Finish Out Allowance§
Definition§
A Finish Out Allowance is a provision in a lease agreement for commercial real estate—typically office or retail space—that allocates a specific sum of money or a certain amount per square foot to the tenant. This allowance enables the tenant to customize and improve the leased space to suit their operational needs and business requirements. The allowance often covers costs such as interior build-outs, fixtures, and other enhancements to make the property fit for its intended use.
Examples§
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Retail Customization:
- A retail tenant leases a space for five years at a $25 per square foot annual rental rate. The landlord, or lessor, provides a finish out allowance of $4 per square foot to customize the space. This might be used for installing walls, lighting, plumbing, and other necessary improvements.
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Office Space Build-out:
- A startup leases 2,000 square feet of office space and receives a finish out allowance of $5 per square foot. They use the allowance to build conference rooms, add a kitchen area, and install necessary IT infrastructure.
Frequently Asked Questions§
Q: What does a finish out allowance typically cover?
A: It generally covers costs related to construction and modifications such as partitioning, HVAC systems, lighting, flooring, and restrooms. It does not typically cover furniture, fixtures, and equipment unless explicitly stated in the lease agreement.
Q: How is the finish out allowance amount determined?
A: The amount is negotiated between the tenant and the landlord and depends on factors such as the length of the lease, rental rate, market conditions, and the nature of the tenant’s business.
Q: Can a tenant receive a direct cash payment instead of a finish out allowance?
A: Usually, the allowance is provided as a reimbursement for actual costs incurred or directly paid to contractors. Direct cash payments are rare and would need to be explicitly stated in the lease agreement.
Q: What happens if the improvement costs exceed the finish out allowance?
A: If the improvement costs exceed the allowance, the tenant would be responsible for covering the additional expenses out-of-pocket.
Q: Is the finish out allowance taxable?
A: The tax treatment of a finish out allowance can vary based on how it’s structured. It is advisable to consult with a tax professional for specific guidance.
Related Terms§
- Tenant Improvements (TI): Changes made to the interior of a commercial or industrial property by the property owner to accommodate the needs of the tenant.
- Lessor: The person or entity that leases property to a tenant.
- Leasehold Improvements: Permanent modifications or enhancements made to leased property by the tenant.
- Base Building Condition: The state of leased premises prior to any improvements, typically consisting of bare walls and a base floor.
Online Resources§
- Investopedia: Tenant Improvements
- Building Owners and Managers Association (BOMA) International
- NAIOP Commercial Real Estate Development Association
References§
- Rouse, David. “Commercial Leasing: A Practical Guide.” R Publishing.
- Justice, Kevin. “Tenant Improvement Projects. Every Landlord’s Necessity.” Project-Inc, 2019
Suggested Books for Further Studies§
- “Commercial Lease Handbook” by Mark Warda
- “Negotiating Commercial Real Estate Leases” by Martin I. Zankel
- “Leasing Space for Your Small Business” by Beth Elpern Burrows
- “The Insider’s Guide to Commercial Real Estate” by Cindy S. Chandler
