Should You Put Limits on Tenant's Costs Covered by TIA?

Although you may have no problem providing a tenant improvement allowance (TIA) for hard costs (the costs of labor and construction materials associated with getting a new space ready to occupy) for a new tenant, are you willing to allow the tenant to use the TIA to cover soft costs (architectural, engineering, design, consulting, and filing fees), and furniture and equipment costs, too? Think twice before agreeing to cover soft costs, which can quickly exhaust TIA funds.

Ideally, an owner doesn’t want the TIA to cover anything other than the hard costs of improvements. That’s because it ensures the money will be used primarily to upgrade and improve the owner’s space. If you agree to cover other costs with the TIA, you run the risk that these costs, which provide little benefit to you, may leave the tenant without enough money to complete its improvements to the space. But if a tenant insists that you provide a TIA that covers these additional costs, there are ways to protect the TIA from being drained by them. That includes requiring a line item budget of estimated construction costs from the tenant and two non-hard-cost limits to the TIA payments clause in the lease: (1) a cap on soft costs; and (2) a right to exclude the entire cost of the tenant’s personal property, including furniture and equipment, from the TIA. For Model Lease Language you can adapt and use, see “Place Limits on Costs Covered by Tenant Improvement Allowance,” available in our online archive.