Tenant Improvements

A form of inducement typically seen in office, retail, and industrial real estate; tenant improvements (TIs) are physical changes to a tenant’s leased space to accommodate the specific needs of the tenant. TIs may include building or moving interior walls or partitions, floor covering, shelves, windows, doors, bathrooms, etc. The cost and who bears responsibility for the work is a negotiation between the tenant and the landlord. TIs are generally quoted as an amount per square foot (or per square meter). They are most often offered at the beginning of a newly signed, or newly renewing lease.

Putting ‘Tenant Improvements’ in Context

Sterling Assets Realty, a (hypothetical) well-established real estate investment firm, recently acquired The Clark Tower, a 20-story office building located in the bustling core business district of downtown Chicago. The building, primarily leased to law firms, tech startups, and consulting companies, was in need of modernization to attract and retain high-value tenants.

One prospective tenant, InnovateTech, a rapidly growing tech startup, was interested in leasing the entire 18th floor, approximately 15,000 square feet. To accommodate their specific needs, such as open workspaces, multiple meeting rooms, a relaxation area, and advanced IT infrastructure, significant tenant improvements were required.

The negotiation between Sterling Assets Realty and InnovateTech concluded with an agreement where Sterling would provide a tenant improvement allowance of $50 per square foot, totaling $750,000. In exchange for this tenant improvement allowance, InnovateTech agreed to sign a 10-year lease at $50 per square foot per year. This allowance covered the cost of constructing new interior walls, installing glass partitions to enhance natural light, laying out eco-friendly carpeting throughout, and upgrading the electrical and plumbing systems to support high-tech equipment and a new kitchenette.

This arrangement allowed InnovateTech to customize their space without the full financial burden, while Sterling Assets Realty secured a long-term lease with a promising tenant, enhancing the building’s overall value and appeal in a competitive market. Thus, the tenant improvements acted not only as a facilitator for a tailored office environment but also as a strategic inducement to secure a 10-year lease agreement.