Tenant Improvements: Now you see them, now you don’t. If improvements are to be made to the leased premises prior to the tenant’s occupancy, the tenant must understand the economic impact of such improvements and know what it will get. Understand that getting such improvements is increasingly difficult in today’s economy given that landlords cannot secure tenant improvement financing like they used to. Here are some important tilps:
Make certain that the obligation to pay rent and other charges do not begin until the tenant improvements are complete.
Determine whether the landlord will be designing and constructing the tenant improvements at its sole cost (a “turnkey” arrangement) or whether the landlord will be giving the tenant an allowance, with either the tenant or landlord designing and constructing the improvements (an “allowance” arrangement).
Before entering into the lease, in an allowance arrangement, the tenant should have final space plans and estimates for the work so that the tenant is not exposed for the cost of improvements in excess of the landlord’s allowance or, at the very least, will know how much it will have to pay.
In both turnkey and allowance arrangements, the tenant must be certain to work with a competent broker and space planner to make certain that the space will be built out to satisfy the tenant’s needs
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Where the landlord does the design work, reserve the right to look at, review and approve all designs and materials utilized, and the right to make changes up through the design stage of the tenant improvement design documents.
Additionally, in an allowance arrangement, make sure that the allowance will not be used up for base building work, such as bathrooms located in common areas, asbestos abatement, or sprinkler systems.
Agreement should be made as to the disposition of the landlord allowance if the actual tenant improvements cost less than the allowance. The landlord would like to keep the unused portion of the allowance, but the tenant should attempt to get the landlord to apply the allowance to the costs of other work that is the responsibility of the tenant under the lease or work letter, pay it to the tenant, off-set it against future rent, or allow the tenant to use some portion of it.
Negotiate remedies for landlord-caused delay and carefully define and limit the consequences of tenant-caused delay.
If you are not sure what you are doing, get help! See your attorney or tenant rep broker!
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