Tenant improvement allowance
A TI allowance is a loan the landlord makes and collects back in rent. Here is what it does to a face rent, and what is left owing when a tenant leaves early.
The allowance and the rent are one number
A tenant improvement allowance is money the landlord puts toward fitting out the space, usually quoted per square foot. It reads like a concession, and in a sense it is — but in most commercial leases the landlord gets it back, through the rent, with interest.
Which means the allowance and the rent cannot be evaluated separately. A proposal at $28 with a large allowance and one at $24 with none are not $4 apart. They may not be apart at all.
Example: $40 per square foot over five years
Sample inputs
- Suite
- 8,000 SF
- Face rent
- $28.00 / SF
- TI allowance
- $320,000
- Per square foot
- $40.00 / SF
- Term
- 60 months
- Landlord's rate
- 8%
Amortized over the term, the allowance costs $6,488.45 a month — which is $9.73 per square foot a year of the rent, doing nothing but paying back the fit-out.
So the $28.00 face rent is $18.27 once the allowance is paid for. More than a third of the quoted rent is the tenant repaying their own build-out.
Over the full term the tenant repays $389,307 on a $320,000 allowance. The $69,307 difference is interest, and it is a real cost that never appears on the face of the lease.
Unamortized TI: what is owed when a tenant leaves early
If the lease ends before the schedule does — a default, a buyout, an early termination right — the landlord has not been repaid. The unamortized balance is what is outstanding, and most leases make the tenant responsible for it.
It is not the allowance prorated by time, and the gap is not small:
| Tenant leaves after | Actually outstanding | Straight-line guess |
|---|---|---|
| 24 months | $207,058 | $192,000 |
| 36 months | $143,463 | $128,000 |
| 48 months | $74,590 | $64,000 |
At 36 months of a 60-month term, 60% of the lease has run and 45% of the allowance is still outstanding. Prorating straight-line says $128,000; the schedule says $143,463. The difference is $15,463, and it exists because early payments are mostly interest.
A landlord who prorates undercharges. A tenant who expects prorating is surprised by the bill. Both are reading a calendar where the lease points at a schedule.
Allowance, cost and turnkey are three different deals
| Structure | What it means | Who carries the overrun |
|---|---|---|
| TI allowance | A capped contribution, paid against invoices or on completion. | The tenant, above the cap. |
| Turnkey build-out | The landlord delivers a finished space to an agreed specification. | The landlord. |
| Building standard | A defined finish level included in the rent, with upgrades charged. | The tenant, for anything above standard. |
| Rent abatement instead | Free rent in place of a contribution. | Nobody — there is no build-out being funded. |
A turnkey deal looks more generous than an allowance of the same size and often is — the landlord is taking construction risk. That risk is priced, and the price is in the rent. Comparing a turnkey proposal and an allowance proposal on face rent alone compares two numbers that mean different things.
Where it belongs in the model
Below the NOI line, with leasing commissions. A TI package is capital: it buys the building more life than the year it was spent in, and it is a cost of getting a lease signed rather than of operating the space.
Put it above the line and NOI falls by the TI. Because value is NOI divided by a cap rate, the mistake does not cost you the TI — it costs you the TI divided by the cap rate, which at a 6.5% cap is more than fifteen times the error.
In a deal, not a spreadsheet
Set the allowance on the suite and it lands in every month.
DealWise amortizes a TI package across the term inside the cash flow, alongside the leasing commission, the free rent and the downtime — so the cost of re-letting a suite is in the return rather than in a footnote. Free plan, no credit card.
Frequently asked questions
What is a tenant improvement allowance?
A sum the landlord contributes toward fitting out the space, usually quoted per square foot. It is not a discount and it is rarely a gift: in most commercial leases the landlord recovers it through the rent, which means the allowance and the rent are two halves of one number.
How do you amortize a tenant improvement allowance into rent?
The same way a loan amortizes. Take the allowance as the principal, the lease term as the amortization period and the landlord's rate as the interest, and the level monthly payment is the rent the allowance is paying for. A $320,000 allowance on an 8,000 SF suite over 60 months at 8% is $6,488.45 a month, or $9.73 per square foot a year.
How do you calculate unamortized tenant improvements?
It is the outstanding balance on that schedule at the month the tenant leaves. On the example above it is $143,463 after 36 months of a 60-month term — not $128,000, which is what prorating the allowance straight-line would suggest. Early payments are mostly interest, so more principal is outstanding than the calendar implies.
Is a tenant improvement allowance an operating expense?
No. It is capital, and it sits below the NOI line with leasing commissions. Treating it as an operating expense understates NOI, and because a cap rate is applied to NOI, the error is multiplied into the value.
What is the difference between an allowance and a turnkey build-out?
An allowance is a capped contribution the tenant spends and overruns on their own account. A turnkey build-out is the landlord delivering a finished space to an agreed specification, carrying the overrun risk themselves. The second looks more generous and is priced accordingly — the risk transfer is in the rent.
Who owns the improvements at the end of the lease?
Usually the landlord, as fixtures, unless the lease says otherwise — and many leases also give the landlord the right to require removal of specific alterations at the tenant's cost. Both provisions matter at exit and both live in the lease rather than in a rule of thumb.
Related
TI amortization calculator
Allowance, term and rate in; the rent equivalent out. No account.
Commercial real estate commissions
The other cost of signing a lease, and why it is five times bigger than it looks.
Net effective rent
Face rent, less what it actually cost to get.
Lease comparison calculator
Rank proposals on what they cost, not on face rent.