Tenant Improvement: How To Budget and Negotiate TI Allowance

When leasing a commercial space whether it’s an office, retail store, or warehouse, customizing it to fit your business’s needs is often essential. These modifications are called Tenant Improvements (TIs). A well-executed TI project starts with a realistic budget, clear cost expectations, and smart negotiations with your landlord. 

TreppCRE forecasts suggest that more than 265 million square feet of commercial real estate space will face lease expirations in 2025. That means commercial business owners will have significant opportunities to negotiate tenant improvement allowances and secure favorable terms.

In this guide, we break down key strategies to help you budget effectively, manage expenses, and secure the best deal for your tenant improvement project.

What is Tenant Improvement?

Tenant Improvement (TI) in construction, also known as Leasehold Improvement, refers to modifications or upgrades made to a leased commercial space to fit a tenant’s specific needs. Examples of tenant improvement can range from simple cosmetic updates, like fresh paint or new flooring, to more significant renovations, such as installing partition walls, HVAC systems, or new electrical fixtures to customize a leased property. 

TI projects typically happen when:

• A business moves into a new commercial space and needs to customize it.
• A tenant renews a lease and negotiates renovations as part of the deal.
• A company expands and needs to reconfigure its workspace.
• A landlord wants to enhance the property to attract new tenants.

Tenant Improvements (TIs) are beneficial for customizing a commercial space to support employee functionality, reflect brand identity, comply with building codes, and improve energy efficiency while maximizing lease value.

Who Pays for Tenant Improvements?

The cost of tenant improvements is usually shared between landlords and tenants in different ways:

Tenant Improvement Allowance (TIA)

This is the most common approach. The landlord pays a set amount per square foot (e.g., $25-$40 for new spaces, $20 or less for second-generation spaces), and the tenant manages the build-out. If construction costs go over the allowance, the tenant covers the difference.

For example, with a $15 per rentable square foot (RSF) allowance on a 5,000 RSF space, the tenant receives $75,000 for improvements. Getting general contractor bids early helps avoid unexpected budget overruns.

Building Standard Allowance (BSA)

In this case, the landlord offers a fixed set of leasehold improvements and covers any cost overruns within that scope. However, if the tenant wants anything beyond the Building Standard Allowance (BSA), they’ll have to pay for it.

Turnkey Build-Out

The landlord takes care of the entire project, delivering a move-in-ready space based on agreed-upon specifications. While this saves the tenant time and hassle, it also means less control over the final design. Turn-key buildouts are common in competitive leasing markets and multi-tenant buildings.

Rent Discounts

Instead of a TI allowance, some landlords offer free rent (e.g., one month per lease year) to help offset renovation expenses. Another option is for the tenant to negotiate an extended lease term in exchange for the landlord covering improvements. According to CBRE research, between 2021 to 2024, the average lease term for prime office buildings was 107 months. This setup allows the tenant to hire tenant improvement contractors and oversee the construction process directly.

The choice of who will pay and manage the TIs depends on lease terms, project complexity, and control preferences. 

Examples of Tenant Improvements 

Tenant Improvement Allowance (TIA) is a financial incentive provided by landlords to help tenants modify and enhance a leased commercial space. TIA covers both hard costs and soft costs, however, these improvements must be permanent, benefiting the property beyond the tenant’s lease term. Here are key upgrades commonly covered under TIA:

1. HVAC Upgrades and Repairs

One of the biggest tenant improvement expenses is upgrading heating, ventilation, and air conditioning (HVAC) systems. Whether it’s replacing an old system, improving air filtration, or adding energy-efficient components, these upgrades are usually covered—as long as they benefit the property. However, if you need a custom air filtration system designed specifically for your business, that might not be included.

2. Electrical & Lighting Improvements

Modern businesses often need upgraded electrical systems—whether that’s additional power outlets, higher circuit capacity, or energy-efficient lighting. If your improvements enhance the space’s functionality (like LED lighting, smart motion sensors, or better ambient lighting), they’re usually covered. However, lighting that’s purely decorative or specific to your brand probably won’t qualify.

3. Plumbing Modifications

Need a sink in your breakroom? Upgrading restrooms? Making your space ADA-compliant? Plumbing upgrades like these are typically covered. But if your business needs specialized plumbing—say, for restaurant grease traps or medical equipment—it may only be covered if it adds lasting value to the property.

