If you are in the middle of an office build-out project or planning one soon, we understand how stressful it can be to worry about going over budget.
Here at AQUILA, we know projects can exceed their budget for a variety of reasons, and our project management team are experts at helping their clients find ways to pay for those excess expenses.
One option, known as an “amortized tenant improvement allowance” or “amortized TI”, can be an effective way for a tenant to do just that.
Read Now: What Is a Tenant Improvement Allowance and What Does It Cover?
In this article, you will find:
- An overview of amortized TI
- Benefits of amortized TI
- Limits on amortized TI
- Alternatives to amortized TI
What is an Amortized Tenant Improvement Allowance?
An amortized tenant improvement allowance is a mix between a TI allowance and a loan from the landlord.
It is a provision that can be negotiated into a lease that enables the tenant to borrow money from the landlord (with interest) which can then be put toward the project. Like a loan from a bank, the tenant will then pay back the landlord over the term of the lease.
Read Next: Your Guide to the Elements of a Commercial Lease (Terms, Definitions)
These agreements are usually capped at a maximum amount the tenant can borrow, which will be specified in the original lease. The tenant is not obligated to use the allowance, and can also choose to use less than the maximum amount.
Here’s an example of what an amortized TI provision might look like in a lease:
Should the budgeted tenant improvement allowance be inadequate to finish the Premises, Landlord shall fund Tenant up to an additional $5.00 per rentable square foot to be amortized into the Base Rent assuming a 10% interest rate.”
Benefits of Amortized TI
The primary benefit of amortized TI is that it gives backup funding in the event your project goes over budget. Rather than having to worry that you will need the cash on hand to cover unexpected expenses, you can utilize your amortized TI allowance to make up the difference.
Because there are restrictions on what a tenant improvement allowance can be used for, you may need to pay for some expenses out of your own pocket, but amortized TI will at least provide a buffer.
This also means you will likely be able to finish your project how it had originally been planned. Instead of having to scale the project back or call it off altogether, you can continue moving forward and paying the expense off over time.
Limits on an Amortized Tenant Improvement Allowance
The biggest restriction on amortized TI is that it needs to be negotiated into your lease before you sign it. If it’s not, it may be nearly impossible to convince the landlord to give you this allowance after the fact. One of the many benefits of a tenant representation broker is that they can help you negotiate with the landlord to have this provision inserted into your lease.
However, assuming you have successfully negotiated an amortized TI provision into your lease, there are still some limits you should be aware of. As mentioned above, there are restrictions on what a TI allowance can be used on. If the costs causing you to exceed your budget do not fall under those restrictions, you will be unable to use your amortized TI allowance to pay for them.
Alternatives to Amortized TI
The obvious alternative to using amortized TI is to come out of pocket for the additional expenses. If your company is willing and able to do so, this solution is the easiest to implement, and you will avoid paying the interest portion that the landlord will require when amortizing through them.
However, if paying out of pocket is not an option and your company is willing to compromise on some of the original plans, value engineering can be a great way to finish the project without exceeding the budget.
On the other hand, if your company is not willing to compromise on the plans, securing a bank loan is also a viable option. Depending on the company’s creditworthiness and interest rates, this option would also be very similar to amortized TI.
Think Amortized TI is Right for You?
We hope this article cleared up some confusion surrounding amortized TI and helped alleviate some of the stress you may have had about going over budget.
If you would like to learn more about negotiating a tenant improvement allowances, read our article Six Tenant Improvement Allowance Questions, Answered.