Are You Getting the Refurbishment Allowance You Need?

November 10, 2017
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At some point every office building or shopping center—even new and top-of-the-line properties—becomes dated. An owner might update common areas or freshen the exterior of the property, but your space will be your responsibility to keep up to your standards. You might’ve received a tenant improvement allowance (TIA) at the beginning of the lease term to outfit the space properly for your business. But what happens when well into the lease, the space needs certain items replaced or improvements made?

To defray the costs necessary to make those changes, you may be able to get the owner to provide a “refurbishment allowance.” A refurbishment allowance, like a TIA, gives you a set amount of money to make improvements in your space. But unlike a tenant allowance, because a refurbishment allowance is given at a future date in the lease term—for example, in year five of a 10-year lease—you’ll need to anticipate the costs of that refurbishment well in advance. That’s not your only challenge, though; most owners won’t want to provide a refurbishment allowance, because it costs them money down the road and they can’t predict how their financial situation will look at that time. But if you can get an owner to agree to it, be ready to address some key issues and deal with limits it’ll propose.

If you get the owner to agree to provide a refurbishment allowance, there are several issues that you’ll have to address. For example, how should the refurbishment allowance be paid?

Most owners would rather have you pay out of pocket, and then reimburse you as you submit invoices. This way, the owner has more control over the disbursement of the refurbishment allowance. But since the allowance is most likely built into your minimum rent, you would probably want the owner to give you the allowance up front, in one lump sum, so that you don’t have to pay out of your pocket and keep billing the owner to get what’s rightfully yours.

If the owner refuses to give you the allowance in one lump sum, consider using our Model Lease Language, below, letting the owner set up the refurbishment allowance on a reimbursement basis, but requiring the owner to reimburse you within 30 days of the receipt of your invoices.

And make sure that all document requests made by the owner are reasonable. Otherwise, the owner could hijack your payments by asking for documents that are nearly impossible to get.

Model Lease Language

Landlord shall reimburse Tenant for the cost of the Refurbishments within [insert #, e.g., 30] days following Landlord’s receipt of invoices marked as paid, unconditional mechanic’s lien releases, and such other information as Landlord may reasonably request with respect to the Refurbishments.

For four more crucial points to consider and Model Language that you can adapt, see “Cover Five Key Issues When Negotiating Refurbishment Allowance,” available to subscribers here.