Tenant Improvement Allowances in Commercial Real Estate: Market Standards, Disbursement Methods, and Effective Rent Impact

Key Takeaways

What a Tenant Improvement Allowance Is

A tenant improvement allowance is the dollar amount a landlord provides, typically expressed per rentable square foot (RSF), to fund the buildout or renovation of a commercial space for a specific tenant. The TI allowance is negotiated as part of the lease and memorialized in the lease agreement, usually in the work letter or tenant improvement exhibit. The allowance covers interior construction: partitions, flooring, ceilings, lighting, HVAC modifications, electrical and data wiring, plumbing, and finishes. It does not typically cover furniture, fixtures, equipment (FF&E), signage, or technology infrastructure, though these exclusions vary by lease.

The TI allowance exists because commercial space is rarely delivered in a condition that matches a specific tenant's operational needs. A law firm's layout differs from a technology company's open-plan configuration, which differs from a medical practice's exam-room-and-waiting-area requirement. Rather than building out every possible configuration on spec, landlords provide a cash contribution and let the tenant (or the landlord, in a turnkey arrangement) customize the space. The landlord recovers the TI cost through the rent structure, either by amortizing it into a higher face rent or by pricing the lease to reflect the TI as a below-the-line concession in the effective rent calculation.

One point that tenants sometimes misunderstand: as a matter of legal title, the landlord usually owns the improvements. Once TI-funded construction is complete, the partitions, built-in cabinetry, upgraded HVAC, and other permanent improvements become part of the building. When the lease expires, the tenant vacates and the improvements stay. Some leases include a restoration clause requiring the tenant to remove certain improvements at lease end. Legal title is not the same as accounting ownership under ASC 842, which is covered below. Either way, TI allowances differ from a simple cash rebate because the landlord expects to recover the cost through the rent structure.

The relationship between TI and rent is not linear, but it is directional. Higher TI generally means higher face rent, because the landlord amortizes the TI cost into the rental stream. A landlord offering $75/SF TI on a 10-year lease at 7% cost of capital is embedding approximately $10.68/SF/year of TI recovery into the rent. The tenant sees a larger buildout budget. The landlord sees a higher gross rent that includes capital recovery. The effective rent, which nets out all concessions, is where the two perspectives converge.

TI Allowance Ranges by Property Type

TI allowances vary widely by property type, building class, market, lease term, tenant credit quality, and whether the space is first-generation (never previously occupied) or second-generation (previously built out by a prior tenant). A second-gen space where the prior tenant's layout is usable may require minimal TI. A first-gen shell or a space requiring full demolition and reconstruction commands a much higher allowance.

The following ranges are illustrative negotiated ranges used for the examples in this article. They are not survey data and are not drawn from a single published source, and individual transactions regularly fall outside these bands depending on deal-specific factors. Gateway markets run higher: HubbleHQ reports that Manhattan office TI averaged $140 per square foot in the first half of 2026 according to Colliers. Published guides also differ by use. Tyler Cauble's guide, which is oriented to Middle Tennessee and similar mid-size markets, lists restaurant TI at $100-250+/SF and medical/dental at $50-150/SF. The restaurant row in the table below sits below those published figures (Cauble's floor is $100/SF), and restaurant buildouts can run well above the table's band. For a general overview of TI allowances, see Cushman & Wakefield's overview of tenant improvement allowances; its accounting section is simplified and does not follow ASC 842, so use the ASC 842 section below for accounting. For a chart of U.S. Class A TI allowance trends, see the Cushman & Wakefield Office Fit Out Cost Guide Americas 2026.

Several factors push TI toward the upper end of these ranges. Longer lease terms give the landlord more months over which to amortize the cost, making a higher TI economically viable. Credit tenants (investment-grade or publicly traded companies) reduce the landlord's risk of a lease default before the TI is fully recovered, which supports a more generous allowance. First-generation space that has never been built out requires more work than a second-generation space where usable improvements remain from the prior tenant. And competitive markets with high vacancy rates force landlords to offer larger concessions to attract tenants, with TI being one of the primary levers alongside free rent.

At the lower end, shorter lease terms compress the amortization window and limit the TI the landlord can offer without destroying effective rent economics. Smaller tenants with limited credit profiles increase the landlord's risk exposure. And in tight markets with low vacancy, landlords have less incentive to offer generous concessions because tenant demand exceeds available supply. As Tyler Cauble notes, when a tenant wants more TI than the landlord will give outright, the landlord can fund the allowance up front and recover it through the rent at an interest rate, and the allowance "is not free money" because it comes out of the landlord's deal economics. A higher allowance can mean the tenant is financing part of the buildout through the lease.

