Set Conditions for Financing Tenant Improvements

Offering tenant improvement allowances (TIAs) is a great way to attract and retain small and new businesses that can’t afford the renovations they need to open shop. But it can also backfire if the tenant defaults before moving in or generating the revenues necessary to pay you back. TIAs also expose you to financial and liability risks. Negotiating the right TIA lease clause is crucial to avoid getting burned.

What are TIAs? Commercial space often needs to be customized to fit a tenant’s needs. But small and new businesses like restaurants are unlikely to have the cash on hand to pay for improvements. And without stable cash flow and a proven track record, these businesses are a risky proposition for banks and other lenders. Landlords can step into this void by offering TIAs to finance the improvements in the expectation that the tenant will eventually make enough money to repay the money in monthly installments over the term of the lease.

What’s the risk? The risk, of course, is that the tenant’s business won’t succeed, leaving you with improvements you’ll just have to tear down for the next tenant. So, it’s crucial to do your due diligence on tenants’ business plans, management team, and proposed construction budgets to determine whether offering TIAs is an acceptable risk.

If you opt for TIAs, you must set out the terms of the arrangement as part of the overall lease. For a model lease clause you can adapt, see “Get 12 Lease Protections When Granting Tenant Improvement Allowances,” available to subscribers here.