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What are some creative ways to finance tenant improvements?

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Tenant improvements (TIs) are the alterations or additions that a landlord or a tenant makes to a commercial space to suit the tenant's needs and preferences. TIs can range from minor cosmetic changes to major structural renovations, depending on the lease terms and the type of business. However, TIs can also be costly and time-consuming, especially for new or small businesses that may not have enough capital or cash flow to cover the expenses. Fortunately, there are some creative ways to finance tenant improvements that can help both landlords and tenants achieve their goals and save money. Here are some of them:

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Renton Ragwan, MBA

610-888-2886 - [email protected] Senior Loan Consultant. SBA, Biz and CRE Financing Nationwide

1 Negotiate a TI allowance

A TI allowance is a sum of money that the landlord agrees to provide to the tenant for TIs, either as a lump sum or a per-square-foot amount. The tenant can use this allowance to pay for the design, construction, and installation of the TIs, or to reimburse the landlord for doing so. A TI allowance can be negotiated as part of the lease terms, depending on the market conditions, the tenant's creditworthiness, the length of the lease, and the scope of the TIs. A TI allowance can benefit both parties, as it can reduce the tenant's upfront costs and increase the landlord's rental income and property value.

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Justin Kline

Transactional Counsel
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Very true that a TI Allowance can provide real economic benefit to both Landlord and Tenant in a proposed leasing transaction. I have experienced this handling numerous leases of commercial space where significant build-out was required. Negotiation of the amount, timing for construction completion, consequences of delay (rent abatement and may Tenant terminate if not completed by date certain, if LL responsible), and Tenant deliverables to receive reimbursement payment for completed construction (if T responsible). Can be quite detailed and inclusion of specifics is essential to enable adequate compliance by the parties.

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Erik Lilla
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When negotiating a TI allowance an important consideration for both the Landlord and the Tenant is the initial term of the lease. If the Tenant is looking for a three year term, it will difficult for the Landlord to recoup their costs without making the rent astronomical. If the a Tenant is willing to commit to longer term, Landlords are often happy to offer larger TI Allowances.

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2 Use a turnkey build-out

A turnkey build-out is a type of TI arrangement where the landlord takes full responsibility for delivering the space to the tenant in a ready-to-use condition, according to the tenant's specifications and requirements. The landlord hires and pays for the contractors, architects, engineers, and other professionals involved in the TIs, and bears the risk of any delays, errors, or overruns. The tenant does not have to worry about managing or financing the TIs, but may have to pay a higher rent or accept a longer lease term to compensate the landlord for the investment. A turnkey build-out can be advantageous for tenants who need a fast and hassle-free move-in, and for landlords who want to maintain control and quality over the TIs.

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Erik Lilla
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In my experience turnkey build-outs aren't available to just any Tenant. The Landlord is going to protect their investment which will require a credit worthy Tenant. If someone goes this route they will need to be prepared to demonstrate strong financials and they may even be required to make a personally guaranty.

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3 Apply for a SBA loan

A Small Business Administration (SBA) loan is a government-backed loan that can be used for various purposes, including TIs. The SBA does not lend money directly, but guarantees a portion of the loan from a participating lender, such as a bank or a credit union. This reduces the risk for the lender and makes it easier for the borrower to qualify for favorable terms and rates. The SBA offers several loan programs, such as the 7(a) program, the 504 program, and the microloan program, each with different eligibility criteria, loan amounts, and repayment options. A SBA loan can be a viable option for tenants who need additional funding for TIs and who meet the SBA's requirements for small businesses.

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Renton Ragwan, MBA

610-888-2886 - [email protected] Senior Loan Consultant. SBA, Biz and CRE Financing Nationwide
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SBA loans are a great way to finance tenant improvements. With an SBA loan the total cost, including both the hard and soft costs can be financed.

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GARY LAM

Transforming Shopping Mall Dynamics: Maximizing Foot Traffic, Revenue, and Community Engagement Through Innovative Strategies
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Leveraging a leasehold improvement loan can be a strategic move when enhancing a leased property. I've utilized this option for an office space renovation, and it was a game-changer. This loan specifically caters to tenant improvements, offering flexibility in covering costs for modifications or upgrades. It's a beneficial approach, allowing businesses to invest in enhancements without straining immediate cash flow, ultimately amplifying the space's functionality and value.

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4 Leverage a leasehold improvement loan

A leasehold improvement loan is a specific type of loan that is designed for financing TIs. Unlike a SBA loan, a leasehold improvement loan is not guaranteed by the government, but by the lease itself. This means that the lender can use the lease as collateral and seize the TIs if the borrower defaults on the loan. A leasehold improvement loan can be obtained from a traditional or alternative lender, such as a bank, a credit union, or an online platform. The terms and rates of a leasehold improvement loan may vary depending on the lender, the borrower, the lease, and the TIs. A leasehold improvement loan can be a suitable choice for tenants who have a strong lease agreement and a solid business plan.

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5 Explore a sale-leaseback transaction

A sale-leaseback transaction is a creative way to finance TIs that involves selling the property to an investor and leasing it back for a fixed period and rent. This allows the tenant to free up capital and use it for TIs or other business needs, while retaining the use and occupancy of the space. The investor, on the other hand, gains a steady income stream and a tax deduction for depreciation. A sale-leaseback transaction can be arranged with an individual or institutional investor, such as a real estate investment trust (REIT) or a private equity firm. A sale-leaseback transaction can be beneficial for tenants who own the property and want to leverage its value for TIs, without giving up their operational flexibility.

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6 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?

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What are some creative ways to finance tenant improvements?

1

2

3

4

5

6

1 Negotiate a TI allowance

2 Use a turnkey build-out

3 Apply for a SBA loan

4 Leverage a leasehold improvement loan

5 Explore a sale-leaseback transaction

6 Here’s what else to consider

Commercial Leasing

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What are some creative ways to finance tenant improvements?

1

2

3

4

5

6

1 Negotiate a TI allowance

2 Use a turnkey build-out

3 Apply for a SBA loan

4 Leverage a leasehold improvement loan

5 Explore a sale-leaseback transaction

6 Here’s what else to consider

Commercial Leasing

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