A tenant improvement allowance, usually called TI or a TI allowance, is money a landlord contributes toward building out or improving a space. It is one of the largest items in many New York office deals, and one that is easy to misread.
The mistake is treating the allowance as the measure of the deal. A larger allowance on a space that needs far more work can leave a tenant spending more of its own money than a smaller allowance on a space that needs very little.
What TI is, and what it isn’t
TI is a landlord contribution toward improvements to the space: walls, ceilings, lighting, mechanical and electrical work, finishes and similar work. It is typically expressed per rentable square foot and set out in the lease’s work letter.
It is not free money for anything the company needs. What it can be spent on, how it is paid and what happens to any balance are all defined by the lease. It also is not the only way a landlord can contribute: sometimes the landlord does the work itself instead.
Two structures: landlord work or a tenant allowance
| Landlord performs the work | Tenant performs the work with an allowance | |
|---|---|---|
| Who manages construction | The landlord and its contractor | The tenant, its architect and contractor |
| Tenant control over design and schedule | Lower | Higher |
| Risk of cost overruns | Usually the landlord’s, within the agreed scope | Usually the tenant’s, above the allowance |
| Cash timing | Tenant generally pays nothing for the agreed scope | Tenant often funds first and is reimbursed |
| What to get in writing | Detailed scope, drawings, finishes and delivery date | Eligible costs, draw process, deadlines and treatment of unused funds |
General comparison. Many deals combine the two, with the landlord performing base work and the tenant finishing the space.
Neither is better in general. Landlord work suits a tenant that wants a defined result and less management. A tenant allowance suits a company that wants control over design and is prepared to run a project, or to hire someone who can.
The work letter
The work letter is the exhibit to the lease (see the lease glossary) that sets out the construction arrangements: who performs which work, to what standard, on what schedule, who approves plans and contractors, and how the allowance is paid. It is where most of the value of the allowance is won or lost.
A vague work letter is a risk. “Landlord will build out the space” means little without drawings, a finish standard and a delivery date.
What the allowance usually covers
Leases often limit the allowance to “hard costs,” meaning physical construction, and cap or exclude “soft costs.” Common questions include:
- Hard costs: demolition, partitions, ceilings, lighting, HVAC distribution, electrical, finishes.
- Soft costs: architecture, engineering, permits, project management and expediting. Often capped as a share of the allowance.
- Cabling and technology: sometimes eligible, sometimes not.
- Furniture, equipment and moving costs: frequently excluded, though some landlords allow part of the allowance for them. Ask directly.
When the money is paid
Many allowances are paid as reimbursement. The tenant pays its contractor, submits invoices and lien waivers, and the landlord reimburses in installments or at completion. That creates a cash-flow gap that can be significant for a growing company.
Ask when draws can be made, what documentation is required, how long the landlord has to pay and whether any amount is held back until final completion. Some tenants negotiate for the landlord to pay the contractor directly.
Overruns and unused allowances
If the build-out costs more than the allowance, the tenant usually pays the difference. That is why scope matters as much as the number: change orders, late design decisions and unforeseen conditions in older buildings are the usual causes of overruns.
If the build-out costs less, the lease decides what happens to the balance. Some leases let unused allowance be applied as a rent credit, sometimes with a cap; many simply let it lapse after a deadline. Negotiate this at the LOI stage, not after construction.
Design the scope before you sign
The strongest way to negotiate an allowance is to know what the space needs. A test fit shows what the plan requires, and an early budget shows what it will cost. With those, a tenant can compare a smaller allowance on a space that needs little work against a larger one on a space that needs a lot, on the same basis. See how to compare two NYC office deals and build-out vs. renovation.
This is also where construction management helps. Someone who has priced similar work can tell you whether an allowance is realistic before you rely on it.
What to negotiate
Before the LOI is signed
- Landlord work vs. allowance, and the scope of each in writing
- Allowance amount relative to a priced test fit
- Eligible costs, including soft costs, cabling and any furniture allowance
- Draw schedule, documentation and payment timing
- Treatment of unused allowance, and the deadline to use it
- Who approves plans and contractors, and how long approvals take
- Restoration obligations for the work you build