A tenant improvement allowance (also referred to as a TA, TIA, TI allowance, or leasehold improvement allowance) is a commercial leasing term that describes the amount of money that a landlord will provide to a tenant, either as cash or as a reimbursement, to cover all or a portion of the costs associated with constructing a commercial space.
TI allowances are typically expressed in terms of dollars per square foot of rentable area. The funds cover all construction related work (hard costs) and professional fees, permits, etc. (soft costs). Tenant improvement allowances do not typically cover the costs of furniture, technology, cabling/wiring, or relocation costs; however, in some cases a portion of the TIA can be negotiated to include one or a combination of these costs, i.e. up to $5.00/sf may be used to cover cabling and moving costs.
Leasehold improvement allowances are generally structured as reimbursements. Tenants are required to spend their own money and submit invoices for the completed work. This can occur in stages as the work progresses or as a lump sum payment when the build out is complete. In some cases, the improvement allowance can be negotiated as an upfront, cash payment.
A variety of factors influence the amount or range of tenant improvement allowances that landlords are willing to provide. Once quantified, landlords will include these costs in their projections and calculations of asking rental rates. As a result, TI allowances do not necessarily impact a tenant’s ability to negotiate a lower rental rate. If additional funds are required, landlords may be willing to amortize the additional costs over the term of the lease by adding them to the rental rate (usually at 8%-10% interest).
Tenant improvement allowances are a valuable concession in commercial leases and can take a variety of forms. Negotiations can be nuanced and commercial real estate professionals should be consulted to ensure that the terms are structured around each tenant’s needs and constraints.