How Tenant Improvement Construction Works

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When you purchase commercial real estate, you are likely to make some alterations or improvements to the interior of the property. That’s where tenant improvement (TI) construction comes into play. TI construction is where a landlord will agree to make certain improvements to a property based upon the needs of their tenant.

 As one of Phoenix’s top commercial real estate firms, we work with people in purchasing, developing, and maintaining their properties. Tenant improvement construction is just one of the numerous services that allow us to be the go-to for commercial property needs. Read our article below to learn how this service works.

What is Tenant Improvement Construction?

TI construction is a general term that relates to the remodeling of the interior of an existing property or space within a building. The overall purpose of this service is to make the space fit tenants’ needs as efficiently as possible. There are several things the property owner and its tenants must consider when completing tenant improvement construction.

Tenant Improvements in New Spaces

Office spaces are often rented in three (3) basic conditions: grey shell, vanilla shell, or existing build-out. The condition of the existing space will affect the costs and schedule of the improvements.  Occasionally, property owners will have Spec Suites available that are completely built-out and ready for immediate occupancy.  This is advantageous for anyone needing to move quickly.

  • Grey shell spaces: Only the demising walls (walls that separate the space from other spaces in the building) are up and may or may not have insulation and unfinished drywall (not taped or textured).  There are no interior walls or ceiling,  no electrical or plumbing or HVAC (typically the HVAC units are installed, but no distribution), and the floors are unfinished. Tenant improvement construction services would include design, permitting, and complete build-out of the space individually customized to meet the tenant’s specific needs.

  •     Vanilla shell spaces: This is a step above the grey shell.  Typically, the demising walls are insulated, drywalled, taped, textured, and primed for painting.  The demising walls will also have electrical outlets at set intervals. An acoustical ceiling (drop ceiling) will be installed that will include lights, fire sprinklers, and HVAC distribution.  Additionally, fully completed restrooms are installed to meet the minimum code requirements based on the size of the space.  There are no interior walls or flooring (other than the restrooms). These tend to provide shorter move-in times and be less costly than a grey shell space.

  •     Exiting Build-Out: This is most commonly referred to as second-generation space as the original build out from grey shell was completed for the previous tenant(s). Depending on the needs of the tenant and the condition of the space, this space may need to be completely demolished back to a grey shell condition and a whole new build out completed.  Or maybe only the finishes (paint and flooring) are replaced and is ready for move-in or anything in between.  Repurposing these existing build outs takes a keen eye and knowledge of current building codes to know what works as existing, what can be reused, and what must be brought up to current code.  This is the most common type of space found in the commercial real estate marked.

How are Tenant Improvement Construction Costs Calculated?

A Tenant Improvement Allowance (TIA) is the sum of money that is agreed on between the tenant and landlord to be paid by the landlord for covering all or part of the construction costs involved in making alterations to the premises. Typically the TIA cannot be applied to low voltage cabling (phone/internet cabling) or tenant’s FF&E (furniture, fixtures, and equipment). Generally, TI construction is calculated based on a cost per square foot basis, but it can be a flat fee.

 Several factors go into determining TIA, such as:

  •     The current status of the commercial real estate market
  •     Rental rates
  •     Credit history of the landlord and tenant
  •     Location
  •     Condition and anticipated improvements needed
  •     The type and number of units owned by the landlord

How Long Does Tenant Improvement Construction Typically Take?

The time it takes to make improvements to a space depends heavily on its condition, the size of the space, and the complexity of the build out.  In today’s market with highly volatile supply availability, the accessibility of materials needed for construction can also significantly affect the construction schedule.  We focus on early procurement and plan for any current known supply issues as we prepare our estimated construction schedules.

Plaza Companies Is Phoenix’s Source for Quality Commercial Real Estate

Tenant improvement construction is one of the many services that help us ensure all of our clients’ needs are met. Founded in 1982, Plaza Companies is a full-service real estate firm specializing in leasing, management, construction, and development of some of the most innovative projects in Arizona. We develop, manage, and create value for a significant portfolio of medical office space, mixed-use developments, and other pieces of commercial real estate.  Our knowledge, experience, and ability to deliver makes us one of Arizona’s best firms. Contact us today to learn how we can help you.

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