A tenant improvement (TI), also called a leasehold improvement or build-out, is a change made to a commercial space to suit a particular tenant. Examples include new walls and offices, upgraded lighting, a kitchen for a restaurant, or specialized electrical work for a medical practice.
Landlords often help pay for improvements through a TI allowance, a set amount of money they contribute toward the build-out in exchange for the tenant signing a lease.
How it works
TI terms are negotiated as part of the lease. Common elements include:
- TI allowance: often expressed per square foot, such as a hypothetical $30 per square foot
- Who manages construction: the landlord (turnkey build-out) or the tenant (with landlord approval of plans and contractors)
- What the allowance covers: usually hard costs like construction and sometimes soft costs like design and permits
- How it is paid: as reimbursements during or after construction, often against invoices and lien waivers
- Ownership at lease end: whether improvements stay or must be removed
Larger allowances usually come with longer lease terms or higher rent, so the landlord can recover the investment.
Worked example
A hypothetical tenant leases 5,000 square feet of office space for seven years. The landlord offers a $35 per square foot TI allowance.
- Total allowance: 5,000 x $35 = $175,000
- Estimated build-out cost: $210,000
- Tenant’s share of the overage: $35,000
The tenant pays the $35,000 difference, and the landlord reimburses up to $175,000 as work is completed. Once the city issues a certificate of occupancy for the space, the tenant can open.
Why it matters for landlords
TI allowances can help you sign stronger tenants and fill space faster, but they tie up capital. Weigh the allowance against the rent and term. Improvements that stay with the building may be treated as capital improvements for accounting and tax purposes, so involve your CPA. For drafting, our commercial lease guide and California commercial lease agreement page cover what to spell out.
Related terms
In practice. How the term shows up day to day.
Who owns tenant improvements when the lease ends?
It depends on the lease. Many leases say permanent improvements become the landlord's property, while the tenant can remove its own trade fixtures and equipment. Some leases require the tenant to restore the space.
What happens if the build-out costs more than the TI allowance?
The tenant usually pays the overage, either upfront or through added rent. The lease should say how cost overruns are handled.