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You may be wondering what exactly a ‘commercial leasehold improvement’ is. First and foremost, a commercial leasehold improvement is referring to a modification of a leased commercial space that creates more suitable conditions for your business needs. A couple examples of this would be knocking down a wall, adding additional electrical and plumbing, etc.
Do note that these are improvements made within your building walls, referring to the leased space. Whatever your business may be, chances are you may end up growing beyond your originally leased layout.
For your commercial business, finding the right space is a must. However, a space that fits every single one of your business needs can be tricky to find. You may find a space in the right location, but an inconvenient layout. If so, it might be that the last tenant took advantage of their leasehold agreement to make the space their own…so you can do the same!
Another reason to utilize your option of leasehold improvements is a commercial new build with empty units waiting to be customized. It is then up to you, as the leaser, to finish the space and make it your own with leasehold improvements.
Think about your business and how it compares to competitors. Next, think about how your business has grown and what are some stressors that are keeping you from doing so? For some, this may look like simply updating the wall colors from a neutral gray to a more eye-popping blue. For others, it could be knocking down a wall and adding a reception area or lobby.
Be sure to check your lease agreement for a section on leasehold improvements. You may find that your landlord already has a guide in place for how these changes are to be made as a leaseholder. If not, it is important to contact your landlord to make sure you know exactly what you can and can’t do as a tenant if you are looking to make these improvements in your commercial space.
A common question that business owners may ask, is how are these leasehold improvements being paid for? What options are available to them? Thankfully, there are a few ways that these improvements can be covered in the cost.
Sometimes referred to as a “build-out”, the landlord may present an improvement plan to the tenant or other options. From there, the landlord manages the project and allows the tenant more time to devote to their business…rather than juggling both current business needs and new projects. However, this may result in the tenant not receiving the specific modifications or details implemented that they wanted, and they may need to cover additional costs to do so.
This gives the tenant practically total authority to oversee changes in their leased space. This takes the time-consuming burden off of the landlord and gives the tenant more flexibility. Provisions are normally put in place in the lease agreement that cover the cost on a lump sum basis, or per square foot. If the project budget is exceeded, then the tenant must pay out of pocket.
If this option is included in the lease, a landlord may offer the tenant a discount on rent depending on the improvements being made. This could look like a certain length of time of free rent, or reduced rent. Much like the tenant improvement allowance, the tenant is also responsible if the cost exceeds the budget.
This cost option is done at the beginning of the lease agreement, where the cost estimate and plans are submitted by the tenant while the landlord supervises and pays for all the work if approved.
Remember, any construction or remodel that happens outside of the leased space is not a leasehold improvement. Some examples of this are HVAC systems, enlarging the building, elevators, escalators, roofs and alarms/security systems. Leasehold improvements are all about customizing your space to make it unique and work for your business.
Also, changes that are required for one tenant of the commercial building, are not required for others. Anything exterior like parking lot repairs, roofing or landscaping do not qualify as leasehold improvements. The main reason is because they do not specify a certain tenant…these changes would affect all tenants.
Curious about commercial leasehold improvements? Want to begin the process of modifying your commercial space to fit your business needs? Contact us and we would be happy to go through all of your options with you! In the meantime, check out some of our commercial projects for more ideas on what you can do with leasehold improvements.