Q & A Table of Contents
Who pays for tenant improvements?
From: Barry in Connecticut
Question: I am looking into opening a fitness center in California and really have never negotiated a lease before. Because the buildings I'm looking at were both retail stores I believe I may have to make many tenant improvements. Do you have any tips on how to get some of these covered by the lessor.
Response: Dear Barry,
If you think there will be improvements needed to turn the space you lease into space you can use, you should realize that each dollar you or the landlord spends needs to be amortized over the term of the lease. That is, if you spend $100 and have a five year lease, theoretically each year $20 of that investment should be repaid. If the landlord spends the $100, then s/he will expect $20 more in rent. If you spend the $100, then you need to contemplate having the business generate enough revenue to pay you back that $100 during the life of the lease.
Thus, you should develop a fairly comprehensive plan of what needs to be done to make the space the right kind of facility.
Improvements to the space that are likely to be valuable to future occupants are probably more likely to be items for which the landlord is willing to 'front' the money. Items that are peculiar to your business will probably not be of interest to the landlord as an investment, unless the landlord concludes s/he can make a good profit on the investment as reflected in your rent.
Another way to look at who should pay for improvements is to determine whether they will become 'permanent' fixtures or elements of the space. Walls, doors, bathrooms, electrical service, heating/air conditioning and similar elements may be required by code for your business -- but may also improve the value of the property for any potential user. These may well be justifiable expenditures to ask the landlord to undertake.
In my own experience as a retail landlord, I have seen a tremendous range of agreements regarding modifications to make a space fit the needs of tenants (tenant improvements). Sometimes the tenant pays for everything, sometimes the landlord 'gives' the tenant all or a portion of the needed money, sometimes the landlord can get it done better for a lower price because of relationships with contractors.
Thus, I would view the whole issue of tenant improvements just like other lease issues: a matter that is open for negotiation. You'll negotiate the amount of rent, who pays utility bills, how much you'll contribute to maintaining common areas such as parking lots, lighting, etc., the length of the term, and many other issues. What you need to do is figure out how much each element is worth to you; how much are you willing to pay; how much is this or that particular aspect of the lease or the space itself likely to benefit your business?
The more you think about these issues ahead of time, the better you'll be able to negotiate a fair and workable deal. Talk with other people who are familiar with the local market, the landlord, your business or similar businesses to get a sense of what is reasonable.
Good luck; I hope your deal works well.
Steve
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