Tenant Improvement Costs

Tenant Improvment costs (TI costs) are the expenses incurred to modify a location to meet your desires and to get approval by the franchise real estate department. Any small business startup budget has limits, and TI costs can quickly eat into your startup funds. In the current economy, you may find landlords far more willing to pay for the modifications you desire. You should not minimize the impact of TI costs on your budget. It is not hard to use up $50,000 to $100,000 modifying electrical, cooling, plumbing, moving walls, etc. If a location hasn't had a new tennant in a long time, there may be many code upgrades required, such as bathrooms for disabled people.

You should consider taking advantage of a commercial broker's experience to make sure you negotiate the best TI program.  Get help from a real estate broker

Tenant Improvement Allowances

In a way, getting a landlord to pay for TI work is like getting an investor to put funds into your small business venture. This is an indirect business financing tool. Landlords often have tenant improvement allowances built into their budgets. They probably won't volunteer this fact to you. Negotiate any TI subsidies into your lease. Get help negotiating the tenant improvement provisions. Work with your lawyer as well as with a commercial realtor. Negotiating this point alone could be the difference between profit and loss for your first year, if you look at the TI work as a cash expense. Even when the expense is spread over 5 years, $100,000 in franchise location setup costs is a $20,000 expense per year. This is in addition to any savings you might realize by timing when you are actually responsible for paying rent.

Free Rent

The landlord will want rent payments from you, to start as soon as the property is "tied up" by the lease. That perspective is understandable. However, you can't be paying rent on a location that doesn't yet generate any cash to pay for that rent. This is an especially valid argument if the location needs to be modified before it can be used. There are construction timelines and inspection timeliness. Getting the location ready for customers could take 6 months. You don't want to be paying rent during that time. Or, look at that as another startup cost. You should be able to negotiate some period of time of "free rent". This could be for a certain number of days or until permits are approved.

The costs involved with finding, modifying and leasing a franchise location are so large that we strongly advise you find experienced realtors to help you negotiate free rent. Of course, you should not sign ANY lease without first reviewing it with a lawyer. Typically the landlord will have his "favorite" lease contract and will insist you work with it. In this economy, you may be able to get him to work with YOUR lease, although he would want to make modifications to his liking. In any case, the balance of power has moved much more in favor of you as the tenant.

Recruit a good real estate professional and a good real estate attorney to get the greatest boost to your profitability and to keep start up costs to the absolute minimum.

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