One additional factor that practitioners frequently underweight: construction cost escalation. TI allowances are negotiated months before construction begins. If material and labor costs increase between lease execution and buildout completion, the tenant bears the excess. In markets where construction costs are rising 3% to 5% annually, a $75/SF TI negotiated in Q1 may cover only about $72 to $74/SF of purchasing power by the time construction begins, three to nine months later. Tenants can build a cost escalation buffer into their TI ask, for example 5% to 10% above the current-dollar estimate.

Three Disbursement Methods

The disbursement method in the work letter controls how TI dollars move from the landlord's balance sheet to the contractor's invoices. Three methods are used in practice: lump sum, draw schedule, and turnkey. Each allocates cost, risk, timeline control, and administrative burden differently. The right method depends on the tenant's construction management capability, the landlord's risk tolerance, and the property type's institutional norms.

Lump Sum

Under a lump-sum arrangement, the landlord pays the full TI allowance to the tenant as a single payment, for example at lease commencement or within a set period, such as 30 days, after the tenant opens for business. The tenant manages the entire construction process: hiring the general contractor, selecting subcontractors, obtaining permits, overseeing the buildout, and paying all invoices. The TI check arrives as a lump sum, and the tenant allocates it as they see fit.

The lump-sum method gives the tenant maximum flexibility and control. The tenant chooses the GC, negotiates subcontractor pricing, manages the construction timeline, and keeps any savings if the buildout comes in under budget. For tenants with in-house construction management capability or strong GC relationships, this is often the preferred approach.

For the landlord, the lump-sum method is administratively simple: write one check, file the receipt, move on. The risk is that the tenant may pocket the savings rather than investing in high-quality improvements that enhance the building's long-term value. Some landlords mitigate this by requiring the tenant to submit receipts proving that the TI was spent on approved improvements, with any unspent balance returned to the landlord or applied as a rent credit. Others accept that risk as the cost of a clean process.

Draw Schedule (Reimbursement)

Reimbursement of the tenant's construction costs is widely used; Tyler Cauble describes tenants as almost always paying for construction up front and being reimbursed by the landlord after the work is done. A draw schedule with progress payments is the tenant-friendlier version of that approach. Under a draw schedule, the tenant manages construction but the landlord reimburses invoices as the work progresses, rather than paying the full amount upfront. The work letter specifies the documentation required for each draw: contractor invoices, lien waivers (partial and final), architect's or construction manager's certification of completion for the work covered by the draw, and proof that the work conforms to the landlord-approved plans and specifications.

A typical draw process works as follows. The tenant submits a draw request to the landlord with supporting documentation. The landlord (or the landlord's construction manager) reviews the request, inspects the work in progress, and approves or rejects the draw within a period specified in the work letter, such as 30 to 45 days. Approved draws are funded by wire transfer or check. The process repeats monthly or at agreed milestones until the allowance is fully disbursed or the buildout is complete. A work letter might allow, for example, 3 to 6 draws over the construction period.

The draw schedule protects the landlord by ensuring that TI dollars are spent on actual improvements, that the work meets quality standards, and that lien waivers are collected at each stage to prevent mechanic's liens from attaching to the property. It protects the tenant by providing periodic funding rather than requiring the tenant to self-finance the entire buildout and wait for reimbursement at the end. The tradeoff is administrative complexity: each draw requires documentation, review, and approval, which adds processing time to the construction cash flow cycle, for example two to four weeks per draw. Tenants who rely on draw funding to pay contractors need to plan for this delay in their construction budgets.

Turnkey

In a turnkey arrangement, the landlord manages the entire buildout. The tenant provides design specifications (usually through the landlord's approved architect), and the landlord hires the GC, manages construction, handles permitting, and delivers the space to the tenant in move-in condition. The TI allowance is applied internally by the landlord against the construction costs. The tenant never handles the cash.

Turnkey is common in institutional portfolios where the landlord has in-house construction management, existing GC relationships, and the purchasing power to negotiate favorable subcontractor pricing. Large REITs and institutional owners often prefer turnkey because it gives them control over the quality of improvements installed in their building, ensures compliance with building standards and fire/life-safety codes, and allows them to manage the construction timeline to coordinate with other building systems work.

