What is Tenant Improvement Allowance?

What is Tenant Improvement Allowance? An office space under renovation.

When you’re looking at commercial properties and start reviewing rental rates, it’s important to know what you’re looking at. However, understanding common commercial real estate terms can sometimes feel like deciphering a foreign language. What is Tenant Improvement Allowance, Cap Rate, Core Factor, Triple Net Lease, or 1031 Exchange? It’s enough to make your head spin. But United Development Realty is here to help.

In this article today, we’re going to cover one of those real estate terms – Tenant Improvement Allowance (TI).

What is Tenant Improvement Allowance?

Time and time again, we hear the same question. What is a Tenant Improvement Allowance? How does it work? And how will it affect my bottom line? Well, to help you better understand the intricacies of TI, here is United Development Realty Founder and CEO Charles Peacock as part of our What’s That Wednesday short video series, which tackles frequently asked questions about the commercial real estate market.

Charles Peacock: Tenant improvement allowance is money that a landlord gives to the tenant when leasing space, typically used for the tenant’s build-out or fit-out for their particular use. There’s a lot of factors that can determine how much an owner is willing to put into the tenant improvement allowance. Things like what type of landlord is it? Is it a big institutional landlord or is it maybe a business owner that’s now leasing his space? Things like what’s the tenant use, what’s the tenant’s credit history, how long is the lease? Things like is it first generational shell space or is it already built out for another use? These are all things that can determine the amount that the owner is willing to put into the deal. You really need to work with an experienced commercial broker that will negotiate all the deal points and make sure that you’re getting a market tenant improvement allowance in your deal. Thank you and we are here to help!

Understanding Tenant Improvement Allowance and Why It Matters

Undoubtedly, if you’re searching for the perfect commercial property, you’re going to be disappointed. Almost any space you find will need some form of improvement or build-out to meet the specific needs of your business. This is where Tenant Improvement Allowance can help.

TI is money given from a landlord to a tenant to help mitigate some of the costs associated with retrofitting a commercial space. This figure is typically referred to in dollars per square foot. The specific amount of allowance is negotiated in the lease, along with an outline of what the money can be used for.

“The average tenant improvement allowance amount will vary, depending on the property condition and the state of the real estate market,” explains Tara Mastroeni, Millionacres, “but it’s not uncommon to see figures that range between $15 and $40 per square foot.”

For example, if a landlord is offering $30.00 per square foot on a 2,500 square foot space, the landlord has agreed to reimburse the tenant for $75,000 in improvement costs. The tenant is responsible for overseeing the build-out and must use their own funds, at least initially, to cover construction costs. The landlord will provide the $75,000 allowance upon proof of completion, which may include receipts, lien waivers, etc.

One common misconception is that TI will cover everything associated with the build-out. However, the landlord is really only interested in aspects that will increase the value of the space. So, most landlords will restrict what TI can be used on. “As a rule of thumb, most landlords prefer to have tenant improvement dollars solely cover the hard costs of the renovation,” explains Mastroeni. Do not expect TI to cover the cost of furniture, fixtures, or moving costs. Some examples of what Tenant Improvement Allowance typically covers include:

  • HVAC
  • Electrical
  • Plumbing
  • Doors
  • Windows
  • Framing/Walls
  • Paint
  • Flooring

“Negotiating TI allowance can be a huge lease incentive for tenants and a necessary cost of doing business for landlords,” explains Mastroeni. “That said, no matter which side of the deal you’re on, it is absolutely crucial to negotiate clear terms for any leasehold improvement.” And TI can be negotiated during the lease negotiation process. So, working with an experienced commercial real estate broker can help ensure a market deal.

United Development Realty is Here to Help!

Whether you’re still struggling with that big question – what is Tenant Improvement Allowance – or you just need a little extra guidance, partnering with the right broker can make all the difference. United Development Realty is a licensed and experienced commercial real estate broker in Maryland specializing in tenant representation. We start by listening to you – your current situation, your wants, and your needs. Then, once we fully understand your business, we can help you review your options and, ultimately, help you make the best decision for your business. Let us help negotiate a market Tenant Improvement Allowance that will allow you to customize your commercial space to your unique needs.

Please call our office today (locations in Bethesda 240-221-1976 and Fells Point 410-522-1632) to get in touch with a licensed broker.

About Charles Peacock

Over the past 30 years, Charles has been involved in Maryland real estate sales & leasing, property management, real estate investment, and the construction industry. He is a licensed commercial real estate broker, specializing in the representation of both tenants and landlords, as well as medical and dental professionals. Charles has also represented several medical building owners.