In New York City, which is often referred to as a “whole different animal” when it comes to real estate, tenant improvements refer to a fixed amount of money specifically designated by the landlord to improve the tenant’s space. There is no situation in which this money could be spent on other things (though this is the case in places outside New York City). Here in New York, when someone offers you a tenant improvement allowance, that money is spent on the actual space in which you will move.

Here are some things to know:

- When a tenant moves out, the landlord demolishes the space and rebuilds it based on a generic model. They build out the space to what is called the “building standard.”

- Landlords will then bring potential tenants into the “building standardized” space – much like looking at a model apartment.

- Smaller tenants will often take these “pre-built units” as they are; larger tenants may request that the landlords transform the space and “build to suit.”

- If you’re looking for 7500 square feet of space or less, the landlord will generally take care of the entire buildout for you. Though you won’t pay out of pocket for the contractor, the construction, etc., you’ll be paying for it in your rent – this is the tenant improvement allowance.

- Landlords are in the construction business – they have contacts with all the people needed to make a buildout happen. They’ll take care of the construction component. Generally, you just take care of the rent and the voice data cabling.

- Should you choose to take care of the construction component yourself, you can ask for a cash contribution from the landlord.

For those of you outside of New York, here’s what you need to know:

When comparing potential rental properties, it’s important not only to consider the amount of rent on the table, but also to consider what is called the tenant improvement allowance. When a tenant leases office space, renovations and reconfigurations are usually necessary. These changes can be as small as a new paint color on the walls, or a gut renovation to transform the space. As part of your lease transaction, the landlord will generally contribute a fixed amount of money toward these changes. This is the tenant improvement allowance. Unfortunately for tenants, landlords don’t use any sort of standardized formula when determining the amount of the tenant improvement allowance.

When negotiating your tenant improvement allowance, make sure you understand what the landlord is using as a basis for construction. For instance, what portions of the common areas are to be built and expected to be paid for from your allowance? You do not want your entire tenant improvement allowance to go to common areas; in this case you would end up paying for the build out of the new office space yourself. Confused?

- Building A offers you $40 rent and $140 for Tenant Improvement Allowance

- Building B offers you $45 rent and $60 for Tenant Improvement

At first glance, the uninformed tenant would be drawn to Building A – imagine what you could do with such a high Tenant Improvement Allowance! However, upon further examination, you may learn that the higher advertised Tenant Improvement Allowance was necessary so that the landlord could update the basic systems – sprinkler head distribution, ceiling grids, etc.

Building B, on the other hand, while offering a lower Tenant Improvement Allowance, is a better deal. This is because the lower Tenant Improvement Allowance at Building B provides the dollars directly to the tenant for the build out of their new space.

Understand the “starting point” of your landlord’s building work. Once you know the base, you can better understand which landlord is offering the best deal. A Tenant Improvement Allowance is practically irrelevant unless it is presented in relation to the current conditions of the building in question. Figuring out this relationship allows you to smoke out the real dollar amount you will have available for your build out.