Who Should Pay for Leasehold Improvements?

William R. Pupkis, CMPE, Healthcare Consultant

LeasingOfficeIf you are considering a move to newly leased office space, the cost of leasehold improvements can become a true item of hard bargaining. Extra plumbing, lead lined walls for X-ray, built-in counter space, and wiring for computer systems might be paid by either the landlord or the tenant, depending on the negotiating circumstances.

Adjusted Rent

"...it can create a trap for the tenant"

The landlord might assume the cost of part or all of the improvements on an agreement to raise the monthly rent enough to repay the amount over the life of the lease. For example, the rent on a five-year lease might be increased from $18.00 per square foot to $20.00. This may sound appealing, but it can create a trap for the tenant. After several years, the landlord might not remember why the rental rate was $20.00 and may consider this the existing base rent. As a result, your renewal increase could be calculated using the $20.00 per square foot rate rather than the initial $18.00 rate.

Alternatives

If the landlord pays for the leasehold improvements and you negotiate an adjusted rate, you can have language put into the lease clearly stating that any rent increases beyond the initial lease period will be calculated at the lower, $18.00 rate. Or, if it is decided that the landlord will not assume the cost of the improvements within the $18.00 base rate, you can pay for the improvements. When it is time for your lease renewal, the bargaining will start at the $18.00 figure.

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This entry was posted on Thursday, December 12th, 2013 at 8:22 pm and is filed under Practice Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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