Negotiating the Warehouse Tenant Improvement Allowance0

Posted by Thomas Miller, CCIM

tenant-improvementPreparing the premises for a tenant’s occupancy can be costly, time consuming, frustrating – and entirely avoidable. Historically, distribution tenant needs tended to be relatively typical. However, with more sophisticated logistics systems entering the marketplace and becoming more widely adopted, landlords today are being faced with far more building preparations than in the past. With these added requirements comes the question of who is paying for them – and how. This is becoming a key component to the lease negotiation, and it’s just as much a consideration as the base rent negotiations. Both have a significant impact on the cost to the occupancy.

Many options exist to provide the tenant with their required needs. The trick is for the tenant to get what they need at the best value yet still secure the desired space. Simply asking a landlord to bankroll the entire project might sound good at the onset, but it could potentially lead to higher rental rates than otherwise could have been achieved by exploring other options. Here’s what to consider:

• Which tenant improvements actually upgrade the real estate long term, which do not, and how does this impact the negotiation?
• What tenant improvements are going to be requested of almost any occupant, and which are unique that are solely for this specialized user?
• What impact will these tenant improvements have on the project as a whole?
• Is the landlord funded in a way to allow him or her to accept the cost of the tenant improvements?tenant-improvement-example

Another important aspect is how any tenant improvement payments are made.

• Will the tenant write a check?
• Will the tenant pay the landlord back through increased rent?
• Does the tenant typically pay an interest rate on top of the actual tenant improvements costs for the use of the landlord’s funds?
• Since the tenant enjoys the benefit of these improvements for the entire term of the lease plus any renewal, should the tenant continue to pay that increased rent for his entire occupancy or only until the ‘loan’ is paid off?

There are few clear yes or no answers to these questions and your real estate agent’s experience will be every bit as valuable in these matters as your attorney, CPA or doctor’s advice is in their respective fields. If you have any concerns about your agent’s ability to successfully navigate this for you, we welcome the opportunity to discuss your options with you.

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About the Author

Thomas Miller, CCIM

Thomas Miller, CCIM is the president and broker of Miller Industrial Properties in Reno, Nevada. He has worked in industrial real estate since 1991, with 15 years of previous experience designing and building industrial warehousing and manufacturing facilities in the northern Nevada market. Contact Tom at tom@mipnv.com or 775-742-9891.

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