Commercial real estate landlords frequently have to resort to concessions to get tenants to occupy space in their buildings. These tactics become more common in times of high vacancy. One of the most popular types of concessions is a tenant allowance, also referred to as a tenant improvement allowance or a T.I. allowance. Tenant allowances are usually lump sums of money that the landlord makes available to the tenant to use in ways to customize the rental space.
Lump Sum Tenant Allowances
Most leases grant tenant allowances as a lump sum that’s based on a per-square-foot basis. For example, a tenant moving into a downtown office building might receive a $40-per-square-foot allowance. So if the tenant occupies a 5,000-square-foot space, the landlord would provide $200,000 toward build-out costs.
Non-Monetary Tenant Allowances
At times, landlords will specify work that they’ll do on the tenant’s behalf instead of offering a lump sum of money. This practice is especially common with smaller spaces in smaller buildings. In these spaces, landlords may offer new carpeting, a fresh coat of paint and signage as a tenant allowance. Offering a non-monetary allowance usually saves landlords money because they frequently have their staff do the work.
Landlords have additional tools to convince tenants to sign a lease. One obvious way is to reduce the rent. Another option is to offer free rent in lieu of T.I.s. This saves the tenant money but also doesn’t require the owner to spend any money moving in the tenant or improving the space. Making concessions with the rent can be a win-win for both owner and tenant, especially if the building were to sit vacant.