A tenant improvement (TI) allowance is a cash contribution a commercial landlord agrees to put toward the cost of building out a tenant’s space, usually paid as a lump sum, in construction-milestone draws, or directly against the tenant’s contractor invoices.
Treadstonelaw.ca describes a TI allowance as a cash contribution from the landlord toward the cost of building out the space, one of several tenant inducements — concessions with real, negotiable dollar value — a landlord may offer to win or keep a tenant. The allowance is typically paid as a lump sum after the tenant opens or the landlord approves the work, drawn down in installments as construction milestones are reached, or applied directly to construction invoices the landlord pays on the tenant’s behalf, and comes with conditions: the work must be landlord-approved in advance, completed by a licensed contractor, and the tenant absorbs any overrun beyond the allowance amount.
The allowance is usually paired with a fixturing period — time before the lease term formally starts when the tenant can move in, build out, install equipment and prepare to open, typically without paying base rent, running anywhere from roughly 30 days for a minimal fit-out to four to six months for a full restaurant or medical clinic build-out.
What the tenant builds doesn’t automatically stay the tenant’s at lease end. The default rule is that leasehold improvements a tenant installs generally become part of the real property once installed and stay with the landlord’s building unless the lease says otherwise, and many leases separately require the tenant to remove specified improvements and restore the space to base building condition at its own expense. And the allowance itself is often conditional on staying: many landlords include a clause requiring the tenant to repay a prorated share of free rent or inducements if the tenant terminates early, defaults, or the business closes.
A landlord offers a new tenant a $25/sq ft TI allowance on a 2,500 sq ft unit, or $62,500, disbursed against approved contractor invoices as the build-out proceeds, plus a 90-day rent-free fixturing period. The lease prorates that allowance evenly over the first three years and requires repayment of the unamortized balance if the tenant terminates or defaults within that window. A tenant that closes its doors twelve months in — one third of the way through the proration period — owes back the remaining two-thirds, or roughly $41,700.
See also: Percentage rent and the natural breakpoint · Gross lease vs net lease · Net operating income, line by line.
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