How can you avoid common pitfalls when analyzing tenant improvement allowances and concessions?

1 What are tenant improvement allowances and concessions?

Tenant improvement allowances (TIAs) are funds that landlords provide to tenants to cover part or all of the costs of renovating, remodeling, or customizing their leased space. TIAs can be expressed as a lump sum, a per-square-foot amount, or a percentage of the rent. Concessions are other benefits that landlords offer to tenants, such as free rent, reduced rent, parking discounts, signage rights, or early occupancy. Concessions can be granted upfront, during the lease term, or at the end of the lease.

2 How do tenant improvement allowances and concessions differ?

TIAs and concessions differ in several ways. First, TIAs are usually taxable to the tenant as income, while concessions are not. Second, TIAs are usually subject to depreciation, while concessions are not. Third, TIAs are usually paid after the tenant completes the improvements and submits invoices, while concessions are usually applied at the beginning or during the lease term. Fourth, TIAs are usually limited by a cap or a budget, while concessions are usually negotiable.

3 How can you avoid overpaying for tenant improvement allowances?

One of the common pitfalls that tenants face when analyzing TIAs is overpaying for them. This can happen when tenants accept a lower rent in exchange for a higher TIA, without considering the net present value (NPV) of the deal. NPV is the difference between the present value of the cash inflows and outflows over the lease term. A lower rent may seem attractive, but it may not offset the higher TIA, especially if the TIA is taxable and depreciated. To avoid this pitfall, you should compare the NPV of different lease scenarios, using a discount rate that reflects your cost of capital and risk.

5 How can you avoid losing flexibility with concessions?

A third common pitfall that tenants face when analyzing concessions is losing flexibility with them. This can happen when tenants accept concessions that are tied to certain conditions, such as a longer lease term, a higher rent escalation, or a restricted sublease clause. These conditions may limit your options if your business needs change, or if the market conditions change. To avoid this pitfall, you should weigh the benefits and costs of the concessions, and negotiate for terms that give you more flexibility, such as a shorter lease term, a lower rent escalation, or a more favorable sublease clause.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?