The risk for the tenant is loss of control. The tenant cannot choose the GC or subcontractors, may have limited visibility into construction costs, and has less ability to manage the construction timeline. If the landlord's construction process runs over budget, the tenant may be asked to cover the excess. If the landlord's timeline slips, the tenant may not have contractual remedies beyond a delayed-delivery rent abatement. Tenants who choose turnkey should negotiate a guaranteed maximum price (GMP), a delivery date with rent abatement for delays, and approval rights over the GC and major subcontractors.

Effective Rent and NPV Impact

Face rent (sometimes called asking rent or gross rent) is the headline number in a lease proposal. It is what the tenant pays per square foot per year before accounting for concessions. Net effective rent (NER) is the landlord's actual economic return after deducting all concession costs: TI amortization, free rent periods, and leasing commissions. The gap between face rent and NER is the concession cost, and it can be substantial. In the worked example below, the NER is 27.4% below face rent; the size of the gap depends entirely on the concession package.

Wall Street Prep's net effective rent guide describes the free-rent version of the metric, with a per-unit residential example: monthly net effective rent equals gross rent times (lease term less free months), divided by the lease term. The formula below extends the same idea to TI and leasing commissions by deducting amortized concession costs from face rent on a per-square-foot, per-year basis:

Why does TI amortization use an interest rate rather than simple straight-lining? Because the TI represents a capital outlay by the landlord at lease commencement. The landlord is investing $750,000 (in a 10,000 SF space at $75/SF TI) at time zero and recovering it over the lease term through rent. The time value of that capital investment means the annual recovery charge is higher than simple division would suggest. At 7% cost of capital over 10 years, the annual capital recovery on $750,000 is $106,783, or $10.68/SF. Simple straight-lining would be $75/SF divided by 10 years = $7.50/SF/year. The difference, $3.18/SF/year, is the landlord's cost of carry on the TI capital.

Consider a concrete example. A 10,000 RSF Class A office lease with the following terms:

• Face rent: $55.00/SF/year NNN, flat for the full term (no escalations in this illustration)
• TI allowance: $75/SF ($750,000 total)
• Free rent: 6 months
• Lease term: 10 years (120 months)
• Leasing commission: $165,000 total (an assumption for this illustration, equal to 3.0% of the $5.5 million of aggregate face rent, or $16.50/SF)
• Landlord's cost of capital: 7%

Effective rent calculation:

• TI amortization: $750,000 amortized at 7% over 10 years = $106,783/year = $10.68/SF/year
• Free rent (straight-lined): 6 months of $55/SF/year = $27.50/SF ($275,000 total), spread over 10 years = $2.75/SF/year
• Leasing commission (straight-lined): $165,000 / 10 years / 10,000 SF = $1.65/SF/year
• Net effective rent: $55.00 - $10.68 - $2.75 - $1.65 = $39.92/SF/year

The landlord retains 72.6% of face rent after concessions. The remaining 27.4% covers TI capital recovery, free rent cost, and broker compensation. This erosion is the cost of leasing the space, not a loss. NER is a tool for comparing deals, not a capitalization input; the worked example below shows how a buyer treats unpaid concessions instead.

Other conventions give different answers from the same inputs. Straight-lining all three concessions with no time value gives ($5,500,000 - $1,190,000) / 10 years / 10,000 SF = $43.10/SF. Applying the same 7% capital-recovery charge to the $165,000 leasing commission as well as the TI raises the commission charge from $1.65 to $2.35/SF/year and lowers the NER to about $39.22/SF. Whichever convention is used, apply it to every proposal being compared.

The NPV lens adds another layer. Rather than straight-lining concession costs, an NPV-based effective rent calculation discounts all landlord cash flows (rent receipts minus concession outlays) to present value at the landlord's discount rate, then divides by the present value of one dollar per SF per year over the lease term. The result depends on conventions the analyst must state. Here, rent is received at the end of each year, Year 1 rent covers only the 6 paid months ($27.50/SF), the TI ($75/SF) and the commission ($16.50/SF) are paid at time zero, rent is flat, and the discount rate is 7% annually. The present value of rent is $360.60/SF; less the $91.50/SF of upfront outlay, the NPV is $269.10/SF. Dividing by the 10-year, 7% annuity factor of 7.0236 gives an NPV-adjusted NER of approximately $38.31/SF, about $1.61 below the $39.92 capital-recovery NER. The TI is charged identically in both measures, so the gap comes from the two items the capital-recovery convention straight-lines: the leasing commission ($0.70/SF) and the free rent ($0.91/SF). Discounting monthly instead of annually would give a different figure (about $38.50/SF at a nominal 7% rate compounded monthly, with rent paid monthly in arrears), which is why the conventions matter.

