Studio Talks: What is Tenant Improvement (TI) Allowance and How Can You Maximize Your Dollars Spent on a New Office Space?
When thinking about both the short-term and long-term goals when we begin to plan for a new office space, it’s fair to say designing an environment that will support our people to perform at their best, or ensuring company culture will live proudly in a space both come top of mind. But, how can we be sure we accomplish our goals not only conceptually and aesthetically, but cost-effectively?
At Studio Eagle, we believe all parties involved can benefit from the role of tenant improvement allowance in their new office space effort – from the first negotiation to the next monetary opportunity that lies ahead in the process.
We sat down with part of our technical team, Mike Macdonald (Technical Director), and Steve Lyons (Technical Manager), to talk about the budgeting process they experience every day working with our clients. From thoughtful analysis, to performing due diligence, to understanding code compliance, we can exercise tenant improvement allowance to set a successful financial groundwork from strategy, to design, to the full office build-out.
Studio Eagle: Help us understand tenant improvement (TI) allowance. What is this and how does it work?
Mike Macdonald: Tenant improvement allowance is known as “TI” allowance, provided by the landlord when the tenant is in the market for a new space – it’s a monetary compensation that can help both the tenant and landlord benefit from the investment. When the tenant submits a letter of intent or a request for proposal is when we find the negotiation typically begins. These allowances can vary on the length of the lease, existing conditions, or by geographic location – just to name a few – depending on the specific tenant and their situation.
Steve Lyons: Often what we have found, is the perception that this allowance covers the entire process. As the technical team here at Studio Eagle, we play an educative and important role of ultimately helping our clients and their landlords in their negotiation to make the most of the dollar opportunity. Whether it is to better manage the soft costs, or how at the end of the day they can achieve the level of design they wish without risking cost overruns, we’re there to keep costs down for the tenant and maximize the spend opportunity from the landlord.
Studio Eagle: How are Studio Eagle’s clients using TI allowance to their benefit?
Steve Lyons: As Mike touched on earlier, we believe a tenant improvement allowance is better for all parties involved – both the tenant and landlord. With a TI allowance, our clients are able to have control of the spend while alleviating project risk overrun for the landlord. When we prepare for due diligence and site inspections for example, having a transparent and controlled spend can help our clients understand their cost more thoroughly. It’s basically our job as the workplace design partner to help our clients determine the best way to appropriate their TI allowance and their capital commitment relative to their specific priorities.
Studio Eagle: What have you learned about the role of due diligence in maximizing the dollars spent here?
Mike Macdonald: Due diligence is key to the progressive budgeting. By performing a thorough inspection of the real estate on the table, we can identify any areas of non-function or any areas that are not code compliant. We can also analyze existing building components such as mechanical and electric systems that could be of repurpose in the new space. Due diligence is really so important to help us better understand the existing conditions and ensure the TI dollars are sufficient to the needs we are discussing.
Studio Eagle: It sounds like progressive budgeting is an integral effort to make the most of a TI allowance. What are the challenges or risks in this costing process and how are Studio Eagle’s technical team and clients overcoming these?
Mike Macdonald: Well, if we take a step back from a process service standpoint, in the traditional design method and construction process the client is simply put, more at risk for cost at every turn. There is lack of transparency, poor coordination, and as we’ve seen it a lack of speed to get the job done – and in the latter, there is that lack of technology that modern processes today need to be efficient. I think it comes down to what’s missing there – any gaps that could lead to cost overrun typically fall back on the client. Having a technical team that works with you from beginning to end to provide progressive budgeting ensures transparency of funds, maximizes the TI allowance, and alleviates overall risk.
Steve Lyons: Additionally, I’d say the economics that we have been facing are that construction costs have seen annual inflation – especially as the economy has been on the rise and there is a higher demand for labor. In a landscape such as this, progressive budgeting is more critical than ever. Also, we’ve seen a trend with businesses today to flesh out further – specifically with their brand identity in full build-out of their new space. Cost consideration is even more important here.
Studio Eagle: Where do you see the industry trending towards with TI allowance in the future?
Mike Macdonald: I definitely think TI allowance will continue to trend upwards in both our suburban and metropolitan areas to both retain talent and in recognizing the construction cost trends as Steve touched on earlier.
Steve Lyons: I agree with Mike. I think TI contributions need to align more with current construction costs. Perhaps we will begin to see more and more tenants opting for the TI route because they need to control their own brand identity and corporate design aesthetics in their new space. Simply put, we are becoming more sophisticated in what we desire in a working environment and expect more from the process that helps us get there. Spaces are becoming smarter, and the addition of technology is adding cost that needs to be handled carefully and managed effectively for the best outcome. At the end of the day, our working environment is performing as more than just a working environment – and our clients should have the control and return their looking for from an investment and retention tool as important as a new office space.
Interested in continuing the conversation with us? We’d love to hear from you! Send us a note or connect with Mike, Steve, and our entire technical team here at Studio Eagle at firstname.lastname@example.org .