Tenant improvements are improvements that a landlord/property owner makes to a property to suit the needs of a new tenant. This can include wall coverings, fire safety equipment, updating security systems, partitions, and HVAC systems, among many other building elements. Tenant improvements are most common for commercial properties, and are extremely rare in multifamily real estate.

A leasing commission (LC) is a percentage based commission that a leasing agent receives when they successfully close a deal between a landlord and a tenant. This commission is typically negotiated and split between the tenant and the landlord.

The benefits of tenant improvements for landlords include the ability to incentivize tenants to sign or renew a lease, while also improving the property. A tenant improvement allowance gives the landlord a way to cover the cost of tenant improvements, while also allowing the tenant to repay the allowance over the life of their lease. This can help reduce the chance of a loan default, while also protecting the borrower from not having enough funds to improve the property. Additionally, tenant improvements can help increase the value of the property, making it more attractive to potential tenants.

Sources:

• https://www.multifamily.loans/ti-lc-tenant-improvements-leasing-commission/
• https://www.commercialrealestate.loans/commercial-real-estate-glossary/tenant-improvement-allowance/

Leasing commissions can have a strong upside for tenants, who want to reduce their fixed costs, as well as for landlords, who want to increase their property's potential monthly revenues. In most cases, a tenant can negotiate down their potential base rent if they're willing to set a lower breakpoint, give a higher percentage of their revenues, or both. A tenant may also be willing to set a lower breakpoint or increase the percentage of their revenues for other concessions, such as a lease renewal option.

Leasing commissions are typically set at a certain amount of the overall cost of the lease, for as many years as the lease is set to continue. For instance, a five-year lease for 5,000 square feet at $30/sq. ft./year has an overall value of $750,000 (5,000 sq. ft. * $30/sq. ft./year * 5). If the leasing commission is set at 5%, the landlord/owner will pay about $37,500 in leasing commissions.

The risks associated with tenant improvements and leasing commission include construction costs rising dramatically, construction delays, and the potential for the tenant improvements not being enough to get the desired investment outcome. Construction costs have risen significantly over the past few years, and construction delays can be caused by supply chain issues. Additionally, the tenant improvements may not be enough to get the desired investment outcome if potential renters are looking for a newer building.

Sources:

• www.multifamily.loans/ti-lc-tenant-improvement-leasing-commissions
• www.multifamily.loans/ti-lc-tenant-improvements-leasing-commission
• www.multifamily.loans/apartment-finance-blog/how-to-renovate-your-apartment-complex
• www.multifamily.loans/apartment-finance-blog/janover-data-reveals-steady-stream-of-cre-loan-inquiries

The best practices for negotiating tenant improvements and leasing commission depend on the specific situation. Generally, it is important to ensure that the tenant and landlord are both in agreement on the terms of the lease, and that the tenant is aware of the costs associated with the tenant improvements. Additionally, it is important to ensure that the tenant is aware of the holdback amount that may be required by the lender, and that the tenant is able to pay for any additional costs that may arise. Finally, it is important to ensure that the tenant is aware of any potential tax implications associated with the tenant improvements and leasing commission.

For more information, please see the following sources:

• Tenant Improvement/Leasing Commissions
• Negotiating Tenant Improvements
• Leasing Commissions