Tenant Improvements: What are they & who pays?

Finding the ideal commercial or residential rental property can be challenging for renters, as it may only meet some of their specific needs and preferences. To cater to unique clients, many landlords and property managers allow tenants to make certain upgrades or modifications to the property. Granting renters the freedom to make these tenant improvements can enhance the property’s overall appeal and ultimately contribute to its long-term value.

In this article, we will explore the concept of tenant improvements, what qualifies as one, and who pays for them.

What are Tenant Improvements?

Tenant improvements (or leasehold improvements) are permanent or semi-permanent changes to a residential or commercial unit that benefit the specific tenant. These improvements are usually negotiated between the landlord and tenant before both parties finalize the lease agreement. The specific changes and responsibility for the costs are explicitly described in the lease.

Common Examples

To be considered a leasehold improvement, the changes to the unit must be significant enough to be permanent or semi-permanent, and they typically fall into the following categories:

• Structure or layout: For commercial spaces, this might mean creating offices or opening spaces and walls to suit the business’s needs. It could also mean splitting up a large bedroom to create two bedrooms in a residential unit.
• HVAC: Adjusting heating, air conditioning, or ventilation systems could also be considered an improvement
• Plumbing: Adding a kitchenette for a break room or an additional bathroom would also fall into this category.
• Lighting and Electrical: Improvements could also involve adding new light fixtures, installing additional outlets, or running new cable for internet service.
• Floor and Ceiling: Landlords may allow tenants to install new carpet or hardwood flooring or replace ceiling tiles to suit the tenant’s preference.

Common Examples of Non-Tenant Improvements

Non-tenant improvements are those that are either overtly temporary, that relate to the overall building’s condition, or that are necessary for habitability or structural safety. Examples include:

• Structure and Foundation: Addressing cracks in the foundation or reinforcing load-bearing walls is structural and necessary for the unit’s safety.
• Building-wide upgrades: Replacing HVAC systems or installing a new elevator benefits the entire building. They are not tenant-preferred improvements.
• Exterior or landscaping: Cosmetic improvements do not qualify.
• Appliances: Replacing or upgrading appliances does not meet the criteria.

The Significance of Tenant Improvements for Landlords & Tenants

For renters, tenant improvements transform a space that merely works into one that meets their needs. Improvements like those listed above can increase a business’s or home office’s productivity, improve operational efficiency/lower utility costs, and match the branding or aesthetics for commercial purposes.

For landlords, these improvements can last beyond the immediate tenant and improve a unit’s overall value and desirability. They can also increase property value and convince tenants who might otherwise be inclined to move to a new location to stay longer.

Sometimes, a requested improvement may not significantly benefit either party. However, the landlord might still choose to move forward with it to sign the tenant. Landlords are not obligated to agree to a proposed improvement, and sometimes, declining the request makes the most sense for the property owner.

Who pays?

They’re most often paid for by the landlord with a Tenant Improvement Allowance (TIA) since the owner will retain most of the long-term value.

Landlords may occasionally offer rent abatement, allowing tenants to improve the property while paying a reduced monthly rent.

In some cases, tenant improvements might be part of a larger build-out fully funded by the landlord, typically in exchange for a higher rent payment.

Regardless of who pays for it, it’s always a good idea to lay out the plan for improvements in the lease agreement to avoid any complications or disputes in the future.

TIAs

A TIA is a set amount of money the landlord agrees to provide so that a tenant can make requested improvements to the rental space. Depending on the amount, this amount could either be paid to the tenant in one lump sum or amortized over multiple rent payments.

The TIA often covers things like:

• Demolition of partitions or walls
• Building new walls
• Carpet or flooring installation
• New paint
• New blinds or window coverings
• Electrical improvements specific to the unit
• Accessibility enhancements
• Installation and maintenance of new plumbing fixtures

Things that a TIA doesn’t usually cover are:

• Specialized, industry-specific equipment
• Branding and signage
• Luxury amenities or finishings
• Furniture
• Moving expenses
• Data cabling

If the tenant’s planned improvements exceed the described and agreed-upon allowance, the tenant will typically be responsible for the overages. Tenants usually submit a budget for the tenant improvements to the landlord to keep everyone aligned on what’s happening and costs.

TIA vs. Rent Concessions

While they may appear similar, TIAs and rent concessions differ as they serve distinct purposes.

A rent concession is when a landlord offers the tenant a discount on rent, usually at the beginning of the lease term. It can arise for a number of reasons. While the cost savings on rent may prompt the tenant to make some improvements to the unit (with the landlord’s permission), the financial break is usually due to market conditions, discounts, or promotions the property owner offers.

TIAs are specifically negotiated as a win-win for both parties. While the tenant benefits in the short term, the landlord should expressly benefit from the improvement over the long term. TIAs must also be used directly for the improvements that have been previously discussed and tracked accordingly.

Streamline Your Landlord-Tenant Relationship with TurboTenant

As landlords consider strategies for attracting property management clients or finding property management leads, it is critical to choose a platform that can streamline operations and make managing property easier.

TurboTenant is a robust property management platform that centralizes workflows by providing landlords with tools to help manage tenant improvements. Some of these features include:

• Rental accounting tools to track expenses and manage profits
• In-app messaging for landlords and tenants provides easy communication during ongoing improvement projects
• Fully customizable online lease agreement templates that make it easy to add language around tenant improvements

Whether you’re a new or experienced property manager, tracking every detail of the rental process has never been easier.

Sign up for a free account today!

Tenant Improvement FAQs