Many tenants are very sensitive about upfront capital requirements as they are about negotiating the best rental rate.
There are several variables which most landlords consider before offering a sizable tenant improvement allowance.
- Tenant creditworthiness. Tenants with better credit are more likely to receive generous tenant improvement packages. If the prospective tenant has a limited operating history, is a local or regional business or is in a highly volatile industry, landlords tend to balk at large improvement packages. There are alternatives to being able to say you’re rated AAA by S&P, including posting a larger security deposit or a letter of credit.
- Length of the initial lease term. With every dollar the landlord invests to lease vacant space, they undoubtably expect a return on this incremental investment. The most common way to realize a return on this investment is by simply increasing the base rental rate. But, another is to require a longer lease term. Here is why. The landlord wants reduce exposure to future capital outlays on the same space. The best way to do that is to make sure the tenant is going to be there for a long time, thereby deferring retenanting costs for as long as possible.
- The type of improvements. Many landlords want to know that the improvement allowance will be spent on items which could be reappropriated for future tenants of the space. In other words, they want to know that the improvements made today will most likely reduce future releasing costs.
- The landlord’s own financial position. Each landlord’s investment strategy and financial position is different. While it is difficult (if not impossible) to truly know this, many tenants rely on their broker to provide proprietary market inteligence to gain a better understanding of a landlord’s preferences.
While there are numerous reasons landlords are wary of offering big tenant improvement packages, the ones above are the most common.