Tenant Improvement Allowance (TI Allowance)

Tenant improvement allowances (TIA or TI) are one of the most significant economic concessions in commercial lease negotiations. They defray the upfront construction costs required to make raw or previously-occupied space functional for a new tenant's specific use. A $50/USF allowance on a 10,000 USF space means the landlord contributes up to $500,000 toward the tenant's build-out.

Typical TI Allowance Ranges by Property Type

• Class A Office (gateway markets): $80–$150/RSF for new leases; $40–$80/RSF for renewals
• Class B/C Office and suburban: $40–$80/RSF
• Retail: $20–$60/RSF depending on shell condition and lease length
• Industrial (vanilla warehouse): $5–$20/RSF — minimal build-out required
• Medical office / life science: $100–$250+/RSF due to plumbing, HVAC, and specialty infrastructure

Longer lease terms command higher TI allowances. A 10-year lease will typically yield 2–3× the TI offered on a 3-year lease because the landlord amortizes the cost over more years of income.

What TI Allowance Can Cover

Typical covered costs include:

• Demolition of existing improvements
• Framing, drywall, and interior partitions
• Flooring (carpet, tile, hardwood, raised floors)
• Ceiling work (drop ceilings, open ceilings with exposed ductwork)
• HVAC distribution (branch lines, diffusers, controls)
• Electrical panels, outlets, data infrastructure
• Plumbing (sinks, restrooms, break rooms)
• Lighting fixtures
• Paint and finishes

TI typically does not cover furniture, fixtures and equipment (FF&E), signage, moving costs, or technology infrastructure beyond basic electrical/data rough-in.

Three Common TI Structures

• Landlord-controlled build-out: The landlord manages construction using their contractors. The tenant specifies finishes. Faster but less control over quality and cost.
• Tenant-controlled with reimbursement: The tenant manages construction and submits receipts for reimbursement. More control, more administrative burden. Requires careful documentation.
• Amortized TI above allowance: If build-out costs exceed the TI allowance, the landlord may fund the excess in exchange for higher rent (amortized over the lease term at an agreed interest rate, typically 6–8%).

TI Disbursement and the Work Letter

TI allowances are disbursed through a work letter — an exhibit to the lease specifying construction requirements, approval processes, and payment milestones. Before releasing TI funds, landlords typically require:

• Architect-certified completion certificates
• Lien waivers from all contractors and subcontractors
• Building permits and certificate of occupancy
• Proof of contractor insurance

TI Deadlines and Expiration Risks

Most TI allowances expire if not drawn within a specific period — often 12–18 months from lease commencement. If the tenant's build-out is delayed (permitting issues, contractor delays), an unfunded TI allowance may lapse. Key protections to negotiate:

• Force majeure extension: Extend the draw period if delays result from causes outside the tenant's control
• Landlord delay extension: Automatically extend the window if landlord approval or access causes delays
• Unused TI conversion: Allow any unused allowance to convert to free rent — only possible if the lease contains explicit conversion language

How TI Affects ASC 842 Lease Accounting

Under ASC 842 and IFRS 16, TI allowances affect how the lease liability and right-of-use asset are recorded. Tenant-owned improvements funded by the landlord's TI are capitalized as leasehold improvements and amortized over the shorter of the asset's useful life or the lease term. Accurate abstraction of TI allowance amounts, disbursement timing, and ownership terms is essential for compliance.