Should You Put Your Tenant Improvement Allowance in Escrow?

Negotiating the Tenant Improvement Allowance (TIA) was already one of the most critical aspects of lease negotiation. Now, let’s throw in the uncertainty that your landlord may not be able to provide what they promise, and prepare for things to get dicey.

Amidst an oversaturated office market, landlords are feeling the pressure to offer generous concessions to attract tenants. And at the same time, the demand for premium properties is skyrocketing compared to the performance of B and C class offices.

All this culminates in the fact that landlords are offering higher TIA's than ever, but if you don’t implement protections before signing your lease, your finances may be in jeopardy. Learn about why tenants should consider putting their TIA's in an escrow account and what happened that led to this.

Putting TIA into Escrow

Putting a tenant improvement allowance in an escrow account involves depositing the allocated funds into a separate account held by a neutral third party, typically an escrow agent or a financial institution. The purpose of this arrangement is to safeguard the funds and ensure they are used appropriately for the approved tenant improvements.?

When the tenant improvement allowance is placed in an escrow account, the landlord does not have direct access to these funds. Instead, the tenant and landlord agree on the conditions and terms under which the funds can be disbursed for approved construction or renovation activities.

The escrow agent acts as a custodian of the funds, releasing them based on the agreed-upon milestones or completion of the tenant improvements. This escrow arrangement provides a level of protection for both the tenant and the landlord.

The tenant has assurance that the funds will be available for the intended improvements, while the landlord has confidence that the funds are secure and will be used appropriately.

By utilizing an escrow account for the tenant improvement allowance, potential disputes and risks related to the allocation and use of the funds are minimized. It provides transparency, accountability, and a structured process for managing and utilizing the funds, ensuring that the tenant improvements are completed as intended.

TIA in Escrow Provides Protections for Tenants

Office tenants can protect their investment, maintain project continuity and control over their office space's design and functionality. This approach provides tenants with peace of mind and greater assurance that their workspace will meet their specific requirements, even in challenging landlord situations.

Prospective office tenants now should absolutely be considering putting this into action. With landlords defaulting left and right , the leasing environment has become precarious for the tenant. And if there’s no safeguards in place in the lease before it happens, the financial burden gets put entirely on tenants. As always, be sure that you're working hand-in-hand with an accredited commercial real estate attorney for all things legal.?

“Money given by landlords to tenants to customize their office space, generally paid as an allowance over a period of time, could be lost, and in the current market, brokers said that money from landlords could be equivalent to $70 a square foot.”

-The New York Times

Oversaturated Office Market Driving Up Tenant Improvements

The modern tenant has different worries. Instead of prioritizing location or amenities, tenants have more foundational concerns whether their landlord’s financials are on the line and whether hard times will negatively impact the service and upkeep of their building.??

Because with so much cheap, empty space on the market post-WFH movement, most buildings have seen their profit margins shrink or go into the red because the deals they offer must be incredibly competitive to lure in long-term tenants.

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