Tenant improvement allowances (TI Dollars as they can be called) is money the landlord contributes to the build-out or improvement of a restaurant space. Generally in the case where the landlord is willing to provide tenant improvement allowances, the landlord provides a shell to the tenant and, it is the tenant’s responsibility to make the improvements to the space. Many times the landlord allows the tenant to purchase the items for the build-out or improvements as long as the items are leasehold improvements and not equipment or fixtures.
Leasehold improvements are defined as alterations made to rental premises in order to customize it for the specific needs of a tenant. These can include painting, partitions, flooring, customized light fixtures, etc.
Thinking about it logically this make sense as the landlord would still have the structure even after that particular tenant has left the site. Having the tenant make the purchase also eliminates the landlord from planning and space development as most landlords are not restaurateurs and don’t know restaurant design. This also allows the tenant to remain in control over the improvements being made to their restaurant assuring the landlord did not cut corners and they received the quality they wanted in their restaurant.
The restaurateur needs to factor in the tenant improvement allowances when budgeting the costs to open the restaurant. For example if the costs to open a new restaurant is $1.5 million, the restaurateur needs to know how much the landlord is willing to provide towards that cost. If the restaurateur is not able to fund the project with their own money, they will need to know how much is needed from private investors and banks and know they have enough funds in place in order to build the restaurant they want.
The last thing a restaurateur wants is to be half way through the build-out of a new restaurant and realize they don’t have enough funds to build the restaurant they envisioned. However, it is also important that the tenant realize this is not free money. The landlord will factor the costs of the tenant improvement allowance into the rent, and the landlord is generally paid back through a higher rent per square foot.
Be sure to check back next week for part 2 of our post, “Accounting for Tenant Improvement Allowances.”
Need assistance with restaurant financial management? Contact Kirk Trowbridge at 614.545.9200 x29.