Tenant Improvement Allowance & Amortization Calculator

A tenant improvement (TI) allowance is a dollar amount the landlord agrees to spend on customizing or renovating a commercial space for a tenant. TI allowances typically cover items like interior buildout, flooring, lighting, HVAC modifications, and other improvements specific to the tenant's use. The allowance is usually expressed as a dollar amount per square foot of leased space.

Multiply the allowance per square foot by the rentable square footage. A $50.00/SF allowance on 10,000 SF is a $500,000 allowance. To check an offer you have already received, divide the total allowance by the square footage to get the per-SF figure, since that is how allowances are quoted and compared.

The tenant almost always funds the overage. That makes the gap between the allowance and the real construction cost a direct out-of-pocket expense, which is why an allowance well below market build cost functions as a rent increase rather than a concession.

TI costs are amortized by spreading the total expense over the lease term (or a specified amortization period) with an interest rate that reflects the landlord's cost of capital. The calculation works like a standard loan amortization — monthly payments are computed using the TI amount as the principal, and the annual total represents the true cost of providing the improvements including financing costs.

The interest rate used for TI amortization should reflect your cost of capital — typically 6% to 10% for commercial real estate investors. Some landlords use their mortgage rate, while others use a higher rate that reflects their required return on invested capital. The rate you choose directly impacts the annual amortized cost and net effective rent calculation.

Net effective rent is the actual economic rent a landlord receives after accounting for concessions like TI allowances, free rent, and leasing commissions. It's calculated by taking the total face rent over the lease term, subtracting the total cost of concessions (including amortized TI), and dividing by the lease term and square footage. Net effective rent is a more accurate measure of lease economics than the face rental rate.

The unamortized balance is the portion of the TI cost the landlord has not yet recovered through rent. Take the total TI cost, divide it by the number of months in the lease term to get the monthly amortization, multiply that by the number of months already elapsed, and subtract the result from the total cost. On a $150,000 buildout amortized over 120 months, the monthly amortization is $1,250; after 36 months the landlord has recovered $45,000 and the unamortized balance is $105,000. If the amortization carries interest, the balance follows the loan schedule instead of a straight line, and the remaining principal is the unamortized amount.

Most leases make the unamortized balance immediately payable by the tenant on a default or early termination, which is why the number matters well beyond the original negotiation. It is also the figure a termination fee is usually built around, alongside unamortized leasing commissions and free rent. Model it before you sign: a generous allowance amortized over a long term leaves a large balance outstanding for years, and that balance is the landlord's real exposure if the tenant does not see the term out.

TI amortization is critical because it reveals the true cost of a lease to the landlord. A lease that appears to have a strong rental rate may actually deliver much lower returns once TI costs are factored in. Failing to amortize TI costs leads to overestimating NOI, inflating cap rates, and making acquisition decisions based on inaccurate financial projections.