Tenant Improvement Allowances: The Economics Most Landlords Get Wrong

A $50/SF tenant improvement allowance on a 10,000 SF space puts $500,000 of landlord capital at risk before the tenant pays a dollar of rent. It's typically the largest upfront investment the landlord makes in a deal, larger than leasing commissions, larger than free rent concessions, larger than legal costs.

Yet the economics of that $500,000 are often modeled with back-of-napkin math. What's the monthly amortization at the landlord's cost of capital? How does the amortization schedule interact with the rent escalation structure? What happens to the unamortized balance if the tenant terminates early? These questions have precise numerical answers, and getting them wrong changes the deal economics materially.

The landlord commits a per-square-foot dollar amount toward the tenant's build-out of the space. The allowance typically covers:

• Construction costs (demolition, framing, finishes, MEP)
• Architectural and engineering design fees
• Permitting and inspection fees
• Project management costs

What it typically does not cover:

• Furniture, fixtures, and equipment (FF&E)
• Technology infrastructure (cabling, AV systems)
• Signage
• Moving costs

Typical Ranges by Property Type

These ranges vary significantly by market, building quality, deal size, and tenant credit, but they establish the order of magnitude.

The TI allowance isn't a gift, it's landlord capital deployed at a cost. The landlord either borrows the money (at their debt rate) or deploys equity (at their required return). Either way, that capital has a carrying cost that needs to be recovered through rent over the lease term.

Why the Interest Rate Matters

The same $50/SF allowance costs the landlord very different amounts depending on the amortization rate:

A 2% difference in amortization rate changes the total cost by over $60,000, money the landlord needs to recover through the rent structure. Use the TI allowance calculator to model how different allowance amounts, rates, and terms affect the amortization schedule and total cost.

Early Termination Exposure

If the tenant terminates at year five of a ten-year lease, roughly half the TI allowance remains unamortized. On a $500,000 allowance at 7%, that's approximately $290,000 in unrecovered capital. This is why TI recapture provisions are critical, and why they need to be calculated correctly, not estimated.

Both TI allowances and free rent are concessions, economic value given to the tenant to close the deal. But they have very different characteristics:

From the Landlord's Perspective

TI Allowance: Cash out the door at lease commencement. Increases the asset's basis. Creates tangible improvements that may have residual value if the tenant leaves.

Free Rent: No cash outlay, just deferred revenue. Doesn't improve the asset. But the landlord's carrying costs (debt service, operating expenses) continue during the free rent period.

From the Tenant's Perspective

TI Allowance: Funds the build-out. Tenant controls the space design. But the tenant's cost of space includes the amortized TI whether they realize it or not.

Free Rent: Reduces initial occupancy cost. Simpler. But the tenant still needs to fund their own build-out from other sources.

The NPV Comparison

Two deals with identical headline concession value can have different NPVs depending on the structure:

Deal A: $50/SF TI allowance, no free rent

• Landlord cash outlay: $500,000 at commencement
• NPV of concession (at 7%): $500,000

Deal B: No TI allowance, 10 months free rent at $50/SF ($500,000 total)

• Landlord forgoes $50,000/month for 10 months
• NPV of concession (at 7%): ~$476,000

The same $500,000 headline number costs the landlord $24,000 less as free rent than as TI, because the free rent cost is spread over time rather than paid upfront. Conversely, TI is more valuable to the tenant because they receive the full amount immediately.

This is why modeling the actual NPV, not just the headline number, matters for every concession negotiation.

Face rent is the rate stated in the lease. Effective rent accounts for all concessions over the term. Two deals with the same face rent can have vastly different effective rents:

Deal B's lower TI is more than offset by the free rent. The effective per-SF cost is $0.75/SF/year lower, a $75,000 difference over the term. Without modeling the full concession package, these differences are invisible.

The interaction between TI amortization and rent escalation schedules adds another layer. If face rent escalates at 3% annually but the TI amortization is a fixed monthly cost, the landlord's net effective rent improves over time as escalations outpace the flat amortization payment. Modeling this correctly matters for both parties.

The financial modeling is only half the picture. The lease provisions governing TI allowances create their own set of risks.

DISCLAIMER: The example provisions throughout this post are illustrations only, not legal advice. We are not recommending this language for use in your leases. Your clauses should be drafted by your own counsel for your specific deal.

Disbursement Schedules

How and when the landlord releases TI funds affects both parties' cash flow and risk:

"Landlord shall disburse the TI Allowance in monthly installments based on the percentage of work completed, as certified by Landlord's architect, within thirty (30) days of each requisition."

Key Issues: Frequency of draws, documentation requirements, retainage holdback (typically 10% until completion), conditions precedent (lien waivers, permit approvals).

Recapture Provisions

If the tenant terminates early, the landlord needs a mechanism to recover unamortized TI:

"In the event of early termination, Tenant shall pay to Landlord the unamortized balance of the TI Allowance, calculated on a straight-line basis over the initial Term, together with interest at the rate of 8% per annum."

Without a recapture provision, the landlord absorbs the entire loss. This is especially concerning in office leases with termination options, where spec suites and turnkey delivery are replacing traditional TI allowances precisely to reduce this exposure.

Over-Allowance Handling

When construction costs exceed the TI allowance, who pays the difference?

"Any costs in excess of the TI Allowance ('Over-Allowance Amount') shall be paid by Tenant directly to Contractor. Landlord shall have no obligation to fund any Over-Allowance Amount."

Landlord Approval Rights

How much control the landlord retains over plans and contractors affects the build-out timeline, and the overall time it takes to get a lease from execution to occupancy. Overly broad approval rights slow down the process. Insufficient approval rights expose the landlord to substandard work.

TI allowances are where deal economics meet lease language. The financial modeling needs to be precise, Excel errors in TI calculations compound through every year of the term, and the drafting needs to protect both parties through scenarios that the deal team hopes won't happen but the lease must anticipate.

• Rent Escalation Clauses: The Complete Guide, how TI amortization interacts with escalation schedules to determine true effective rent
• The Office Lease Is Being Rewritten, how spec suites and turnkey delivery are replacing traditional TI allowances
• The True Cost of Drafting Leases in Word and Excel, how manual TI calculations create compounding errors
• How Long Should It Take to Draft a Commercial Lease?. TI provisions add significant complexity to drafting time