A tenant improvement allowance is a term in a commercial lease that specifies a monetary amount a landlord will contribute to the improvement of a commercial space to adapt the space to the needs of the tenant.
The tenant improvement allowance is also loosely called a "TI allowance," "TI," or a "tenant allowance." The TI allowance is often expressed as a dollar amount per square foot, such as "$50 PSF".
When prospective tenants look for commercial space for lease, the commercial space they find is seldom suited for the particular needs or tastes of the prospective tenant. The commercial space will have to be customized according to the needs and specifications of the tenant before the tenant can occupy the space.
As landlords compete for tenants, one condition of a commercial lease they can use to entice tenants is the tenant improvement allowance. As a lease term negotiated between landlords and tenants, TI's tend to be disciplined by the current lease market.
The TI allowance tends to be an upper limit of what the landlord will contribute to improve the space. If a tenant and landlord can't agree on the buildout, they must either come up with a lower cost plan, or agree the tenant will pay for the construction costs that exceed the tenant improvement allowance.
During lease negotiations, the landlord and tenant should determine who will be responsible for the construction. Landlords and tenants in different markets and property types have different preferences as to who should manage and perform construction of tenant improvements.
Landlord and tenant can also agree for a space to be turnkey, which means the landlord will pay for the entire cost of the buildout and manage the construction. The space will be provided by the landlord ready to be occupied by the tenant on the agreed upon date.