ASC 842 Accounting Treatment

The accounting treatment of tenant improvement allowances under ASC 842 (the FASB lease accounting standard, effective for public entities for fiscal years beginning after December 15, 2018, and for all other entities for fiscal years beginning after December 15, 2021, per Deloitte's summary of the effective dates) depends on two questions. First, who owns the improvements? Second, when is the allowance received?

Ownership Determination

ASC 842 does not provide explicit guidance on how to determine the owner of a leasehold improvement, which matters because a lessor payment for a lessee-owned improvement is a lease incentive, while a payment for a lessor-owned improvement is not. The RSM accounting brief on lessee accounting for tenant improvement allowances lists factors to weigh rather than a single test: who holds legal title (a factor that is rarely determinative on its own), whether the lease requires the lessee to construct specific improvements, whether the lessee can remove or alter the improvements without the lessor's approval or compensating the lessor, and whether the improvements are so specialized that the lessor or a subsequent lessee would be unlikely to benefit from them at the end of the lease.

Where the factors point to the lessee as the accounting owner, the lessee capitalizes the construction cost as property, plant, and equipment (PP&E) and generally amortizes it over the shorter of the useful life or the remaining lease term. In this case, the TI allowance received from the landlord is a lease incentive.

Where the factors point to the lessor as the owner, the lessor's payment is the acquisition of its own asset, not a lease incentive (RSM). The lessee does not treat the allowance as an incentive; Occupier's guide to TI allowance accounting notes that the lessee records its improvement expenditures as prepaid rent, with reimbursements reducing the prepaid rent balance. The landlord capitalizes and depreciates the improvements.

Because the factors turn on the lease terms and the specific improvements, the answer varies by deal and should be documented with the company's auditors. Buildouts designed around one tenant's layout often point toward lessee ownership, in which case the TI allowance is a lease incentive under ASC 842.

Lease Incentive Accounting: Lessee Side

When the TI allowance is classified as a lease incentive, the accounting treatment depends on timing. As detailed in FinQuery's ASC 842 guide on tenant improvement allowances, the treatment differs based on when the incentive is received relative to lease commencement.

TI received at or before lease commencement. The TI allowance reduces the initial measurement of the ROU asset. The lease liability is unaffected because the TI does not change the future lease payment obligations. The lessee records the ROU asset at a lower initial value, which results in lower straight-line lease expense over the lease term. The effect is equivalent to the landlord subsidizing the lessee's lease cost. In journal entry form:

At commencement: Dr. ROU Asset (net of TI incentive), Dr. Cash (TI received), Cr. Lease Liability (PV of future lease payments).

TI payable after lease commencement. If the lessor owes the allowance at a known point after commencement, as a reduction of rent payments for example, the payments are factored into both the lease liability and the ROU asset measurement, and the lease liability is lower because the expected receipts net against rent in the periods they are expected (FinQuery).

Reimbursement-based (contingent) TI. Many allowances are paid only as the tenant incurs and documents construction costs. The RSM brief states that ASC 842 does not directly address contingent lease incentives and describes multiple approaches that would be considered acceptable as an accounting policy election: (1) estimate at commencement the amounts reasonably certain to be incurred, reducing the lease liability and the ROU asset at commencement; (2) treat incentives received or receivable after commencement as a reduction in lease payments, akin to a lease remeasurement; or (3) reduce the ROU asset and lease liability as qualifying expenditures are incurred, with a cumulative catch-up adjustment to lease expense. The lessee should pick one approach as a policy and apply it consistently.

Lessor Side

For the landlord (lessor), the TI allowance is part of the lease's total consideration. Under ASC 842, the lessor treats the TI as a lease incentive that is netted against rental revenue over the lease term on a straight-line basis. If the improvements are lessor-owned, the landlord capitalizes them and depreciates them. If the improvements are lessee-owned, the landlord recognizes the TI outlay as a reduction of rental income over the term.

