Whether we are meeting with a tenant who is looking to relocate, or a landlord who is looking to fill their vacant space, one of the first questions that always comes up is what is the going tenant improvement allowance. While there are many factors to take into account, the most important one is to recognize the asking lease rate for a particular building. Lease rates will typically vary quite a bit depending on the class of building and current condition of the space. The higher the lease rate the more a landlord can justify offering a higher allowance. Conversely, the lower the lease rate, the less allowance the landlord can offer. New construction also warrants a higher allowance than second generation space, however it also correlates to a higher lease rate. Other factors that influence how much allowance is offered is the length of the term and credit of the tenant.
While each space should be examined on a case by case basis, in the Central Ohio market we are currently observing the following market trends related to tenant improvement allowances. New construction, class A buildings with top of market lease rates are offering allowances in the range of $5.00 to $6.00/SF per year of lease term. So for a 10 year lease a tenant can expect between $50.00 and $60.00/SF of allowance. For existing class A second generation spaces we are seeing allowances at $4.00 to $5.00/SF per year of lease term. Second generation class B spaces fall in line thereafter at $3.00 to $4.00/SF per year. All class C spaces the allowances are typically negotiated on an overall cost basis or negotiated on a line item basis such as paint, carpet, etc. Medical spaces and other specialized build outs will often justify that there is an additional allowance which is to be amortized at a market interest rate and spread over the term of the lease.
Keep in mind that while these are the market trends, each individual situation is different. Market demands will sometimes dictate that the landlord doesn’t need to allow a market allowance because their space is in that high of demand, or conversely, they need to offer an above market allowance to compensate for an inadequacy. Furthermore, depending on the cash basis of a landlord it may be prudent for a landlord to offer abated rent in exchange for a tenant funding their own tenant improvement allowance, however such figure is not usually representative of a dollar for dollar credit. The other thing to remember is that most landlords do not wish to offer an allowance that is higher than what the particular scope of work calls for. In this instance the two parties may decide to negotiate other concessions until they reach mutually agreeable terms.