TIBs are paid for by the tenant, but they become part of the building. As such, the landlord generally obtains ownership of the upgrades once they’ve been installed unless a contract states otherwise.
What Is a Tenant Improvement and Betterment?
Many commercial property insurance policies define tenants improvements and betterments as fixtures, alterations, installations, or additions to a building that you occupy but don’t own. TIBs are items you’ve purchased or installed at your expense, but that you can’t legally remove. As an example, we’ll say that Larry owns Luxury Leathers, a leather goods shop located in a strip mall. He operates his business out of space he rents from the mall owner, Shopping Centers, Inc. Larry has made various improvements to his rental space since Luxury Leathers moved in two years ago, including new recessed lighting, new carpeting, and a small office constructed behind the retail area. The office, lighting, and carpeting Larry has installed in his store are TIBs. They’re now part of the building. Larry doesn’t own them, so he can’t take it with him if he moves to another location. He could damage the building if he attempted to remove them.
Acronym: TIBs
How TIBs Work
Completed TIBs are to be insured by the landlord. Shopping Centers, Inc., has insured the building under a commercial property policy, and the policy automatically covers any improvements to the building that are made during the policy period. Larry knows that any TIBs he installs will become the property of his landlord, but he’ll nonetheless have the use of those improvements for the remainder of his lease. Larry could lose his use interest in the property if the TIBs are damaged or destroyed by a fire or other peril, but he can also insure his interest in the improvements under a commercial property policy.
TIBs vs. Trade Fixtures
Tenants can’t tear out TIBs they’ve installed, but they can remove trade fixtures. These are items installed by the tenant that the tenant expects to remove when they vacate the building. They are essential to the tenant’s business and can be removed without damaging the property. Trade fixtures remain the property of the tenant, so the tenant is responsible for insuring them. Suppose Larry installs new showcase cabinets in his store for displaying his leather goods. Both Larry and his landlord expect that Larry will take the showcases with him when he moves to another location. Even though the showcases are attached to the building, they’re considered trade fixtures rather than TIBs. Other examples of trade fixtures are computers, vending machines, and machine shop equipment. Tenants should ensure that their leases clearly specify what types of property qualify as trade fixtures. Otherwise, the landlord might refuse to allow the tenant to remove certain property when the lease expires. TIBs are often insured in conjunction with the building under the landlord’s commercial property policy because they’re owned by the landlord. Policies typically cover the building scheduled in the policy, completed additions, and fixtures, which include property that’s permanently attached to the building. Suppose that the lease between Luxury Leathers and Shopping Centers, Inc., requires the landlord to insure TIBs. The office, carpeting, and recessed lights Larry has installed should qualify as covered property if Shopping Centers, Inc., is insured under a typical property policy. Improvements made by a tenant increase the value of the landlord’s building. The value of the building will increase by $15,000 if a tenant spends $15,000 on TIBs. The building limit on the landlord’s policy should be increased by the value of the TIBs. Otherwise, the building may be underinsured and the landlord could incur a coinsurance penalty if a loss occurs. The tenant need not insure these items if the lease requires that the landlord must repair or replace damaged TIBs. Otherwise, TIBs should be insured under the tenant’s property policy.
Replacement Cost and Actual Cash Value
Depending on your policy, TIBs might be covered on a replacement cost or actual cash value basis. Losses are typically covered in full only if you make repairs “promptly,” but this term isn’t clearly defined. Your insurer might pay only a portion of their original cost if you don’t repair TIBs promptly. The typical formula is original cost times the number of days from the date of loss to the expiration of your lease, divided by the number of days from installation of improvements to the expiration of the lease. Suppose that Luxury Leathers signed a five-year lease on January 1, 2015. Larry completed the improvements on January 1, 2016. All the improvements were destroyed by a fire on January 1, 2017. Larry’s insurer won’t pay more than $11,250, based on the $15,000 cost of the TIBs: $15,000 X 1095 (three times 365) divided by 1460 (four times 365) = $11,250 Your insurer won’t pay anything if your landlord repairs or replaces the damaged improvements.
