Dental and Medical Counsel Blog

Understanding and Negotiating a Tenant Improvement Allowance

July 3, 2018
Tenant Improvement Allowance - Real Estate Attorney

Let’s assume you have found a commercial space to open your new medical or dental practice. You, as a tenant, may be able to have your landlord pay you for the costs to improve your space in the ways that are needed to operate a successful practice. Whether you are a tenant who is seeking to upgrade existing space, or a new tenant who has not yet built out new space, it might be in your best interest to negotiate on a tenant improvement allowance for your commercial lease.

Negotiated in the Contract

A tenant improvement allowance is negotiated into a contract in which a landlord pays the tenant a set dollar amount in exchange for the tenant to design improvements which meets the needs of the tenant’s business. For example, this would allow a dental practice to design a space in such a way that it has enough water, sewage, and drainage to meet the capacity required for the unique type of setting that is needed for dental work. This allowance is usually a set dollar amount per each square foot of space in the contract. Alternatively, it could be a set dollar amount for the entire project’s construction. Negotiating and confirming the dollar amount is one of the most important pieces of a tenant improvement allowance.

Allocation of Allowance

One of the first things you will need to know is how much money your landlord will provide you to work with. After determining this amount, you will further need to understand if you will be paying the contractors out of pocket, or if your landlord will pay you the allowance up front, half-way through, or in some other arrangement. You will also need to find out exactly which costs are covered as part of the allowance. For example, hard construction costs are usually allowed, but that may not include things like cable running, furnishings, or other technology requirements.

This is where it is crucial for you to understand how much everything costs. A landlord often evaluates the dollar amounts for tenant improvement allowances based on the market, how valuable he or she feels that the tenant is, and how valuable the build out of the property may be. A tenant, on the other hand, will need to self-evaluate the potential costs of the build out. If you underestimate costs and negotiate for the wrong price, you could be out big bucks. We highly recommend using dental specific commercial brokers such as Carr Healthcare Realty in these types of negotiations.

It is also useful to have a medical or dental attorney involved throughout this process. When you have completed the negotiation process and feel that you have achieved the best tenant improvement allowance possible, you can readily move forward and achieve the best build out possible.

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