What Is Tenant Improvement Allowance? A CRE Professional’s Guide

A tenant improvement allowance is money a landlord puts toward a tenant’s buildout costs, negotiated as part of a lease. It shows up in nearly every commercial lease negotiation, from a single-tenant industrial deal to a multi-floor office relocation. It directly affects the net effective rent a tenant actually pays.

What Is a Tenant Improvement Allowance?

A tenant improvement allowance (TI allowance) is a landlord-funded contribution, usually quoted per square foot. It covers construction and finish-out costs so a tenant can occupy the space. Landlords fund it because vacant space generates no income, and a competitive allowance helps close the deal and retain the tenant for the lease term.

TI allowances cover items like partition walls, flooring, ceilings, lighting, HVAC modifications, and electrical work. What they don’t typically cover: furniture, fixtures not attached to the building, and equipment specific to the tenant’s business. Landlords and tenants negotiate that line deal by deal. It’s one of the first things a broker or asset manager should check against comparable transactions in the same submarket and asset class.

In CRE data terms, this figure is part of a lease’s concession package. CompStak’s platform field for this data point is called Landlord work, tracked separately from free rent so analysts can isolate each concession type when comparing deals.

How Does Tenant Improvement Allowance Work?

A landlord and tenant negotiate a per-square-foot TI allowance during lease negotiation, then write it into the lease. The tenant either manages the buildout and submits costs for reimbursement, or the landlord manages construction directly and bills back any costs above the allowance.

Three things typically drive the negotiated amount. Lease term length matters most: a longer term generally supports a larger allowance, since the landlord amortizes that cost over more years of rent. Space condition at delivery counts too, whether vanilla shell or second-generation space with existing improvements. A tenant taking raw shell space usually needs a materially larger allowance than one moving into space with existing infrastructure. Tenant credit profile is the third factor landlords weigh.

Landlords also weigh allowance size against starting rent. A tenant might negotiate a higher TI allowance in exchange for a higher starting rent, or a lower allowance paired with a rent discount. This tradeoff is why comparing allowances in isolation gives an incomplete picture of deal economics. Look at starting rent and free rent too.

What Is a Reasonable Tenant Improvement Allowance?

There’s no single national benchmark for a reasonable TI allowance. It varies by market, asset class, tenant industry, and lease term length. The most reliable reference point is comparable lease data from the same submarket and building class, not a national average.

Asset class matters. Class A office space typically commands larger allowances than Class B/C because tenants expect a higher finish level and landlords are competing for higher-credit tenants. Industrial allowances tend to run lower per square foot than office. Industrial buildouts, like racking, dock doors, and minor office build-out within a warehouse, cost less than a full office fit-out on comparable square footage.

CompStak’s lease comp data illustrates how allowance size differs by landlord type within a single sector. In CompStak’s analysis of industrial ownership, tenant improvement allowances averaged $3.15/SF for FTSE Nareit Industrial-affiliated landlords, compared with $4.65/SF across all other industrial owners, per CompStak’s Portfolio series: FTSE Nareit Industrial vs all other industrial owners. That gap likely reflects portfolio composition and tenant mix rather than a single market factor. It’s exactly why allowance benchmarking works best at the comp level, not as a flat rule of thumb.

Source: CompStak’s Portfolio series: FTSE Nareit Industrial vs all other industrial owners. Data as of early 2026.

How to Calculate Tenant Improvement Allowance

Calculate a TI allowance by multiplying the negotiated per-square-foot amount by the tenant’s rentable square footage. A 10,000 SF tenant with a $40/SF allowance receives $400,000 toward buildout. To measure total concession value, add the TI allowance to the value of any free rent and divide by the lease’s total rent value.

That second formula is what CompStak calls the concession ratio: free rent value plus Work Value (TI), expressed as a percentage of total lease value. Use it to compare two leases that structure concessions differently, one heavy on free rent, another heavy on TI. A TI allowance calculator, spreadsheet or platform tool, should always net out both concession types together. Landlords frequently shift value between the two without changing total deal economics, so looking at TI alone can mislead.

For asset managers underwriting a renewal or new lease, running the concession ratio against comparable deals in CompStak’s database shows whether an ask is in line with the market. That matters more for budgeting than the TI figure alone.

Tenant Improvement Allowance Tax Treatment

Tax treatment depends on who owns the resulting improvements. If the landlord retains ownership of the buildout, the landlord typically capitalizes and depreciates the cost. If the tenant owns the improvements, the tenant may need to capitalize the cost and could face taxable income on unused allowance funds, depending on how the lease structures reimbursement.

The Internal Revenue Service treats leasehold improvements under specific depreciation rules that differ from standard building depreciation. Details shift with lease structure and improvement ownership. They also depend on whether the allowance exceeds actual construction costs. Because these rules affect both landlord underwriting and tenant occupancy cost, this is not an area to generalize from a blog post. Lease counsel and a tax advisor should review the specific lease language before either party assumes a tax position.

Tenant Improvement Allowance Trends

Concession levels, including TI allowances, have started to ease in some office segments after several years of elevated concessions tied to the post-pandemic leasing slowdown. Industrial TI allowances vary by landlord and remain a smaller share of total lease value than in office, reflecting lower buildout costs per square foot.

In office, concession ratios, which combine free rent and TI, declined over the past two quarters for both Prime Class A and non-Prime Class A space, according to CompStak’s 2025 Biannual Office Market Report — Part Four. Ratios remain elevated relative to historical norms, though. That’s a modest signal that landlords are pulling back on concessions as leasing activity stabilizes, not evidence of a full reversal.

CompStak’s office portfolio comparison shows a similar pattern by landlord type. FTSE Nareit Office-affiliated landlords carried a concessions ratio of 14.7%, slightly below the 15.6% ratio across all other office owners, per CompStak’s Portfolio comparison: FTSE Nareit Office index owners vs all other office owners. The gap is narrow. Concession behavior doesn’t diverge sharply by ownership type once market and asset-class mix are factored in.

Tracking these ratios over time, rather than relying on a single headline TI figure, gives a clearer read on whether a market is tightening or loosening for tenants.

Source: CompStak’s 2025 Biannual Office Market Report — Part Four and Portfolio comparison: FTSE Nareit Office index owners vs all other office owners. Data as of Q4 2025 and February 2026.

Key Takeaway: A tenant improvement allowance is a negotiated, per-square-foot landlord contribution toward buildout costs. It should never be evaluated alone. Pair it with free rent, starting rent, and the concession ratio to see the full economics of a lease, and benchmark against comps in the same market, asset class, and tenant size band rather than a national average.

How CompStak Tracks Tenant Improvement Allowance Data

CompStak captures TI allowance data as Landlord work, one of dozens of fields recorded on every lease comp. Comps come in through CompStak Exchange, CompStak’s free comp-sharing network. Each one runs through machine learning checks and statistical anomaly detection, then review by a CompStak data analyst, before it appears in CompStak One.

Brokers building an offering memorandum benefit from that structure. So do lenders underwriting a refinance and asset managers benchmarking a renewal. Allowance figures sit alongside starting rent and free rent for the same transaction. Lease escalations are recorded too, rather than allowance existing as an isolated data point pulled from a survey. Pulling comparable TI allowances by submarket and asset class through CompStak’s database gives a more defensible number than a rule-of-thumb estimate, particularly in markets where concession structures have moved meaningfully in the last several quarters.

Get started with CompStak to pull verified lease comps, including landlord work and concession data, for the markets and asset classes you cover.