The improvement allowance is usually the biggest single concession in a commercial lease, and it is routinely handled in two sentences that leave most of the important questions open.
Two structures
Turnkey. The landlord builds the space to an agreed plan and specification and hands over the keys. The tenant’s exposure is limited to what it asked for; cost overruns are the landlord’s problem. Landlords price turnkey accordingly, because they are absorbing construction risk.
Cash allowance. The tenant manages the build and the landlord reimburses up to a stated amount. The tenant controls scope, quality and timing, and carries the overrun risk. This suits tenants with specific requirements and the capacity to run a project.
Neither is better in the abstract. What matters is that the structure matches who is actually competent to manage the construction.
Four things to settle in writing
- Amount and basis. Per square foot of rentable area or a lump sum? Does it include or exclude design fees, permits, and the landlord’s construction management fee? A landlord fee of several per cent applied to the allowance reduces what reaches the actual work.
- Scope boundary. What is base building and what is tenant work. Ambiguity here is where disputes start: HVAC distribution, electrical service upgrades, fire suppression modifications, accessibility work triggered by the fit-out.
- Payment trigger and timing. Allowances are commonly released on substantial completion, occupancy, and delivery of lien-free certificates and paid invoices. A tenant funding the work up front needs to know exactly which documents release the money and how many days the landlord then has to pay. “Promptly” is not a timeline.
- Restoration. If the lease requires the premises returned to base building condition, a tenant can end up demolishing improvements the landlord funded. Agree that the landlord will identify, at the time it approves the drawings, which elements must be removed, and waive restoration for the rest.
The unamortised balance
Improvement allowances rarely disappear if the deal ends early. A termination right usually requires the tenant to repay the unamortised portion of the landlord’s leasing costs, including the allowance, plus commissions and free rent. Ask for the formula and a worked example at the offer stage. It is the difference between a genuine exit and a theoretical one.
What tenants underestimate
Permit timelines, long-lead mechanical equipment, and the fact that a change in occupancy classification can trigger code upgrades that were not in anyone’s budget. Build float into the fixturing period, and confirm permit feasibility as a condition rather than an assumption.
What landlords underestimate
That an allowance paid slowly costs goodwill out of proportion to the money. A tenant that has fronted construction cost and is waiting on reimbursement is a tenant forming a permanent view of the relationship.
Talk it through with Rimrock
Rimrock Sales & Leasing works with owners, investors and tenants across Calgary, Edmonton and Lethbridge. Get in touch or call 403-910-4611.