If you’re thinking about purchasing commercial rental property as an investment, then you need to be informed about tenant improvements and the best way to handle them.
Real estate transactions, especially commercial deals, have layers of complexity that demand a specific type of expertise. You’ll want a highly skilled title company on your side when it comes to escrow accounts, zoning assistance, and coordinated endorsement preparation. Read on to learn more about this aspect of the industry and how the right partners can help ensure your success.
Whether it’s office space, future retail, or simply a warehouse, many owners offer a tenant or leaseholder improvement allowance as an enticement to sign lucrative long-term leases. This is a specific amount of money earmarked for construction or renovation costs.
It’s usually expressed on a per-square-foot basis, and the funds may go towards interior changes to accommodate the needs of the tenant. Common improvement requests include:
- Installing partitions or cubicles
- New flooring
- Light fixtures
- Custom cabinetry, shelving, or countertops
- Adding tech such as electrical, internet, or alarm systems
Some modifications are not considered to be leasehold improvements — exterior projects like landscaping, parking lots, roofing, or updating the HVAC do not benefit a specific tenant so are usually not covered in these types of agreements. General building work like lobbies and elevators are also not included.
When the rental term ends, the work is generally the property of the landlord, unless otherwise specified in the lease. Qualified improvements may also be tax-advantaged in certain circumstances; consult with your trusted tax professional to find out more.
Sometimes, tenants are offered rent discounts toward leaseholder improvements as well. Each situation is unique, and you’ll need to work with your renter and your attorney to create a lease document and terms that are beneficial to both parties.
Protecting your investment
Helping your commercial renters update the property to suit their needs is good business, but it’s always wise to protect yourself and your assets. You can deposit the tenant improvement allowance with a title company and create a construction escrow account.
It might seem like extra work to involve a third party to manage funds for this project. Following this procedure ensures that your money is safe while the work is being done, especially if it’s being overseen by the tenant. The title company managing your construction escrow account will also ensure every contractor and subcontractor gets paid on time and the work is done according to the contract.
This also helps you avoid the hassle and complications of a mechanic’s lien. Unpaid or dissatisfied service providers can make a legal claim against your property to get the money that they’re owed, which will put a cloud on the title, and make the property very difficult to profit from.
Once a lien is created, settling these charges frequently includes court costs and interest as well as the original amount owed, so it just makes sense to set up contractor payments via a tenant improvement escrow account with a trusted title company.
Who’s in charge?
Some landlords may be very hands-on during this process, but not every owner has the time to commit to requesting bids and making decisions. Of course, the owners of the business moving into your commercial space will definitely want to have a say in the way things are done. While you want to generate revenue from profitable tenants, it’s also vitally important to not let yourself be taken advantage of by unscrupulous renters or pushy contractors.
During the lease negotiation process, you’ll need to determine exactly who is in charge of the renovations and who has the final say to ensure everyone is on the same page. Your title company that administers the tenant improvement escrow account will do so according to the agreed-upon specifications in the rental agreement. Working with a knowledgeable commercial real estate team gives you an edge during the leasing process and helps protect your interests while keeping your tenants happy as well.
Find the right partner
Investing in and leasing commercial real estate can be an exciting and rewarding way to generate income and build generational wealth. We offer a full spectrum of services to help you navigate these negotiations and come out ahead. At Landtrust Title Services, we work with the very best attorneys, Realtors, and lenders to make sure your buying experience is as pleasing and seamless as possible.
From the first steps of the purchase process, title clearance, settlement and closing, and throughout the property management journey, our expert staff will be there to help you with any issue. If you have any questions about acquiring commercial real estate, leasing your rental property, or creating an improvement escrow account for your tenants, reach out to us today!