Negotiating For Tenant Allowance Dollars on your Commercial Lease

A Guide for Healthcare Tenants by Dale Willerton and Jeff Grandfield – The Lease Coach

When speaking in front of 300 business-owners, we had mentioned the importance of both a tenant allowance and negotiating a tenant allowance several times. A woman in the audience raised her hand and asked, “What is a tenant allowance?” Our answer was that, “If you don’t know what a tenant allowance is, you’ve likely never got one!” We then explained that The Lease Coach not only negotiates for tenant allowances on new leases, but lease renewals as well.

Here are some of the points to consider:

1. Tenant Allowance – A tenant allowance is inducement money paid by the landlord to the tenant. The tenant uses this money to offset the cost of building walls, painting, and any leasehold improvements that need to be done to the premises. This does not, typically, include any money the tenant spends on fixtures or equipment. The tenant’s allowance money typically does not need to be repaid to the landlord (it is an inducement).

2. Landlord’s Work – Rather than accept a tenant allowance from a Landlord it is not uncommon for the landlord to use his own money to at least partially turnkey the premises for the healthcare tenant. This is especially common if the landlord owns a construction company and has staff on salary that can do that type of work. When negotiating for either a tenant allowance or landlord’s work these are some points well worth considering:

a) The more money you want the landlord to kick in, the more prepared you need to be. At The Lease Coach, we will frequently have a healthcare tenant get a preliminary design and construction cost prepared so we can show this to the landlord and negotiate for the maximum allowance we can get. As seeing is believing for the landlord legitimate quotes on contractor letterhead go a long way.

b) The leasehold improvements always cost more than initially expected. You do not want to come up $30K short because you did not get your ducks in a row. It pays to get multiple quotes starting from a single design plan. 

c) Before you get three or four weeks into the leasing process with a particular landlord, it makes sense to ask the landlord or their leasing rep. what their inducement package includes. Some landlords have standard allowance that they give to almost any tenant. The Lease Coach utilizes several strategies and can frequently, effectively, double that allowance for a tenant – the key is to try to keep the rental rate down while increasing the allowance.

d) There are many types of landlords; some of them are flush with money and can contribute 100% of your leasehold improvements while others may provide a tenant with a more limited amount of tenant allowance money. If you are not afraid of a longer lease term or slightly higher rental rate, The Lease Coach can often persuade the landlord to pay totally for your leasehold improvements.

Keep in mind that negotiating for the maximum lease inducement package can make all the difference in the world to a start-up business or tenant. Far too often, doctors approach the leasing process timidly, almost as if applying for the privilege of paying the landlord rent. Consequently, they leave a lot of inducements and incentives on the bargaining table.

It’s also important to understand how the landlord pays you the tenant allowance. Tenants often mistakenly assume the landlord pays that money as soon as the deal is signed and before construction is started. This, however, is rarely the case! In most cases, you are reimbursed after you meet a number of conditions, including opening for business and proving that you have paid the contractors. To play things safe, have some short-term financing in place to carry you through if you’re relying on the landlord’s contribution to your build out. It’s also possible to negotiate for some of the allowance to be paid up front in certain cases.

Remember, you’re not going to get more than you ask for. Instead of settling for a lesser amount, The Lease Coach begins negotiations by asking for a higher amount of tenant allowance money to allow for “wiggle room”. If you’ve established you want a $75,000 tenant allowance and ask for that exact amount, don’t be surprised if you walk away with $40,000. At almost every conference we speak at, this subject comes up and someone will ask, “Just how much tenant allowance should I ask for?”. Ask for all of what you need and not just part of it. 

For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to [email protected].

Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail [email protected] or visit www.TheLeaseCoach.com.