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Leasehold, Tenant, and Build-Out Improvements in CRE

November 27, 2019

Three terms which are similar, but different

There’s an old song, made most popular by an Ella Fitzgerald/Louis Armstrong duet, in which the singers lament the differences in how they each pronounce the same words differently. One says “to-may-to,” while the other says “to-mah-to.” As they compare their words, the two must decide if they’re going to overlook their differences or call the whole thing off.

It’s sort of the same thing with leasehold, tenant, and build-out improvements—three terms that kind of mean the same thing. Pretty much, that is. There are subtle differences, and it’s important for landlords and tenants to understand the nuances. Because, like Ella and Louis, no one wants to call the whole thing off.

A look at the similarities between leasehold, tenant, and build-out improvements

In commercial leases, the three terms are industry-specific ways of describing the same idea: improvements and modifications to a structure in order to prepare for a new tenant.

  • “Leasehold improvements” is the accounting term.
  • “Tenant improvements” are from the world of commercial real estate.
  • “Build-out” is the term in the construction industry.

The scope of these improvements is determined by several factors, including if space was previously occupied, the age of the building, and how closely aligned the previous tenant’s business is to that of the new tenant. Modifications can include everything from lighting and plumbing systems to security and Wi-Fi to reconfiguring the space inside and out.

A look at the differences

The differences between the terms become more apparent when examining which party—landlord or tenant or both—is overseeing the work and who will be paying for the improvements. For both parties, this is a critical part of the lease negotiation process and the secret is in the details.

To assist both parties, there are several standard tools at their disposal.

  • Tenant Improvement Allowance (TIA): In this lease concession, the landlord will provide a specific amount of money to be used as an allowance by the tenant to make any necessary modifications. The tenant will oversee the project.
  • Rent Discount: Very often, landlords will agree to free rent or a discounted rent, with the understanding that the tenant will apply the savings to the remodeling project. Again, the tenant oversees the project.
  • Building Standard Allowance: The landlord puts together an improvement package offering the tenant a choice of modification options, such as three paint colors for the walls. The landlord oversees the project, but the tenant is responsible for any improvements not included in the offered package.
  • Turnkey: The tenant provides the landlord with a design plan and estimated costs. The landlord agrees to pay for the improvements and oversees the work.

Preparing for the inevitable bumps in the road

Although there is a definite excitement to moving into a newly remodeled space, it’s important to not get distracted by that excitement. Problems will arise. Delays will occur. To that end, it’s critical that both parties fully understand the tenant improvement project, the costs, and the penalties if either party is unable to fulfill its obligation.

One of the easiest preventative measures is to attach a detailed improvement plan to the lease, including a description of building-standard materials and finishes. At the same time, there must also be a timeline for not only the progression of the project but also a date when work is to be completed—and the consequences, should either party miss that deadline.

An option for tenants and landlords

At the end of the day, it doesn’t matter how one says “tomato.” It’s more important to work with a team that is as skilled with the subtle nuances of tenant improvement provisions as it is with the details that are designed to protect the financial assets and business goals of landlords and tenants. Morris Southeast Group is that team.

To learn more about owner and tenant representation and what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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