Don’t Get Burned by Landlord’s TIA Provision
During lease negotiations you and the owner of the space you’re considering renting will probably discuss a tenant improvement allowance (TIA) that will help you pay for the cost of altering your new office building or shopping center space. This discussion is important. After all, a budget that doesn’t provide for all of the necessary improvements could threaten your ability to complete construction work.
A TIA isn’t as simple as it might seem. Tenants generally use TIAs to pay for two different types of costs: “hard costs” and “soft costs” of moving into and occupying a new space. Most properties have the same types of hard costs, such as the cost of labor and materials. But soft cost items can vary from property to property, and you might not be aware of how extensive the soft costs involved in construction work can be—or that some leases often cap the portion of the TIA that may be used to fund them.
Don’t leave yourself in the position of being forced to dig into your own pocket to cover soft costs you expected the owner to pay for. Doing the following can protect you:
- Carefully Define Soft Costs. Examples of soft cost fees are: architectural fees; engineering reports and fees; the appraisal fee; the toxic report fee; legal fees; consulting fees; design fees; and government fees (including the plan check fee, the building permit fee, any assessments, and any sewer and water hook-up fees).
- Aim for Higher Soft Costs Cap. Agreeing on a higher cap is especially important if you won’t be making major improvements to the space, and will therefore have few hard costs and mostly soft costs, such as substantial consulting fees.
- Avoid Line Item Budget. A budget can work to your disadvantage. The owner may try to bar you from using the TIA for costs that pop up during construction but weren’t mentioned in the budget ahead of time. Or the owner might dispute costs in your budget and hold up the start of construction.
For a detailed explanation of how you can broaden the definition of soft costs your TIA must cover, and model lease language to help you get flexibility to spend your TIA, see “Set High 'Soft Cost' Limits in TIA Clause,” available to subscribers here.