A tenant improvement allowance, also known as a TI allowance, is an amount of money provided by a landlord to a tenant to pay for the cost of improvements to a commercial property. The landlord typically provides the tenant with a lump sum payment or a line of credit to cover the costs of the improvements. This allows the tenant to customize the space they are renting to suit their needs while the landlord is able to maintain control over the quality and cost of the improvements. 

Tenant improvement allowances are commonly used in commercial real estate leases, particularly in office, retail, and industrial properties. It is important to understand how they work and how to set a favorable allowance that will help you attract and retain long-term tenants.

What Are Tenant Improvements?

Tenant improvements, or TIs, are modifications or additions made to a leased commercial property to make it suitable for the tenant’s use. This can include anything from minor changes like painting and carpeting, to more significant and permanent modifications like installing new walls, plumbing, or electrical systems. Common tenant improvements include:

• Painting and wall coverings

• Flooring

• Lighting and ceiling fans

• Windows

• Doors and hardware

• Cabinets and countertops

• Plumbing and electrical systems

Tenant improvements are an important factor in commercial real estate leases, as they can significantly affect the cost of a lease. A TI allowance gives a landlord a way to incentivize a tenant to sign or renew a lease while improving the property.

Note that a tenant improvement allowance represents the maximum amount a landlord will cover. If a TI allowance is set at $15 per square foot and a tenant spends $20 per square foot, the landlord’s contribution will not change unless specifically agreed to in advance.

How Much Should I Offer a New Tenant?

The amount of a tenant improvement allowance offered to a tenant will vary depending on the type of property and your tenant’s needs. Many landlords will calculate the TI allowances they’ll offer by calculating it as a percentage of the total rent or by expressing it as a dollar value per square foot of the lease.

For example, a property owner may offer a 5% or 10% tenant improvement allowance for a standard office lease, meaning the landlord would cover that amount of the tenant’s annual rent for improvements. Often, for the sake of simplicity, this would be expressed as a real dollar figure — for example, a $20-per-square-foot tenant allowance. 

Note that many tenants expect to be able to negotiate this figure. Because of this, it is usually best to have a range you, as the property owner, are willing to accept.

Determine Your Leasing Income

You can use our handy commercial lease calculator below to figure out your annual leasing income. This enables you to understand how much the TI allowance could cut into your net operating income.

Differences in TIs Between Property Types

The amount of tenant improvement allowance offered will vary depending on the type of commercial property being leased. For example, retail properties tend to have higher tenant improvement allowances than office properties, since these properties require more extensive modifications to make them suitable for retail tenants. Industrial properties typically require fewer tenant improvements and thus have lower tenant improvement allowances.

The table below is a rough approximation of tenant improvement allowances by asset type. It may appear more useful to express this as a dollar-per-square-foot figure, of course. But, due to wide variation in rents across markets, a percent can offer you a good idea of what you may need to offer in real terms.

Conclusion

A tenant improvement allowance is the maximum amount of money a landlord will cover for a tenant to improve the rentable space within a commercial property. TI allowances cover a broad spectrum of improvements, mostly on the building’s interior.

The amount of the allowance will vary depending on many factors, from the market to the asset type. It also may depend on the type of lease. A triple-net lease may have a different level than a full-service commercial lease, for example. Beyond this, the amount is also generally a point of negotiation between a tenant and a landlord.

TI allowances are typically expressed as a value per square foot of a lease when marketing space to lease. However, it may be more useful for a landlord to look at the cost as a percentage of the annual rental income generated by the lease agreement.