Tenant Improvement Amortization: How TI Allowances Work
Understand how tenant improvement costs are structured, amortized, and how they impact your deal economics, with formulas, examples, and practical underwriting guidance.
What are tenant improvements?
Tenant improvements (TI) are the modifications a landlord makes to a commercial space to customize it for a specific tenant. This can include everything from basic paint and carpet to full build-outs with walls, plumbing, electrical, HVAC modifications, and specialty installations. The cost is typically expressed as a per-square-foot allowance, for example, “$45/SF TI allowance.”
TI allowances are one of the largest upfront costs in commercial leasing. For a 10,000 SF office suite at $45/SF, that’s $450,000 the landlord invests before collecting a single rent check. Understanding how these costs are amortized over the lease term (and how they affect your actual return on the lease) is essential for both landlords evaluating deals and investors underwriting acquisitions.
How TI amortization works
TI amortization formula
Monthly TI Cost = TI Amount × (r × (1+r)n) / ((1+r)n − 1)
Where r = monthly interest rate and n = lease term in months
TI amortization calculates the landlord’s true monthly cost of providing the tenant improvement allowance. The landlord is effectively lending money to the tenant (in the form of build-out) and recovering it through the rental rate over the lease term. The amortization schedule includes an interest component to account for the time value of money.
The interest rate used is typically the landlord’s cost of capital or a market rate, commonly 6% to 8%. The amortization period matches the lease term. A shorter lease means higher monthly TI cost; a longer lease spreads the cost over more months.
This is why experienced landlords and brokers think about the “net effective rent”, the face rent minus the amortized TI cost and any free rent. Two deals with the same face rent but different TI packages have very different actual returns.
Worked examples
Office lease: 10,000 SF, 7-year term
Sample inputs
- Suite SF
- 10,000
- TI allowance
- $45.00/SF
- Lease term
- 84 months
- Amortization rate
- 7%
- Face rent
- $28.00/SF/yr
A landlord offers a $45/SF TI allowance on a 10,000 SF office suite with a 7-year lease. At a 7% amortization rate over 84 months, the monthly TI cost is $6,792. If the face rent is $28/SF/year ($23,333/month), the net effective rent after TI amortization is $16,542/month, or approximately $19.85/SF/year. The TI cost consumes 29% of the gross rent.
Retail space: 3,000 SF, 5-year term
Sample inputs
- Suite SF
- 3,000
- TI allowance
- $25.00/SF
- Lease term
- 60 months
- Amortization rate
- 7%
- Face rent
- $30.00/SF/yr
A retail landlord offers $25/SF TI for a small shop tenant on a 5-year lease. Monthly TI cost at 7%: $1,485. Face rent of $30/SF/year ($7,500/month) minus TI amortization leaves $6,015/month net, $24.06/SF/year effective. Shorter lease terms drive up the per-month TI cost significantly.
Industrial suite: 20,000 SF, 10-year term
Sample inputs
- Suite SF
- 20,000
- TI allowance
- $15.00/SF
- TI amount
- $300,000
- Lease term
- 120 months
- Amortization rate
- 6.5%
- Face rent
- $12.00/SF NNN
Industrial TI allowances are typically lower per SF but the spaces are larger. $15/SF on 20,000 SF = $300,000. Amortized at 6.5% over 120 months: $3,406/month. With face rent of $12/SF NNN ($20,000/month), TI amortization consumes 17%, much lower than office due to the longer lease term and lower per-SF TI.
Calculate TI amortization instantly
Use DealWise AI’s free TI Amortization Calculator to model any tenant improvement scenario: adjust the allowance, rate, and term and see the monthly cost instantly.
TI allowances by asset class
| Asset class | Typical TI range | Lease term | Key considerations |
|---|---|---|---|
| Class A Office | $40 – $80/SF | 7 – 10 yr | Full build-outs with high-end finishes, HVAC, specialty lighting |
| Class B Office | $20 – $45/SF | 5 – 7 yr | Standard build-outs, carpet/paint, basic partitioning |
| Retail (Inline) | $15 – $35/SF | 5 – 10 yr | Varies widely by use: restaurants require more than dry goods |
| Retail (Anchor) | $5 – $20/SF | 10 – 20 yr | Tenants often do their own build-out; TI is a negotiated allowance |
| Industrial | $5 – $20/SF | 5 – 10 yr | Office build-out within warehouse; warehouse portion needs minimal TI |
| Medical Office | $60 – $120/SF | 7 – 15 yr | Plumbing, specialized electrical, exam rooms, ADA compliance |
Why TI matters for underwriting
For landlords and investors evaluating new leases: TI directly affects your net effective rent and return on cost. A lease with $30/SF face rent and $50/SF TI on a 5-year term has a very different real return than $30/SF rent with $20/SF TI on a 10-year term. Always calculate the amortized TI cost before comparing lease proposals.
For acquisition underwriting: When you’re buying a property and modeling re-leasing assumptions, TI allowances are a major cash outflow that affects your projected returns. If a tenant’s lease expires in Year 3 and you assume a $40/SF TI to re-lease the space, that capital cost needs to flow through your cash flow model. DealWise AI handles this automatically: you enter the TI assumption per suite and it factors into the projected cash flow.
For lease negotiation: Understanding TI amortization gives you leverage. A landlord offering $50/SF TI at 7% on a 5-year lease is spending $847/month per 1,000 SF. If you can extend to 7 years, that drops to $639/month. Offering a longer lease in exchange for a higher TI allowance can be a win for both sides.
Frequently asked questions
Who pays for tenant improvements, the landlord or the tenant?
It varies by deal. In most commercial leases, the landlord provides a TI allowance and the tenant manages the build-out. If the tenant's desired improvements exceed the allowance, the tenant pays the overage. Some leases use a 'turnkey' approach where the landlord handles everything and delivers the space ready to occupy. In industrial leases, tenants often do their own improvements with a smaller landlord contribution.
What interest rate should I use for TI amortization?
Use the landlord's cost of capital or a market rate that reflects the time value of money. Most professionals use 6% to 8%. Some use their actual mortgage rate as a proxy. The exact rate matters less than being consistent. The bigger driver is the lease term length and the TI amount per SF.
How does TI affect NOI?
TI is a capital expenditure, not an operating expense, so it does not reduce NOI directly. However, TI affects cash flow below the NOI line. When you're modeling an acquisition, TI costs on projected re-leasing reduce your actual cash returns even though NOI appears unchanged. This is why cap rate alone can be misleading for properties with near-term lease expirations requiring significant TI.
What is net effective rent?
Net effective rent is the face rent minus the amortized cost of concessions, primarily TI allowances and free rent periods. It represents the landlord's true income from the lease. Two deals with $30/SF face rent can have vastly different net effective rents depending on TI and free rent. Always compare leases on a net effective basis, not face rent.
Final thoughts
Tenant improvement costs are one of the most significant, and most overlooked, factors in commercial real estate deal economics. Whether you’re negotiating a new lease, evaluating an acquisition with near-term rollovers, or comparing competing lease proposals, understanding TI amortization gives you a clearer picture of real returns.
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