avoid making any assumptions. Improvements must be determined beforehand and written into the property lease to protect both parties. Following are two types of upgrades:
Necessary – Improvements such as requirements to bring buildings up to safety code; to add in ADA-compliant upgrades; and to repair existing damages and current HVAC and electrical systems are all generally viewed as the property owner’s financial responsibility. Those type of changes must be made regardless of the tenant in order for a landlord to lease the building. Most building owners also allow for simple changes, such as paint and carpeting that are normal wear items done every few years.
Debatable – Where tenant representatives are particularly helpful is when a tenant is considering other, more specific improvements and modifications to meet a more precise business need. They may not actually be required for a business to physically occupy a space; however, they may be a requirement for a particular company to operate their business. Such modifications frequently include architectural and aesthetic changes to client-useable areas such as entryways, reception areas, and hallways or redesigning open space for more specific use by a company.
A building owner may agree to add certain debatable items to an improvement allowance; however, other requests may need to be negotiated by a tenant representative especially when they are things a tenant may want but not necessarily need to conduct business.
Improvement Allowance Agreement
An improvement allowance is meant to cover other important things besides the agreed cost of necessary repairs – such as the cost of the design plan and drawings, building permits, and any other associated costs that are necessary to ensure any changes are done legally and according to code.
Negotiating with a building owner can improve the likelihood of a tenant having unnecessary modifications added to their allowance. Partial payment as well as method and duration of reimbursement or an agreement to a longer lease are all things that tenant representatives can negotiate with a building owner.
There may be changes that a landlord refuses to pay but will allow a tenant to make at their own expense. In these situations, tenant representatives and business owners must carefully consider whether it is worth leasing the space or if finding a different building would be the better financial choice.
Even after an agreement has been reached on what a building owner will reimburse, businesses should enlist the help of tenant representatives to be sure improvements have been properly listed and accurately estimated before accepting the terms outlined in the lease. Failing to do so could leave a tenant shorthanded once the lease has been signed and the time comes to pay for the changes made – don’t let this happen to your company!
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