When looking for a commercial space to lease for your next tenant fit-out, one of the first decisions you will have to make is whether you will be agreeing to a turnkey fit-out or working with a tenant improvement allowance. In this article, we’ll walk you through the difference between these two types of fit-out arrangements and discuss some of the pros and cons of each.
The difference between a turnkey fit-out and tenant improvement fit-out
Turnkey fit-outs get their name from the idea that all the tenant has to do is turn the key to take occupancy and start utilizing the space. In a turnkey fit-out the landlord takes care of, and control of, the construction, providing a move-in ready space for the tenant according to the agreed upon terms in the lease.
If you opt for a turnkey fit-out, you will not have to pay outright for construction, but you should look to see how the cost of the fit-out is reflected in your monthly fees.
The alternative to a turnkey fit-out is to agree to a tenant improvement allowance. In this type of arrangement, the landlord gives an agreed upon amount, or allowance, to the tenant who uses it to complete the fit-out. Anything the tenant wishes to have done above and beyond the allowance is the tenant’s responsibility.
If you opt for a tenant improvement allowance, you are the one in control of the construction. The specifics of tenant improvement allowances vary from landlord to landlord, so you should be aware of how the terms are spelled out in your lease. Some leases may specify that the landlord allocate a lump sum to pay for fit-out costs, while other leases may spell out a schedule where a percentage of your rent is diverted each month to pay for fit-out costs.
The pros and cons of turnkey fit-outs and tenant improvement fit-outs
Both turnkey and tenant improvement fit-outs have advantages and potential drawbacks. Here are a few things to consider when deciding which may be best for you:
Do you have to move into your space quickly with little to no lead time? A turnkey fit-out has the advantage of being ready for immediate occupancy.
How much control do you want over the fit-out process? Are there design, material, and construction elements you want to make sure are customized to your specifications? A tenant improvement allowance gives you the control and flexibility to manage the project to your preferences.
How confident are you in the quality of the work the landlord may have done for you in a turnkey fit-out? Does the landlord have experience and a proven track record with managing successful fit-outs for commercial leases? Or do you feel more confident in overseeing the quality of construction if you are more directly involved with a tenant improvement allowance?
Scope of Project
How much work really needs to be done for your fit-out? If the space is already close to being able to be used and just needs some slight refurbishing or cosmetic improvements, a turnkey fit-out may make more sense. If the space needs major work and significant customization, you may want to consider the degree of input and control that comes with a tenant improvement allowance.
A.F. Alber’s 30+ years of experience gives us the expertise to help you navigate these questions as you go through the site selection process and lease negotiation. With a specialization in value engineering, we’re here to assist you in making sure any tenant improvement allowance you’re working with is utilized wisely for the greatest return on your fit-out investment!