Office Space Tenant Improvements – Part 1 of 2

First, let us point out that due to the lack of new buildings in the Fairfield and Westchester county office market, almost all available space is second or third generation (meaning one or more tenants previously occupied it). Some landlords have actually “gutted” their available space due to their outdated condition or layout, as it is easier in these circumstances for tenants to view raw space.

So, in this market when a tenant is looking to relocate their office space (or renew), who pays for the alterations? It is typical for the landlord to pay for them.  Tenant’s often ask:  if I take space “as is”, or just have it carpeted and painted, will I be able to negotiate a substantially lower rent than the asking rent. In most cases the answer is “no” due to the landlord’s existing or future mortgages, as they often have to maintain certain base rent levels. Tenants should focus on what we call the “net effective” base rent, which is the base rent minus the value of free rent. The favorable impact of free rent can be substantial. A landlord can off-set a higher rent with free rent in year one, and sometimes in year two and beyond. However, it should be noted it will often not be to the level of the tenant’s expectations of sacrificing tenant improvement dollars for a lower base rent.

There are several critical factors to keep in mind with regards to the negotiation of a tenant improvement allowance provided by a landlord, namely: the size of the tenant (larger deals command more concessions), the credit-worthiness of the tenant, and the term of the lease (in most cases the minimum term is five years and the longer the term the more concessions will be available).