The straight-line treatment means the landlord's GAAP rental income in each period equals the total lease consideration (aggregate rent minus TI and other incentives) divided by the number of periods. Face rent in the lease may escalate (3% annually, for example), but GAAP straight-line rent is level. The TI outlay reduces the total consideration, which reduces the straight-line amount in every period.

Worked Example: 10,000 SF Office Lease

A 10,000 RSF Class A office lease with a $75/SF TI allowance shows how TI flows through both the tenant's occupancy cost model and the landlord's effective rent pro forma.

Deal Terms

Tenant Perspective: Total Occupancy Cost

The tenant's out-of-pocket buildout cost is the excess above the TI allowance: $820,000 actual cost minus $750,000 TI = $70,000 out of pocket ($7.00/SF). This is the tenant's capital contribution to the buildout.

The tenant's total occupancy cost over the lease term includes base rent (after free rent), operating expense pass-throughs (excluded from this NNN example since the tenant pays them directly), and the out-of-pocket buildout excess. With flat rent of $55.00/SF and 6 months of free rent in Year 1:

Total base rent over 10 years (with free rent) is $5,225,000: $275,000 in Year 1 plus 9 years at $550,000, or $5,500,000 less the $275,000 of free rent. Add the $70,000 out-of-pocket buildout excess, and the tenant's total occupancy cost for base rent plus buildout is $5,295,000, or $52.95/SF/year on a straight-line basis. The tenant's effective occupancy cost per year is the sum of the straight-lined base rent and the straight-lined buildout excess.

Landlord Perspective: Net Effective Rent

The landlord's economics look different. The landlord's gross receipts are the same $5,225,000 in total rent. But the landlord's costs include:

• TI outlay: $750,000 at lease commencement (or over months 1-4 via draws)
• Leasing commission: $165,000 at lease execution
• Free rent cost: $275,000 in forgone rent (6 months at $55.00/SF)

Total concession cost: $1,190,000 ($119.00/SF). The landlord invested $915,000 in upfront cash (TI + LC) and gave away $275,000 in rent. Expressed as an annual net effective rent, plain straight-lining of all concessions gives ($5,500,000 - $1,190,000) / 10 years / 10,000 SF = $43.10/SF. That ignores the time value of the $915,000 of upfront cash. This article uses the capital-recovery convention instead, which charges the TI at the landlord's 7% cost of capital:

• TI amortization at 7% over 10 years: $10.68/SF/year ($106,783 / 10,000 SF)
• Free rent straight-lined: $2.75/SF/year
• LC straight-lined: $1.65/SF/year
• NER = $55.00 - $10.68 - $2.75 - $1.65 = $39.92/SF/year

Rent in this example is flat so that every figure ties across sections. If rent instead escalated 3% annually from $55.00, average face rent over the 10 years would be $63.05/SF and the same method would give an NER of about $47.97/SF ($63.05 - $10.68 - $2.75 - $1.65), or 76.1% of average face rent.

NER is a way to compare deals; it is not a capitalization input. Concessions are one-time costs, so a buyer valuing this lease at signing deducts the unpaid concessions dollar for dollar from the income-based value. As a simplified illustration that treats the NNN rent as net operating income and ignores rollover, vacancy, and the finite 10-year term, capitalizing the $55.00 face rent at a 6.5% cap rate gives $55.00 / 0.065 * 10,000 SF = approximately $8,462,000, and deducting the $1,190,000 of unpaid concessions gives approximately $7,272,000. Capitalizing the $39.92 NER instead would imply a deduction of ($55.00 - $39.92) / 0.065 * 10,000 SF = $2,320,000, nearly twice the $1,190,000 of actual concession cash, because that shortcut treats a one-time cost as a perpetual annual charge. Effective rent matters for comparing proposals and for understanding what the next buyer inherits, but the concession dollars still owed are what reduce value.

