Whether you need a minor repair or full-scale renovation, you may need construction services for your space. Understanding commercial tenant improvements can be intimidating, but you’ll be well on your way to building and implementing your very own construction project with enough research and communication.
Leasehold improvements are your ticket to a refreshed commercial space, from installing energy-efficient windows and lighting to upgrading electrical outlets. Discover who pays for what in a tenant improvement project.
Leasehold improvements cover any changes to transform a rental property to benefit the tenant. Depending on conditions set during lease negotiations, modifications may be paid for either by you, the landlord, or both parties. Regardless of who oversees the construction process, all tenant improvements belong to the landlord once the lease ends.
Common tenant improvements include:
- Building new interior walls or ceilings
- Replacing flooring material
- Updating electrical, plumbing, and lighting systems
- Additional rooms
Shared responsibility is the critical differentiator between a renovation and leasehold improvement project. While a property owner is always in control of their renovation and covers construction costs, tenant control in a leasehold improvement plan is determined by the lease agreement.
These initiatives are also more limited in scope than traditional renovations. While building improvements impact the entire property, leasehold improvements only affect the tenant. Neighbors don’t experience any change. Because tenant improvements are very localized, additions that alter the overall health of the structure are off-limits.
Restricted improvements include:
- Paving a driveway or parking lot
- Renovating lobbies or common areas
- Repairing or replacing an elevator
- HVAC system updates
Your landlord may offer you several different leasehold improvements depending on your lease agreement. One of the most popular options is the tenant improvement allowance, which places the construction project under complete tenant control. While the landlord details the provisions in the lease document, often providing a lump sum (on a square foot basis) to cover construction costs, the tenant communicates with the tenant improvement contractor and sees the project through.
Tenant improvement allowances relieve the burden involved with construction management, saving them time and busywork. If the project exceeds the budget, the tenant covers the difference.
Other tenant improvement types include:
Building standard allowances, or build-outs, are fixed improvement packages the landlord offers to the tenant. The landlord cooperates with the construction company and covers all costs. The tenant has to pay for any changes to their commercial space that aren’t included in the package.
While a BSA allows the tenant to focus on running their organization, the cost is a loss of control. The tenant may not receive all the upgrades they need to improve their business.
Turnkey builds often take place before a tenant moves into the property. The landlord covers the construction costs and is in complete control of the project. While the tenant may provide cost estimates and plans, the landlord collaborates with the project managers. You avoid paying for improvements down the line, but there’s little you can do if the landlord cuts construction costs by opting for cheaper materials.
The landlord may offer rent discounts while the tenant pays for the leasehold improvements. This option is often detailed in the lease agreement and can be anything from one rent-free month or reduced rent for a certain period. The tenant works directly with the general contractors and is responsible for the budget.
A tenant improvement allowance isn’t the only way to finance a commercial tenant improvement project. You can also apply for a more traditional loan. You may be eligible for a Small Business Administration (SBA) loan or amortized tenant improvement allowance, depending on your lease agreement. Researching your options and understanding the requirements can help you determine whether you have the cash flow needed for a loan.
New and existing small businesses may apply for a Small Business Administration (SBA) loan to help finance their leasehold improvement plan. SBA loans are government loans that cover startup costs, real estate acquisitions, expansions, and more.
Companies apply for an SBA through a bank or credit union and require an unconditional personal guarantee from anyone with at least 20% ownership. Your assets are at stake if you can’t repay the loan within the agreed-upon term. SBA loan requirements vary but offer low fees, competitive rates, and terms up to 25 years in length.
Amortized tenant improvement allowances blend tenant improvement allowance terms and a more traditional loan. They allow the tenant to borrow a certain amount of money from the landlord to fund the construction project. After the project is complete, the tenant is expected to pay the landlord back within the lease term. Maximum loan amounts are detailed in the lease agreement, and tenants can use less than the listed amount.
This unique arrangement provides backup funding in case your project goes over budget. Rather than pay out of pocket, you can fall back on your allowance to cover unexpected costs, keeping your project on schedule and your vision intact.
Understanding your options for a tenant improvement project is challenging when you’re busy running your business. Paula June Bakjajian, the RSP Group founder, has over 50 years of experience supporting the Bay Area with high-quality commercial and residential construction services. We’re a creative, collaborative, and client-centered general contractor who can help you navigate the entire tenant improvement process.
Our construction management is simple and effective. We encourage cooperation between designers, architects, and stakeholders and can be there for you from planning to post-construction with our design-build services.
Ready to introduce industry-leading improvements to your commercial space? Reach out today.
RSP Group is an inclusive, creative, and collaborative construction service provider in the San Francisco Bay Area. We help you realize your ambitions with unique solutions tailored to your needs.