How can you determine the scope of tenant improvements?

Tenant improvements, or TIs, are the changes that a landlord or a tenant makes to a commercial space to suit the tenant's needs. TIs can range from minor cosmetic upgrades to major structural modifications, depending on the lease terms and the tenant's business requirements. Determining the scope of TIs is a crucial step in any real estate development project, as it affects the budget, timeline, and quality of the final product. In this article, you will learn how to determine the scope of TIs by following these six steps:

1 Assess the existing condition

The first step is to assess the existing condition of the space, or the "as-is" state. This involves inspecting the physical features, such as the layout, flooring, ceiling, lighting, plumbing, electrical, HVAC, fire safety, and accessibility. You should also review the legal documents, such as the lease agreement, the building codes, the zoning regulations, and the permits. This will help you identify what needs to be changed, what can be reused, and what are the potential challenges or risks.

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Abdulla fahmy-Abu Dhabi real estate consultant

Real Estate Consultant for Home Buyers 🏘️ | Home sellers | Resilience | off plan Advisor | Investor's property | Abu Dhabi, Dubai real estate | Helping people to maximize ROI
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*Nail the tenant improvement sweet spot: 1. Needs & Wants: What's vital (operationally, brand-wise) & what's dreamy? Assess the space, too. 2. Budget & Feasibility: Landlord contribution? Tenant allowance? Get contractor quotes, prioritize must-haves. 3. Collaboration: Talk to the landlord, seek expert advice. 4. Flexibility: Adapt to budget realities, plan for future needs. Balance function, aesthetics, and cost. With clear communication and adaptability, you'll waltz through the tenant improvement process!

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2 Define the tenant's needs

The second step is to define the tenant's needs, or the "to-be" state. This involves consulting with the tenant and understanding their business goals, preferences, and expectations. You should also consider the industry standards, the market trends, and the best practices for the tenant's type of business. For example, a retail store may need more display windows, signage, and shelving, while a medical office may need more exam rooms, sinks, and storage. You should also factor in the tenant's growth plans, future needs, and sustainability goals.

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3 Compare the as-is and to-be states

The third step is to compare the as-is and to-be states, or the "gap analysis". This involves listing the differences between the existing condition and the desired condition, and prioritizing them according to their importance, urgency, and feasibility. You should also estimate the costs, time, and resources needed for each difference, and evaluate the return on investment, or ROI. This will help you determine what is essential, what is desirable, and what is optional for the tenant improvement project.

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4 Negotiate the tenant improvement allowance

The fourth step is to negotiate the tenant improvement allowance, or the TIA. This is the amount of money that the landlord agrees to pay or reimburse for the tenant improvements, usually expressed as a dollar amount per square foot or a lump sum. The TIA depends on various factors, such as the market conditions, the lease terms, the landlord's financial situation, and the tenant's bargaining power. You should also consider the tax implications, the accounting methods, and the legal liabilities of the TIA. The goal is to reach a fair and mutually beneficial deal that covers the scope of TIs.

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GARY LAM

Adding Value to Real Estate: Blending Expertise in Commercial, Residential, and Property Management with a Passion for Driving Impact and Excellence
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Negotiating the allowance for tenant improvements is crucial. It involves reaching a mutual agreement between the landlord and tenant regarding the budget allocated for enhancements. Clearly outline improvement costs, ensure they align with tenant needs, and discuss how expenses exceeding the allowance will be handled. A well-negotiated allowance sets expectations, avoids financial disputes, and ensures a smooth improvement process, benefitting both parties involved.

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5 Draft the tenant improvement work letter

The fifth step is to draft the tenant improvement work letter, or the TIWL. This is a document that specifies the details of the tenant improvement project, such as the scope, schedule, budget, quality standards, responsibilities, and approvals. The TIWL should be clear, comprehensive, and consistent with the lease agreement and the TIA. It should also include contingencies, change orders, and dispute resolution mechanisms. The TIWL should be reviewed and signed by both parties before the commencement of the work.

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6 Manage the tenant improvement project

The sixth and final step is to manage the tenant improvement project, or the TI project management. This involves overseeing the planning, design, construction, and delivery of the tenant improvements, according to the TIWL. You should also monitor the progress, performance, and quality of the work, and communicate regularly with the stakeholders, such as the tenant, the landlord, the contractors, and the consultants. You should also handle any issues, changes, or conflicts that may arise during the project, and ensure that the tenant is satisfied with the outcome.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you determine the scope of tenant improvements?

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4

5

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1 Assess the existing condition

2 Define the tenant's needs

3 Compare the as-is and to-be states

4 Negotiate the tenant improvement allowance

5 Draft the tenant improvement work letter

6 Manage the tenant improvement project

7 Here’s what else to consider

Real Estate Development

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How can you determine the scope of tenant improvements?

1

2

3

4

5

6

7

1 Assess the existing condition

2 Define the tenant's needs

3 Compare the as-is and to-be states

4 Negotiate the tenant improvement allowance

5 Draft the tenant improvement work letter

6 Manage the tenant improvement project

7 Here’s what else to consider

Real Estate Development

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