Turnkey or Tenant Improvement Allowance and how they differ?

Turnkey:

When negotiating a lease the Landlord and tenant will typically agree to certain improvements required to meet the Tenant’s needs.  The Lease will define those preoccupancy construction terms.  You can view it as a level of risk.  In a Turnkey, the Landlord is responsible for preparing the space in accordance with an agreed upon space plan and a predefined level of finishes, often called a “work letter”.   Any level of finishes or construction above the defined “work letter” and preapproved space plan become a tenant cost.  Typically, any savings the Landlord can achieve after the terms are set will be a Landlord realized savings not likely to be passed on to the tenant and hard to define.  The bulk of the risk in a turnkey deal is with the Landlord.

The components of a Turnkey Tenant Construction Deal are as follows:

  • Landlord and Tenant approved Space Plan
  • Landlord and Tenant responsibilities
  • Exhibit defining level of finishes and any tenant specialty items the Landlord may have agreed to under the lease.
  • Schedule

In a Turnkey lease deal the Landlord has the majority of control over the construction, along with the majority of the risk.  Therefore, in a Turnkey if the Landlord’s budget is $40.00 per square foot, but the Landlord is able to deliver the space for $35.00 per square foot the Landlord keeps the savings and often times the Tenant is not even aware of the reserve.

Tenant Improvement (TI) Allowance:

On the other hand, Tenant Improvement (TI) allowances, are negotiated amounts, often market driven, a Tenant’s Market may translate to a higher Tenant Improvement package, the opposite would be true in a tight market giving the negotiating advantage to the Landlord.  The TI allowance is usually a per square foot dollar amount. The lease may read “… $50.00 per square foot is available for Tenant Improvements…”

The amount of TI allowance is typically a negotiate item varying with rental rate, term and square footage.  Since nothing in life is free, the lease terms will dictate what the Landlord is willing to contribute within the terms of the lease.  Leasing 1,000 SF office for five years, the TI allowance will be lower than someone who is renting a 50,000 SF office for ten years. The total dollar amount of allowance is the allowance rate per square foot multiplied by the square footage (example: $50.00×10,000=$500,000).  This then becomes your budget you will need to design and build to.

The Tenant Allowance is a benefit to the Tenant and a considered a usual cost of doing business for the Landlord such as a capital improvement or lease acquisition expense.  Be prepared to negotiate hard for the is benefit.

Another item of negotiation is what happens to unspent TI dollars.  Say you spend $45.00 of a $50.00 allowance who gets the extra $5.00 and how is it to be applied, rent reduction, free rent or to be utilized for future improvements.

In an allowance deal, the Tenant has more control over the design and construction, however has the risk of any overage resulting from the Tenant’s desired level of finishes, and other niceties.

  • Components of a Tenant Improvement Allowance:
  • Improvement Allowance usually expressed in $XX.XX/Square Foot
  • Definition of what constitutes an Improvement (allow costs)
  • Landlord and Tenant approved Space Plan
  • Landlord and Tenant responsibilities
  • Definition of responsibility for the design and construction
    • Landlord or Tenant
    • Building Standard Design Elements
  • Treatment of uncommitted improvement dollars
  • Schedule

Whether you are involved with a Turnkey or Tenant Allowance it is advisable to utilize a professional to ensure you get the maximum value as defined in your lease, manage the overall budget, manage Tenant driven activates such as FFE, audio visual, IT and Telecom infrastructure and the physical relocation.  Ensuring the tenant is ready to occupy when the space is ready.   Avoiding tenant caused delays and lease holdovers.

A Project Manager, dedicated to your project, will help mitigate the risk, assume tasks and add value through the process.

AT RSC Project Management, we review and manage the process from site selection, lease negotiation, design, construction, relocation to full occupancy and everything little step between.

For more information check us out at www.rscpmc.com