TI: Tenant Improvements

What are tenant improvements and who pays for them?

Tenant improvements (TIs) are customizations done to a space to meet the needs of a tenant. Money provided by the landlord to the tenant to complete these improvements is called the tenant improvement allowance.

Tenant improvements for new space

Newly built office and retail space is sometimes delivered to the tenant in shell condition. Shell condition means that the interior of the space is unfinished and mostly bare. Developers typically deliver space in shell condition as they may not know how much space a future tenant will occupy or what their needs will be. By leaving the space in shell condition until it becomes leased, developers don’t waste money and effort on creating improvements that may not work for the future tenant.

Tenant improvements for existing space

Except for new buildings, most available rental space has already been built out with improvements for the previous occupant. Often times, the improvements for the previous tenant will not fully meet the needs of a new tenant. Because of this, landlords will sometimes offer new tenants a tenant improvement allowance. This tenant improvement allowance offsets tenant’s construction costs as well as the costs to remove the previous TIs to get the space into buildable condition.

Tenant improvement allowances

It is important for tenants to read the fine print of their lease so that they fully understand how the structure of the tenant allowance works. As with most aspects of commercial real estate, counseling with an experienced tenant representative can help you get the best deal. The amount of the TI allowance a tenant may receive varies and is based on the following factors:

  • Age of Space: shell spaces typically get more generous allowances than already-built ones.

  • Lease Term & Rate: Leases with higher rents and longer terms usually receive more TI money.

  • Market Vacancy: TI allowances are usually more generous in markets with greater supply and higher vacancy.

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