How a TI allowance works
The landlord agrees to pay up to a set amount, usually stated per square foot, toward the cost of building out your space: walls, flooring, lighting, restrooms, HVAC changes and the like. You or the landlord hire the contractor, and the landlord pays up to the allowance. Anything over it is yours to pay.
The landlord earns that money back through your rent over the term, which is why a longer lease gets a larger allowance.
Ways the build out can be handled
Allowance
A fixed dollar amount per square foot. You control the design and the contractor, and you pay any overage.
- Stated in $ per SF
- Overage is yours
Turnkey
The landlord delivers the space finished to an agreed plan and pays for it, whatever it costs. You get less control over contractors and finishes, but the landlord carries the risk of cost overruns.
- Needs a detailed plan attached to the lease
As is with free rent
The space already fits your use, so instead of an allowance you take extra months of free rent or a lower rate.
- Common for existing restaurant and office space
What drives the amount
| Factor | Effect on the allowance |
|---|---|
| Lease term | Longer terms earn more. A 10 year lease earns far more than a 3 year lease |
| Condition of the space | A raw shell needs more than a space that already fits your use |
| How long it has been empty | Landlords with long vacancies give more to fill the space |
| Your credit | Stronger financials make a landlord more willing to invest |
| The market | Denver office and industrial tenants currently have leverage to ask for bigger packages |
Ask your broker for the allowances landlords have actually given on recent comparable leases, not just what they advertise.
What to negotiate
Make the money flexible
- Let unused allowance go toward rent, furniture, cabling, signs or moving costs
- Include architecture, engineering and permit fees as allowed costs
- Ask for the landlord to pay the contractor directly, so you are not out of pocket
Protect yourself
- Have the landlord pay for base building items like code upgrades, ADA restrooms and roof or HVAC repairs, outside your allowance
- Limit or remove the landlord's construction management fee
- Make rent start after your build out and permits are done
- Agree that you do not have to remove the improvements when you leave
Before you sign
- Is the allowance amount, and what it can pay for, written in the lease?
- Are base building and code items paid by the landlord outside the allowance?
- When and how is the allowance paid out?
- Can unused allowance be applied to rent or other costs?
- Does rent start after construction and permits, not on a fixed date?
- Did you get a contractor's estimate before agreeing to the amount?
Common follow up questions
Do I have to pay back a tenant improvement allowance?
Not directly. The landlord recovers it through your rent over the term. But if you default or leave early, many leases let the landlord recover the unamortized part, and a personal guaranty may cover it.
Can I get a TI allowance on a short lease?
Usually only a small one. Landlords tie the allowance to how long they will collect rent, so a 2 or 3 year lease often gets little more than paint and carpet.
Is a TI allowance the same as free rent?
No. Free rent is months with no base rent. A TI allowance pays for construction. Many deals include both, and you can sometimes trade one for the other.
This page is general information, not lending, legal or tax advice. Programs, limits and terms change, and every situation is different. Talk with your lender, attorney and CPA before you decide.