Definition

A tenant improvement (TI) allowance is a dollar amount, usually expressed per square foot, that a landlord agrees to contribute toward the cost of building out a tenant's leased space. TI money is used for walls, flooring, lighting, HVAC distribution, restrooms, and any other physical improvements needed to get the space usable for the tenant.

TI Allowance = $/SF x Leased Square Footage

If I lease a 5,000 SF office suite in Nashville at $25/SF in TI, the landlord is putting up $125,000 toward the buildout.

Tyler's Take

TI is one of the most misunderstood line items in commercial leasing, and it's where I see beginner landlords and new tenants both leave money on the table.

The rule of thumb most brokers miss: TI isn't free. Every dollar the landlord spends on TI has to be recovered through rent, plain and simple. If I'm writing a 5-year lease and I give a tenant $150,000 in TI, I'm amortizing that over 60 months at the landlord's cost of capital. That comes out to roughly $3,000/month in extra rent the tenant is going to pay whether they realize it or not. If the tenant doesn't want to pay for the TI through higher rent, they need to bring less expensive plans.

For landlords, the move I coach clients on is to use TI strategically. A great credit tenant signing a 10-year NNN deal? Give them strong TI because you're locking in durable income. A month-to-month tenant with no credit in a soft submarket? Offer minimal TI and a shorter term. The TI check is one of the biggest negotiating levers you have and most new landlords give it away way too easily.

As of 2026 in Nashville, typical TI allowances I'm seeing: second-generation retail $10-30/SF, first-generation retail $40-80/SF, office $30-70/SF, medical office $60-150/SF, industrial warehouse $3-15/SF, flex $10-25/SF. Numbers have climbed with construction costs.

How TI Actually Works

1. Negotiation. TI dollars are negotiated alongside rent, term, free rent, and other lease terms. It's a package.

2. Approval process. Tenant submits construction plans and a budget. Landlord reviews and approves.

3. Construction. Either the tenant hires their own general contractor (tenant-build) or the landlord manages the buildout (landlord-build, also called turnkey).

4. Reimbursement. If tenant-build, the tenant pays contractors upfront and submits invoices for reimbursement up to the TI cap. Landlord releases funds as work is completed and lien waivers are produced.

5. Overages. Any cost above the TI cap comes out of the tenant's pocket, unless they negotiate to amortize overages into rent.

Worked Example

I'm leasing a 4,000 SF office suite in East Nashville. Market rent is $28/SF NNN, term is 5 years, TI allowance is $40/SF.

Total TI commitment = 4,000 SF x $40 = $160,000
Base rent (Year 1) = 4,000 x $28 = $112,000/year

From the landlord's perspective, that $160,000 in TI has to earn its way back. At a roughly 8% cost of capital, amortized over 60 months, that's about $3,243/month, or $9.73/SF annualized. Meaning the "real" rent on this deal is closer to $37.73/SF when you factor the TI in. If I can't justify that underwriting, I either cut TI or push rent.

TI vs. Free Rent vs. Concessions

TI allowance = money for construction. Shows up on the balance sheet as an asset, depreciates over the lease life.

Free rent = months of no rent at the start of the lease. Shows up as reduced income in early years.

Moving allowance / cash concession = straight cash to the tenant. Rare in small deals, common in big corporate leases.

Savvy tenants push for TI because it builds their space. Savvy landlords prefer free rent in soft markets because it's easier to pull back mid-negotiation and doesn't require construction oversight.

Common Mistakes

1. Not specifying what TI covers. Does it include architect fees? Permit fees? Soft costs? If it's not in the work letter, the tenant will ask for more money later.

2. Ignoring unused TI. What happens if the tenant's buildout comes in $20k under budget? In most Nashville deals, unused TI is forfeited. In stronger tenant markets, it can convert to free rent or cash.

3. Underestimating construction costs. A $40/SF office buildout in Nashville in 2026 barely covers a light refresh. True first-gen office is closer to $70-100/SF.

4. Not getting lien waivers. Always require unconditional lien waivers before releasing TI funds. Otherwise you can end up paying twice when a sub goes unpaid.

Frequently Asked Questions

What's a typical TI allowance in Nashville?
It depends on asset class and whether the space is first or second generation. As of 2026, I'm seeing $10-30/SF for second-gen retail, $40-80/SF for first-gen retail, $30-70/SF for office, $60-150/SF for medical office, and $3-15/SF for warehouse space.

Does TI come out of the tenant's pocket?
Indirectly, yes. TI is baked into the rent you're paying. Landlords amortize the cost of TI across the lease term at their cost of capital, so higher TI almost always means higher rent.

Who owns the improvements built with TI money?
The landlord. Once installed, tenant improvements become part of the building and stay with the property when the lease ends, regardless of who paid for them.

Is TI the same as a build-to-suit?
No. TI is a contribution toward finishing a space inside an existing building. A build-to-suit is the landlord building a brand-new building specifically for one tenant, usually on a ground lease or long-term lease.

Run Your Own Numbers

Use the free Commercial Real Estate Calculators to model TI amortization into effective rent.

Related Terms

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