Comparing Two Proposals with Different TI/Rent Combinations

Tenants and landlords often compare proposals that bundle TI and rent differently. Consider two proposals for the same 10,000 RSF space:

At first glance, Proposal A appears more expensive ($55/SF vs $50/SF face rent). But the TI and free rent packages are very different. Computing the NER for each, with flat face rent in both proposals and the same conventions as above:

• Proposal A NER: $55.00 - $10.68 (TI) - $2.75 (free rent) - $1.65 (LC) = $39.92/SF
• Proposal B NER: $50.00 - $5.70 (TI at $40/SF amortized at 7% over 10 yrs) - $1.25 (3 months free rent) - $1.50 (LC) = $41.55/SF

Proposal A, despite its higher face rent, delivers a lower NER ($39.92 vs $41.55) because the higher TI allowance more than offsets the rent premium. A tenant that selects Proposal B based solely on face rent comparison overlooks a $1.63/SF/year difference in net effective rent, which totals $163,000 undiscounted over the 10-year term for a 10,000 SF space (about $115,000 in present value at 7%). That is the landlord-side NER gap, and $0.15/SF of it is the difference in leasing commissions ($1.65 vs $1.50), which the landlord pays and the tenant does not receive. Counting only face rent less amortized TI and free rent, with the same 7% rate, the tenant-side gap is about $1.48/SF/year ($148,000 undiscounted, about $104,000 in present value). If the buildout costs $82/SF under either proposal (the worked-example figure), the tenant's out-of-pocket buildout shortfall is $7/SF ($70,000) under Proposal A and $42/SF ($420,000) under Proposal B; the $35/SF difference is the TI difference, which the NER comparison already reflects through TI amortization. The shortfall matters for cash planning at move-in, not as an extra cost on top of NER. This is why effective rent analysis, not face rent comparison, is the better basis for evaluating lease proposals.

Negotiation Tactics

TI interacts with face rent, free rent, lease term, escalation rate, renewal options, and early termination provisions. Skilled negotiators on both sides treat TI as one element of a multi-variable optimization.

Tenant-Side Tactics

Anchor to actual construction costs. Before negotiating TI, obtain competitive bids from at least two general contractors for the planned buildout. A space plan from an architect and a GC budget estimate give the tenant a defensible basis for the TI ask. Asking for $75/SF TI without a construction budget is negotiating blind. Presenting a detailed budget that demonstrates $82/SF in actual costs justifies a $75/SF ask and signals to the landlord that the tenant has done the homework.

Leverage competing proposals. TI negotiation is most effective when the tenant has genuine alternatives. A tenant negotiating with only one landlord has limited leverage. A tenant with two or three competing proposals can use the best TI offer from one landlord to improve the terms from another. The competing proposal does not need to be identical in space or location; it needs to be a credible alternative that the tenant would actually accept.

Negotiate the TI floor and the unused TI provision. The TI floor is the minimum allowance the landlord will provide regardless of actual buildout costs. The unused TI provision governs what happens to TI dollars that the tenant does not spend on construction. Some leases allow the tenant to apply unused TI toward rent abatement (reducing the first several months of rent). Others require the tenant to forfeit unused TI. A tenant who expects the buildout to come in under the TI amount should negotiate for unused TI to convert to rent credit. This effectively increases the total concession package.

Consider the amortization rate. Two TI offers of $75/SF may produce different NER results if the landlords are using different amortization rates to embed the TI cost into rent. Landlords do not usually state the rate they use, but if a proposal includes amortized TI, ask what interest rate applies to the amortized portion; Tyler Cauble reports such rates are usually 6% to 10%. A landlord using 8% will embed a higher capital recovery charge into rent than one using 6%, which means the face rent in the first scenario includes more TI recovery cost and the effective rent difference between the two proposals is smaller than the face rent difference suggests.

Landlord-Side Tactics

Cap TI with a guaranteed maximum price. Rather than committing to a fixed TI amount and absorbing any construction overruns, landlords can cap TI at a GMP based on the approved space plan and competitive GC bids. If the buildout exceeds the GMP, the tenant pays the excess. This protects the landlord from construction cost risk while still providing the tenant with a defined budget.

Include a TI recapture clause. A TI recapture clause requires the tenant to repay a portion of the unamortized TI if the tenant terminates the lease early, defaults, or assigns the lease. The recapture amount can decline ratably over the lease term. For example, on a 10-year lease with $75/SF TI, the recapture amount in Year 3 might be 70% of the original TI ($52.50/SF). By Year 7, it might be 30% ($22.50/SF). By Year 10, it is zero. This clause protects the landlord's TI investment in the event that the lease terminates before the TI is fully amortized through rent.

Tie TI to lease term length. Offer a TI schedule that increases with lease term. For example, a 5-year term gets $40/SF, a 7-year term gets $55/SF, and a 10-year term gets $75/SF. This structure incentivizes the tenant to commit to a longer term, which gives the landlord more months to amortize the TI cost and reduces rollover risk. It also prevents the situation where a tenant negotiates a high TI on a short lease, leaving the landlord underwater on the TI investment if the tenant does not renew.

