When negotiating a commercial lease, one of the most important terms to understand is the Tenant Improvement (TI) Allowance. Whether you’re a tenant looking to customize a new space or a landlord trying to attract high-quality tenants, the TI allowance plays a critical role in shaping the economics of a lease—and the space itself.
Here, we’ll break down what a TI allowance is and how it works.
What Is a Tenant Improvement Allowance? A Tenant Improvement Allowance is a sum of money a landlord agrees to contribute toward the cost of building out or customizing a commercial space for a tenant’s specific use. A shell commercial space will need significant changes depending on whether it is being transformed into a restaurant or a hair salon, for example. The Tenant Improvement allowance could include building walls or private offices, installing flooring, ceilings, or lighting, electrical and plumbing work, HVAC upgrades, or interior painting.
The allowance is typically expressed per square foot and is negotiated as part of the lease terms.
Why Do Landlords Offer TI Allowances? TI allowances are a strategic investment by landlords. In investing up front to help tenants create a space that fits their needs, landlords increase the chances of securing longer lease terms, attracting high-credit tenants, reducing vacancy time, and ultimately, increasing property value.
How TI Allowance Works. Let’s say you’re leasing 5,000 SF of office space, and the landlord offers a $30/SF TI allowance. That would mean you’ll receive up to $150,000 to put toward the buildout. How that TI allowance is applied is a critical component to review and understand PRIOR to signing your lease agreement.
For example, most TI allowances are reimbursed only after the work is completed. The tenant fronts the money and then sends invoices for repayment. And there are typically deadlines (e.g., 6–12 months from lease start) to complete improvements and submit reimbursement paperwork. The Landlord may limit the ways that TI funds are used, such as prohibiting them from being used for furniture, fixtures, or moving costs.
Can I manage my own Buildout? This depends on the lease. In many cases, the tenant manages construction and selects contractors. This allows for more control but comes with more responsibility. Alternatively, the landlord manages the entire construction process and delivers the space move-in ready.
Final Thoughts. Whether you’re a landlord or a tenant, don’t overlook this critical part of the lease negotiation! TI allowances can be a powerful tool to transform a commercial space. But like any part of a lease, they need to be understood and negotiated carefully. Done right, a TI allowance can set the stage for a successful long-term tenancy.
Whether you’re a tenant planning a relocation or a landlord marketing vacant commercial space, the attorneys at Way Law can make certain that the tenant improvement allowance helps you create win-win lease deals. Call the attorneys at Way Law today for help with any of your commercial leasing needs!