Tenant Improvement Cost Calculator

A tenant improvement (TI) allowance is a sum of money a landlord provides to a tenant to cover the cost of customizing or improving a leased space before the tenant moves in. TI allowances are common in commercial real estate leases and are typically expressed as a dollar amount per square foot of leased space.

TI allowances reduce the effective cost of a lease because the landlord is funding improvements that the tenant would otherwise pay for. To compare leases fairly, you can calculate effective rent by amortizing the TI allowance over the lease term and deducting the per-year benefit from the annual rent. Effective Annual Rent = Annual Rent - (TI Allowance / Lease Term).

The tenant pays for any improvement costs that exceed the TI allowance. These costs are sometimes called 'overage' or 'above-allowance TI costs.' For example, if construction costs $80 per square foot but the TI allowance is $50 per square foot, the tenant pays the $30 per square foot overage out of pocket or finances it.

Under IRS rules, tenant improvement allowances paid by a landlord to a tenant may or may not be taxable depending on how the improvements are structured and who retains ownership of the improvements. The Tax Cuts and Jobs Act of 2017 created Qualified Improvement Property (QIP) provisions. Consult a tax professional for advice on your specific lease structure.

TI allowances vary widely by market, property type, and lease term. Office TI allowances in major US markets have ranged from $30 to $100 or more per square foot in recent years, with new construction or long-term leases often warranting higher allowances. Industrial TI allowances tend to be lower. Landlords in weaker markets may offer higher TI allowances to attract tenants.