Tenant Improvement Allowance: How It Works and What It's Worth

A tenant improvement allowance (TI allowance, or TIA) is a sum of money a landlord agrees to contribute toward the cost of building out or renovating a tenant's leased space. It is almost always quoted as a dollar figure per rentable square foot, for example $60 per square foot, and paid to cover construction of the interior: walls, flooring, lighting, HVAC distribution, restrooms, and finishes. The tenant pays for any construction cost above the allowance out of pocket, and the improvements typically become the landlord's property at the end of the lease.

The TI allowance is one of the biggest single concessions in a commercial lease, negotiated line by line inside a work letter attached to the lease. Get it right and a tenant funds most of its buildout with the landlord's money. Fail to record exactly what it covers and the tenant eats a six-figure overage nobody planned for. This guide covers the mechanics, a worked calculation, honest per-square-foot ranges, ownership and tax questions, and the ASC 842 treatment.

Last updated July 2026.

What is a tenant improvement allowance?

A tenant improvement allowance is the amount a landlord commits to spend on customizing a leased space for a specific tenant, expressed as total dollars or as dollars per rentable square foot times the size of the premises. It funds the hard and soft costs of the interior buildout: framing, drywall, ceilings, flooring, paint, electrical and lighting, plumbing, mechanical distribution, doors, and often architectural and permit fees. It is a leasing concession, part of the economic package alongside base rent, free rent, and escalations, and it exists because a landlord would rather spend capital to land a creditworthy tenant on a long term than leave the space dark.

How does a tenant improvement allowance work?

The allowance works as a reimbursement or direct payment capped at the agreed amount. The tenant and landlord sign a work letter stating the dollar figure, what it covers, who manages construction, and how funds get disbursed. In most deals the tenant hires the contractor, pays the invoices, and submits documentation (lien waivers, paid receipts, a certificate of occupancy) for the landlord to reimburse up to the cap. In a turnkey deal the landlord manages the work and delivers a finished space, absorbing overruns itself.

Three things drive the negotiation: the size of the allowance, what it can be spent on, and what happens to money left over. Landlords usually restrict the allowance to real property improvements that stay with the building and exclude furniture, cabling, moving costs, and trade fixtures, though a tenant with leverage can apply unused dollars to those items or to rent. Any spending above the cap is the tenant's responsibility, and unused allowance normally reverts to the landlord.

How is a tenant improvement allowance calculated?

The core calculation is simple: rentable square footage times allowance per square foot equals the total TI allowance. A 12,000 square foot suite at $65 per square foot gives a $780,000 pool. What matters next is comparing that pool against the actual construction budget to see whether the tenant is out of pocket or has money left over.

Here is a worked example. A tenant leases 12,000 rentable square feet and negotiates a $65 per square foot allowance. The contractor bids the buildout at $90 per square foot for a full second-generation renovation.

Here the allowance covers $780,000 and the tenant pays the remaining $300,000 itself. Had the bid come in at $58 per square foot, total cost would be $696,000, leaving $84,000 of unused allowance. Whether the tenant keeps that surplus depends entirely on the work letter: some leases let a tenant apply it to rent, cabling, or furniture, while many simply let it revert to the landlord. That single sentence is worth reading before you sign. Once you have the rent schedule and TI figures you can pull the numbers into a spreadsheet to model the amortization and compare deals on an equal footing.

What is a good tenant improvement allowance per square foot?

A good allowance depends on the market, the condition of the space, the length of the term, and the tenant's credit, so treat any number as a typical range rather than a fixed rate. For office space, a light refresh of a second-generation suite (space that already has usable improvements) often runs $15 to $40 per square foot. A more substantial second-generation renovation commonly lands around $50 to $100 per square foot. A full buildout of raw shell or first-generation space, or a high-end custom fit-out, can push well past $100 per square foot.

Retail and restaurant deals vary widely because trade fixtures and equipment drive so much of the cost, and grey-shell restaurant buildouts routinely exceed office figures. The reliable rule is that longer terms and stronger covenants earn larger allowances, because the landlord amortizes the cost over more years of committed rent. Rather than chasing a headline number, compare the allowance against the rent: a large allowance paired with above-market rent can be worth less than a smaller allowance with lower rent once you run the net effective rent.

