TI Allowance

A tenant improvement (TI) allowance is money the landlord contributes toward building out a tenant’s space. It is normally quoted per rentable square foot and is one of the largest economic terms in a commercial lease after rent itself.

How it is structured

The allowance is stated as a rate — say $45 per rentable square foot — and multiplied by the leased area. On a 12,400 square foot suite, that is $558,000.

Disbursement is typically reimbursement against documented costs: the tenant builds, submits invoices and lien waivers, and the landlord funds. Some deals fund progressively; some fund on completion. Unused allowance is usually forfeited rather than paid out, though it can sometimes be applied against rent if negotiated.

Why it is really rent

A TI allowance is landlord capital, and it is priced into the base rate. A deal with a $45 allowance and a $30 rate and one with a $15 allowance and a $27 rate can have nearly identical economics over a ten-year term.

This is why comparing proposals on base rate alone is misleading. The comparison that matters is effective rent — total rent over the term, less allowances and free rent, divided by the term and the area.

Amortization makes the relationship explicit: landlords frequently calculate the rate needed to recover the allowance over the term at an assumed return, and quote accordingly. A tenant asking for more TI is asking for a loan repaid through rent.

Terms worth pinning down

• Whether the allowance covers soft costs — architecture, engineering, permits — or hard construction only
• Who controls the build: tenant-managed with landlord approval, or landlord-delivered
• What happens to unused allowance
• Whether improvements revert to the landlord at expiration, and what must be removed
• Whether the allowance is at risk if the tenant defaults early

Because the allowance interacts with rent, term, and restoration obligations, it belongs in the lease abstract as a structured term rather than a note.