Tenant Improvement (TI) Allowance: Typical Costs, Structure and Tenant Responsibilities

Answer

A tenant improvement (TI) allowance is a sum a landlord agrees to contribute toward the cost of customizing a commercial lease space for a tenant’s business needs. Often called a “build-out allowance” or “fit-out,” a TI allowance covers construction, finishes, and some soft costs so the space meets the tenant’s operational requirements before opening.

TI allowances vary by market, property class and lease length. Landlords commonly express allowances either as a total dollar amount (for example, $25,000–$200,000) or as a rate per rentable square foot (for example, $10–$200 per SF). Higher allowances appear in competitive markets or for long-term leases; basic strip-center build-outs sit at the low end while full service office or lab fit-outs cost substantially more.

How TI allowances are structured and used:

• Allowance cap: landlord sets a maximum that the tenant can apply to approved construction costs; the tenant pays any overage.
• Disbursement: landlord may reimburse after work is complete and invoices are approved, or provide funds up front in staged draws tied to milestones.
• Scope and approvals: the lease usually requires landlord-approved plans, licensed contractors, permits, lien waivers and a final punchlist before release of funds.
• Amortization: some landlords amortize the allowance by increasing rent (a TI amortization) or treat it as a one-time concession; terms should be explicit in the lease.
• Ownership and removals: tenant improvements often become landlord property at lease end unless the parties agree on removal rights or restoration obligations.

Because TI arrangements touch construction, budgets and long-term obligations, tenants are recommended to get competitive contractor estimates, require clear draw schedules and document approved scope. Landlords should define eligible costs and inspection criteria to avoid disputes. For specifics that depend on state rules or complex lease terms, it’s advisable to consult a licensed attorney, architect, or commercial broker before signing.