What is the difference between a tenant improvement allowance and a build-out allowance?

In everyday leasing conversation the two terms are used interchangeably, and both refer to landlord money contributed toward improving the space. Any distinction is one of emphasis, not a firm legal difference. "Tenant improvement allowance" is the broad, standard term for the concession expressed as dollars per square foot. "Build-out allowance" tends to get used for a more extensive construction project, often in raw or shell space, where the landlord funds a ground-up interior rather than a cosmetic update.

Because the labels are loose, what matters is the definition written into the work letter, not the name. Read what the allowance actually covers, whether it is turnkey or reimbursement, what counts as an eligible cost, and how disbursement works. Two leases that both say "build-out allowance" can allocate risk very differently.

Who owns the improvements paid for by a TI allowance?

The landlord almost always owns the improvements funded by a TI allowance. Anything affixed to the building, walls, flooring, ceilings, lighting, mechanical systems, becomes part of the real property and stays with the space when the lease ends. This is a key reason landlords fund the work: they are investing in an asset they keep and re-lease. The tenant gets the use of the improved space during the term, not title to the improvements.

Trade fixtures and personal property, such as furniture, equipment, and signage the tenant installs at its own expense, generally remain the tenant's and can be removed at lease end, subject to any restoration obligation. Watch the surrender and restoration clause: a landlord may require the tenant to remove certain improvements and return the space to base condition, a surprise cost at the back end of the term.

Is a tenant improvement allowance taxable?

This is not tax advice, but the general rule is that a TI allowance can be taxable income to the tenant unless it fits a specific exception or is structured as a reimbursement for improvements the landlord owns. When the landlord funds and owns the improvements, the allowance is often not treated as income to the tenant. When cash is paid to the tenant with few strings, the IRS may treat it as taxable.

One notable exception is IRC Section 110, the qualified lessee construction allowance, which lets a retail tenant exclude a construction allowance from income on a short-term lease (15 years or less) when the money builds improvements that revert to the landlord and both parties meet the statute's requirements. The mechanics are specific and interact with how the improvements are depreciated, so run any real deal past a tax advisor before relying on a particular outcome.

How is a tenant improvement allowance treated under ASC 842?

Under ASC 842, a tenant improvement allowance is generally accounted for as a lease incentive. A lease incentive reduces the lessee's total lease payments, which lowers the initial measurement of the right-of-use (ROU) asset and the lease liability. An allowance the tenant is entitled to receive at commencement is netted against the ROU asset, so the tenant does not capitalize the full gross cost of the space as if it had paid for everything itself.

The nuance is who owns and controls the resulting asset. If the improvements are lessee assets, the allowance is a lease incentive that reduces the ROU asset and is effectively recognized over the term through lower amortization and rent expense. If the improvements are lessor assets, the accounting can differ. The allowance also has to be reflected consistently in the straight-line lease expense calculation, which is one more reason the exact amount and payment timing need to be captured accurately. This is the kind of buried financial term that gets missed when a lease is filed and never abstracted.

Why the TI allowance belongs in your lease abstract

The tenant improvement allowance rarely sits in one clean place. The headline number lives in the work letter, but the definition of eligible costs, the disbursement conditions, the treatment of unused funds, the restoration obligation, and any revisions in lease amendments are scattered across the document. A complete lease abstract has to capture all of it, because the allowance drives the economics of the deal and feeds straight into net effective rent and your ASC 842 numbers.

For an office portfolio this adds up fast. Teams running lease abstraction across office REIT portfolios track the TI allowance on every lease alongside rent, free rent, and escalations, because those concessions separate face rent from the net effective rent a landlord actually earns. A thorough commercial lease abstraction pulls the allowance, the work-letter terms, and the amendment history into one dataset, and our commercial lease abstract template lists every financial field worth capturing. Purpose-built lease abstraction software links each figure back to the page it came from, so the number can be defended when it is questioned. Upload a lease at the top of this page to see the TI allowance and work-letter terms the AI pulls out.