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What Are Tenant Improvements (TI) and Who Pays for Them?

  • marketing08413
  • Sep 24
  • 2 min read

When leasing commercial real estate, one of the most important parts of the negotiation process is deciding how the space will be built out or customized for the tenant’s needs. This is where Tenant Improvements (TI) come in. Understanding what TI covers—and who pays for it—can make a big difference in both the functionality of your space and the overall cost of your lease.


What Are Tenant Improvements (TI)?

Tenant Improvements refer to customizations, build-outs, or upgrades made to a leased space so it suits the tenant’s business operations. Common examples include:


  • Building out private offices or conference rooms

  • Installing new flooring, lighting, or HVAC systems

  • Adding kitchens or break rooms

  • Reconfiguring walls, layouts, or entryways


In short, TI is the work that transforms a raw or generic space into one that’s functional and tailored to the tenant.


Who Pays for Tenant Improvements?


The cost of Tenant Improvements can be handled in a few different ways, depending on the lease agreement:


1. Tenant Improvement Allowance (TIA)


The most common arrangement.


  • The landlord provides a set budget (for example, $30 per rentable square foot).

  • The tenant uses this allowance to design and build out the space.

  • If the improvements exceed the allowance, the tenant pays the difference.


2. Turnkey Build-Out


In this case, the landlord pays for and manages the entire build-out.


  • The space is delivered “move-in ready” to the tenant’s agreed-upon specifications.

  • This option minimizes tenant involvement but may offer less control over design and materials.


3. Tenant-Paid Improvements


Sometimes, the tenant pays for all improvements directly.


  • Less common in competitive leasing markets.

  • May result in concessions from the landlord, such as lower rent or more flexible lease terms.


Why Tenant Improvements Matter


  • For tenants: TI can significantly reduce upfront costs and ensure the space meets operational needs.

  • For landlords: Offering TI helps attract quality tenants and encourages longer lease commitments.

  • For both: Clear TI terms in the lease prevent disputes over construction costs, timelines, and responsibilities.


Tenant Improvements are the modifications that make a leased space truly usable for a tenant. While landlords often contribute through an allowance, the specifics—how much they’ll pay, what’s included, and who manages the build-out—are all negotiable. Understanding these details is essential for tenants who want to control costs and landlords who want to keep their properties competitive.




Written by LevRose CRE with assistance from: LevRoseCRE.(2024)

ChatGPT [Open AI]. https://chat.openai.com/

 
 
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