Require competitive bidding for construction. In draw schedule and turnkey arrangements, landlords should require the tenant (or their own construction manager) to obtain at least three competitive bids for the GC contract. Competitive bidding reduces the risk that construction costs are inflated and ensures that TI dollars are spent efficiently. Some landlords include a right-to-audit clause in the work letter, giving them the ability to review construction invoices and contractor markups.

Common Mistakes Practitioners Make

1. Comparing proposals on face rent alone. Face rent is the headline number, but it tells you nothing about the total economics of the lease. A $55/SF lease with $75/SF TI and 6 months of free rent has a very different effective rent than a $50/SF lease with $40/SF TI and 3 months of free rent. Practitioners who rank proposals by face rent without computing NER can select the wrong deal, as the two-proposal comparison above shows. Run the effective rent calculation for every proposal before comparing them.

2. Ignoring the landlord's amortization rate. TI amortization at 6% versus 8% produces different capital recovery charges and therefore different effective rents, even when the TI amount and face rent are identical. Landlords price rent from many inputs, and the rate used to recover TI is not usually stated in the lease. But it drives the economics of the deal. When comparing proposals from different landlords, ask whether the TI is amortized and at what rate, or back into it from the rent structure.

3. Failing to negotiate unused TI provisions. If the buildout comes in under budget, the unused TI balance sits in a gray area. Some leases require the tenant to forfeit unused TI. Others allow conversion to rent credit. Others are silent on the topic. Leaving this provision unaddressed invites disputes. Negotiate the treatment of unused TI explicitly in the work letter, ideally specifying that unused TI converts to rent abatement applied to the first months of the lease term.

4. Missing the construction cost escalation window. TI is negotiated at lease execution but construction may not begin for 3 to 9 months. If construction costs are rising, the real purchasing power of the TI allowance declines between negotiation and buildout. A $75/SF TI negotiated in January that buys $75/SF of construction in January may only buy about $71/SF in June if costs have risen 5% in the interim, a deliberately sharper case than the 3% to 5% annual range above. Tenants can build a cost escalation buffer into the TI ask (for example 5% to 10%) or negotiate a construction start deadline with a TI escalation clause.

5. Overlooking TI recapture exposure. Leases may include a TI recapture clause that requires the tenant to repay unamortized TI upon early termination. Tenants who negotiate a high TI on a 10-year lease and then need to exercise an early termination option in Year 4 may face a substantial recapture liability. Review the recapture schedule and model the exposure before committing to a high-TI, long-term deal. If the business plan involves any possibility of early exit, negotiate a reduced recapture schedule or a cap on the recapture amount.

6. Treating TI as free money. TI is not a gift from the landlord. It is a capital investment that the landlord recovers through the rent structure. A tenant who views TI as a subsidy rather than an embedded financing cost will overweight TI in proposal comparisons, accept higher face rents without questioning the amortization math, and underestimate total occupancy cost. The institutional discipline is to model TI as what it is: a form of landlord financing embedded in the lease economics.

Model It in Apers

Related Articles

• Free Rent and Abatement: Effective Rent Accounting. The free rent component of the concession package. How to straight-line free rent, model abatement periods in the pro forma, and handle GAAP recognition under ASC 842.
• Leasing Commission Structures and Broker Compensation. The LC component of effective rent. How commission structures differ by property type, how split commissions work between tenant rep and listing brokers, and how LC flows through the landlord's pro forma.
• Renewal Probability and Rollover by Tenant Type. What happens when the lease expires. How renewal probabilities affect the expected TI exposure at rollover and how institutional investors model the distribution of rollover outcomes.
• Co-Tenancy and Kick-Out Clauses: Retail Downside. The retail-specific lease provisions that interact with TI. How co-tenancy failures and kick-out triggers affect the landlord's ability to recover TI investments in anchored shopping centers.
• Office Lease Analysis: Gross vs NNN and Expense Stops. The expense structure that sits alongside TI in the lease. How gross, NNN, and modified gross structures change the tenant's total occupancy cost and the landlord's net operating income.
• Below the Line: TI, LC, CapEx, and Reserves. Where TI sits in the property-level cash flow model. How below-the-line items reduce NOI to arrive at cash flow before debt service, and how institutional investors model TI reserves for future rollover events.