Hidden Traps in Landlord-Funded Tenant Improvement Allowances

Office lease negotiations are complex, and tenants who lack strong representation are often at a serious disadvantage as they don’t know what they don’t know. One area where this becomes painfully clear is the tenant improvement allowance (TIA).

Landlords often prefer providing a TIA because it works to their advantage. While it may appear generous, it frequently comes with hidden costs tenants don’t anticipate. Things like path-of-travel compliance, demolition, and landlord-supervision fees, to name a few.

Depending on the building’s compliance status, path-of-travel expenses can be substantial. Missing demolition costs alone can reduce the effective TIA by as much as $10 per square foot. And supervision fees? Don’t get us started.

Typically pegged at 3% of the total project cost, supervision fees can turn into a sneaky profit center for the landlord. On a $300/sf buildout for 15,000 sf, that’s $135,000 siphoned directly from the allowance, far more than the actual cost of oversight.

A savvy tenant advisor will:

• Negotiate the TI allowance net of demolition and path-of-travel costs.

• Cap supervision fees at the lesser of a fixed amount or actual cost.

Another common mistake: not knowing what it will cost to build the space.

Before finalizing lease terms, tenants must:

• Develop a preliminary design plan.

• Obtain ROM (rough order of magnitude) pricing from multiple contractors.

• Use this data to inform negotiations.

Without due diligence, tenants risk costly surprises and budget overruns.

In TI negotiations, traps are hidden everywhere.