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  • Writer's pictureCalamos Real Estate LLC

Feasible asks: What brokers can tell you about term length and TI allowance

As the second-highest expense for many businesses, getting the most out of your real estate is a pretty big deal. Even with property search tools at our fingertips, and even in today’s tenants’ market, there are advantages to being represented by a licensed real estate broker when looking to open a new business location or move from your current one.


At Calamos Real Estate, we offer a unique perspective: Our boutique firm is the developer and property manager of CityGate Centre, a 31-acre mixed-use community in Naperville that stands out in the market for being roughly 90 percent leased across office, retail and multi-family residential properties.


This experience gives us insight to what matters most to a tenant, and direct knowledge of landlord and property manager needs and expectations. In short, as tenant-representing commercial real estate brokers we understand which tenant asks are feasible for an owner. That’s a value-add as we guide you along the path to a successful lease transaction.


In Part 1 of this series we looked at rent abatement and escalation clauses, and how each offers different advantages and the value to you which may be determined by where you are in your business growth journey. The factor that had the most impact on whether you received maximum short-term savings or maximum long-term savings is lease term length, which we’ll cover here along with tenant improvement allowances aka, TI Allowances or just TI.


What brokers can tell you about term length

Term length is just what it sounds like, the length of your lease term. The industry considers an average commercial lease term to be three to seven years. And when it comes to negotiating a lease, historically the longer your lease term, the better your position.


Despite this, if you’re in growth mode you may want a short-term lease of less than three years so you can move to larger space as needed. With a short-term lease, however, you can expect to pay more per square foot and to forgo TI and most other negotiating powers.


Conversely, the longer your lease term the better position your broker is to ask on your behalf for more from your landlord, especially if you choose a long-term lease, considered any lease of 10+ years.


In Part 1 we showed an example of how lease term affects your overall lease cost, and how rent abatement allowances can be recaptured by the landlord over the term of the lease. Additionally, the longer your lease, the further out the landlord’s cost of any vacancy between the expiry of your lease and finding the next tenant.


For clear reasons, long-term leases are preferred by most landlords—but that doesn’t mean short-term is always better for tenants.

Your tenant-representing broker can help you weigh the advantages and disadvantages of shorter and longer lease terms based on your growth projections and cash-flow needs, among other factors, such as moving costs when your lease expires and what it takes to optimize a space for your business.


Tenant Improvement Allowance

A Tenant Improvement Allowance—or TI—is a per-square-foot amount the landlord may

provide for space modifications which may be cosmetic or structural. TI funds can be applied to such things as materials, permit costs, architect and/or designer fees and labor, but rarely for furniture and other removeable items and, unless you are making very modest improvements, TI will cover some, but not all, of the costs.


Term length is a factor a landlord will consider in negotiating a TI allowance.

Let’s go back to our example from Part 1—the 5,000 square-foot office.


You’ve located an available 5,000 sf suite in a great geographic location and at the right price composed of 10 private offices, a meeting room and an open area of about 2,000 sf.


Your business, however, is highly collaborative, and your organizational structure is considerably flat. The meeting room would be useful but your only private office needs are for confidential conversations, i.e., one office each for the two managing partners and one for HR. The rest of your team thrives in an open, collaborative space, ideally about 3,700 sf., where they’re frequently joined by those managing partners.


Is this property a bad fit? Or might this otherwise ideal location be updated to suit your needs?


You could continue looking at other spaces, or your broker can approach the landlord about updating the space. The landlord will consider whether your proposed lease term is long enough to justify their cost of their contribution. The second factor they likely will consider is whether the changes you want to make will increase or decrease value of the space over time—the importance of which often declines with a longer lease term.


There are so many factors that will influence lease negotiations and which asks are truly feasible. Having a licensed tenant-representing broker on your side, fluent in these factors and the pros and cons of each, can pay off many times over.


If you’re ready to speak with an Illinois Licensed Broker representing tenants, send us a message.


And be sure to check back for our next Feasible Asks post: FOMO and Don’t-Miss Opportunities.

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