Spell Out What Tenant May Purchase with TIA
Your work letter agreement—that is, the contract that establishes the terms and conditions of structural changes that the leased space will undergo in preparation for your tenant’s occupancy—should clarify what the tenant may purchase with its improvement allowance. That’s because you don’t want the tenant to use its tenant improvement allowance (TIA) for equipment, personal property, furniture, or other items that won’t become your property at the end of the term. And you probably won’t want to pay for items that probably won’t be of value to future tenants.
So, how specific should the work letter agreement be? For example, does the agreement have to enumerate or anticipate the exact materials, labor, or equipment the improvements will require? You don’t have to enumerate the cost of each little item. You can figure out generally how much everything will cost and then set the cost cap at that amount. However, because work letter agreements often don’t go into painstaking detail, it’s important that they include definitions and assign categories of responsibility. For example, a clear definition of what qualifies as a “base building improvement” or a “base, shell, and core” can be helpful. That’s because work letter agreements almost always provide that these improvements will come out of a tenant’s pocket. Show your attorney this Model Clause to adapt for your work letter agreement.
Definitions of Base, Shell, and Core. The “Base, Shell, and Core” shall consist of the Building shell and exterior; the core area, including the necessary mechanical, electrical, sprinkler, plumbing, life safety, heating, air conditioning, ventilation, and structural systems with the Building core, stubbed out to the face of the core wall at locations determined by the Landlord; finished core area toilet rooms including necessary plumbing fixtures, ceramic tile floors, accessories, ceilings, and lighting; and those portions of the Premises which were in existence prior to the construction of the Tenant Improvements. Tenant hereby accepts the Base, Shell, and Core in their present “as is” condition and with no representations and warranties as to their condition or suitability for Tenant’s purposes. To the extent the Base, Shell, and Core must be changed or added to in order to accommodate the special needs of Tenant in the Premises, such changes or additions shall be considered Tenant Improvements (as defined in Section [insert #]). Any items provided by Landlord in the Premises in addition to the Base, Shell, and Core shall be paid for by Tenant, subject to Section [insert #] below.