Tenant Improvement (TI)

Tenant Improvements vs. Building Improvements: What is the Difference?

The difference between tenant improvements (TI) and building improvements is as follows.

• Tenant Improvements (TI) → These costs directly benefit an individual tenant rather than the entire building, as in the case of building improvements.
• Building Improvements → In contrast, a building improvement is beneficial to all tenants at a given property, such as upgrades to the common area, i.e. shared spaces. For example, a modern gym used by all tenants would not qualify as an example of a building improvement.

Why are Tenant Improvements Important?

For tenants of commercial properties, the decision to commit to a multi-year lease agreement is based on factors specific to their unique needs.

The core determinant of the requirements specific to each tenant boils down to the factors that ensure their operations can be run efficiently, without any constraints.

From the perspective of a property owner, securing commercial tenants requires understanding those specific needs – often retrieved via discussions – and negotiating an amicable solution in which both parties are satisfied.

In short, the property owner must be open to accommodating the requests of the tenants, or else the tenant is likely to sign a lease elsewhere.

But while the property customizations are technically meant to serve the best interests of a specific tenant, certain changes can still be beneficial across the long run, i.e. the improvements have a positive impact on the quality (and value) of the rental property or unit, despite being customized for a particular tenant.

Of course, structural changes to a property are permanent, so there must be a balance wherein the property still can be rented by other tenants at a later date. If the requested changes cause the market of potential tenants to drop off far too substantially, approval of the tenant improvements can be a costly error.

Who Pays for Tenant Improvements?

In commercial leases, the property owner (or landlord) is the party that pays for tenant improvements (TI) in most cases.

The formal terms are stated in the agreed-upon leasing agreement, where the negotiated tenant improvement allowance is outlined.

Simply put, tenant improvement allowances are an agreed-upon figure that the landlord agrees to pay the tenant, either directly or indirectly, for the property improvements.

For instance, the contract specifies whether the lessor or lessee will pay for the tenant improvements, including language around what will occur if the total cost of the property improvement exceeds the stated allowance.

In most cases, the tenant improvement allowance (TI) is expressed as either a fixed total dollar sum or on a per-square-foot (PSF) basis.

• Total Cost > Tenant Improvement Allowance → The tenant is typically responsible for paying the excess beyond the tenant improvement allowance if the actual spending was greater than the originally agreed-upon amount.
• Total Cost < Tenant Improvement Allowance → Conversely, if the build-out costs less than the tenant improvement allowance, the landlord could adjust the rent payments downward. However, these specific terms are negotiated between the two sides in the lease, so the lease agreement ultimately dictates the outcome.