A tenant improvement allowance — TI — is a dollar amount the landlord agrees to contribute toward the cost of building out a leased space for the tenant's use. The allowance is typically expressed in dollars per square foot ($20/sf, $50/sf, and so on) and is paid out either as direct reimbursement against tenant-submitted invoices or as a landlord-managed construction project to a specification the tenant approves. The size of the TI depends on the condition of the space (cold shell vs. warm shell vs. second-generation), the tenant's credit, the market cycle, the length of the lease, and the tenant's leverage in negotiation. Typical ranges run from $10-30/sf for second-generation space in soft markets to $100/sf or more for new first-generation office space in strong markets.
Economically, a TI allowance is a rent concession in disguise. The landlord's cost of the TI is amortized implicitly over the lease term and is effectively a reduction in the net rent the landlord collects. A 10-year lease at $30/sf with a $50/sf TI has a net effective rent of roughly $25/sf ($30 - $5 per year of TI amortization, before accounting for time value). This is why sophisticated landlords and tenants focus on effective rent in negotiations rather than nominal base rent — a face-rent of $30 with generous TI can be economically identical to a face-rent of $25 with no TI, but the psychology and the optics differ substantially. Institutional underwriters routinely convert quoted rents to effective rent using assumed TI amortization before comparing deals.
The TI is typically paid in draws against construction progress or as a lump sum at substantial completion. Draws are more common in larger projects where the construction period is long enough that the tenant cannot finance the full build-out from working capital; lump-sum reimbursement is common in smaller buildouts where the tenant handles construction directly. Unused TI allowances are a meaningful negotiation point: some leases let the tenant apply unused TI as rent credit or take it as cash, while others let the landlord keep any unused amount. The default favoring the landlord is standard in institutional leases, but tenants with leverage regularly negotiate retention of unused allowances.
Accounting for TI allowances under ASC 842 and IFRS 16 added complexity that did not exist under the old lease accounting rules. The landlord treats the TI as a reduction in rental income over the lease term, straight-lined under ASC 842. The tenant treats any landlord-reimbursed TI as a lease incentive that reduces the right-of-use asset and the lease liability, effectively reducing the straight-line rent expense reported on the tenant's income statement. When the tenant builds out its own TI (rather than receiving landlord reimbursement), the tenant capitalizes the improvements as leasehold improvements and depreciates them over the shorter of the lease term or the improvement's useful life. The accounting doesn't change the economics, but it changes how the numbers appear in financial statements — a consideration for public tenants and corporate occupiers with board-level oversight of their real estate footprint.
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