What Are Commercial Property Tenant Improvements and Who Pays for Them?

Both commercial real estate tenants and landlords know about tenant improvements. However, many are not sure what the exact rules are here. If you're among those who would like to learn about tenant improvements, what they are, and who pays for them, then this is the right article for you. 

We’ll cover all you need to know about tenant improvements in commercial properties and who typically pays for them. Let’s take a look.

What Are Commercial Property Tenant Improvements?

Tenant improvements on commercial properties (TIs) are all the improvements made on the said property, either by the tenant, the landlord, or both. This means that TIs include all improvements and betterments to the commercial property the tenant needs for their business to function. They could also be improvements that will allow their business to function better, so they could essentially be considered upgrades as well.

Tenant improvements are almost always necessary for every new tenant as one can rarely find a space that fits exactly what their business needs. On top of that, most commercial properties already have various TIs from the previous tenant.

Who Pays for Tenant Improvements in Commercial Properties?

Because TIs are almost always needed in commercial real estate, it's vital for you to know who needs to pay for them. 

As is the case with most lease conditions (and yes, TIs are often parts of a typical commercial real estate lease), TIs are up for negotiation. In most cases, when a commercial lease is negotiated between the two parties, many conditions need to be discussed. 

Most tenants and landlords worry about the rent, the length of the lease, who's responsible for utility bills and other expenses, and several other crucial things, but they don't always include TIs. We would argue that TIs need to be one of the main items of negotiation in all commercial lease negotiations.

In our opinion, the TIs should be sponsored by the party that will benefit from them the most. Usually, they are primarily beneficial for the tenant. That's because they are unique to the tenant's business needs. Unless the landlord is planning to lease the space in the future to a tenant with the same business and office needs, the TIs will remain useful only for the current tenant for the duration of their lease. 

However, if the tenant plans to occupy the commercial space for a very long time, then the landlord should be open to splitting the TIs expenses. Also, many landlords and submarkets have built in an expectation of how much a landlord is willing to contribute towards the Tis based upon the lease rate, in fact there are some leases that call for a “Build-To-Suit” whereby the landlord pays for all of the Tis (other than FF&E). 

Individual situations will vary with each tenant and landlord, so the party who is responsible for the TIs is a question you and the other party need to answer. You should consider your specific situation and reach an agreement that will suit both of you. 

If you still have questions concerning tenant improvements in commercial real estate, don’t hesitate to ask! You can reach us at info@cbicommercial.com.