4. Flooring & Walls

Installing new carpet, tile, or hardwood flooring is a common tenant improvement allowed by the landlord, as these materials remain when the tenant vacates. The same goes for painting, wallpaper, and even acoustic paneling. But covering tenant-specific decor, like company-branded wall graphics, signage, or artwork is the tenant’s responsibility. 

5. Windows, Doors & Partitions

Replacing outdated windows, repairing frames, and ensuring proper insulation are covered if they improve energy efficiency. You can also install permanent walls or partitions to create new office layouts. And if your space requires ADA modifications, like wider doorways or ramp installations, that’s usually included too.

6. Space Reconfiguration

Changing the layout of your space, whether that means adding or removing partitions for functionality, building conference rooms, or private offices, or optimizing the open floor plan, is a common tenant improvement expense. However, furniture and movable partitions are not financed by the allowance.

7. Technology & Security Infrastructure

TIA can help cover things like structured cabling, integrated security systems, fire alarms, and sprinkler upgrades, anything that’s permanently installed as part of the property. However, business-specific technology like Wi-Fi routers, cabling, personal security cameras, or removable audiovisual equipment usually isn’t covered.

8. Compliance Upgrades

If your space needs improvements to meet ADA, fire safety, or health code requirements, those expenses are usually eligible for TIA. Think wider doorways, accessible restrooms, or emergency exit upgrades. However, building-wide improvements, like upgrading an entire elevator system or a shared lobby, fall outside the tenant’s responsibility.

While the tenant improvement allowance (TIA) covers many essential upgrades, tenants should anticipate additional out-of-pocket expenses for non-covered items such as furniture, branding elements, permit or legal fees, and other moving expenses. 

What is a Tenant Improvement Allowance?

A Tenant Improvement Allowance (TIA) is a sum provided by the landlord to cover part or all of the renovation costs. TIA is usually negotiated as a lump-sum amount in the lease agreement and is typically expressed as a per-square-foot amount. The average T.I. allowance in the United States is nearly $43.00 per square foot. 

How TIA Works

• The tenant receives funds to modify the space according to their needs.
• The allowance is usually reimbursed rather than paid upfront.
• If construction costs exceed the TIA, the tenant must pay the difference.
• If costs are lower than the TIA, the tenant may not be able to keep the excess (depends on lease terms).

What is a reasonable tenant improvement allowance?

A reasonable Tenant Improvement Allowance (TIA) typically falls between $10 to $50 per square foot, depending on several factors such as the market, lease length, tenant creditworthiness, and the type of space. 

However, recent tenant improvement trends indicate higher allowances; for instance, over the past 12 months, 10-year equivalent TI packages have averaged approximately $75 per square foot. In major markets like Manhattan, San Francisco, and Washington, D.C., with increased competition for quality tenants, TIAs have averaged $128 to $135 per square foot. Los Angeles provides an average TIA from $60 to $80 per square foot. Smaller markets like Dallas and Chicago provide more modest TIAs, averaging from $30 to $50 per square foot in Dallas and $6.23 per square foot in Chicago, respectively.

Therefore, it’s essential for tenants to negotiate a TIA that funds necessary leasehold improvements without overextending their out-of-pocket expenses.

How to Negotiate the Best Tenant Improvement Allowance (TIA)

Securing a strong Tenant Improvement Allowance (TIA) requires strategic negotiation, market research, and a clear understanding of your business’s needs. A well-negotiated TIA can significantly reduce upfront costs while ensuring your leased space is tailored to support long-term success. Here’s how to maximize your TIA and secure the best terms possible.

Step 1: Compare Multiple Offers

Before entering negotiations, research typical TIA rates in your area and industry. TIAs are generally calculated per square foot, with higher allowances available for longer lease terms, stronger tenant credit, or competitive leasing markets. If possible, negotiate with multiple landlords to compare offers. A landlord offering $40 per square foot may increase their offer to $50 if they know you’re considering a competing space with better terms.

Here are the average Tenant Improvement Allowances (TIA) per square foot for different types of commercial real estate:

• Office Spaces: $30 to $70 per square foot
• Retail Centers: $20 to $50 per square foot
• Industrial Spaces: $15 to $30 per square foot
• Medical & Healthcare Facilities: $50 to $100 per square foot

Step 2: Extend the Lease Term for a Higher TIA

Landlords are more likely to offer generous TIAs for tenants committing to longer leases since this reduces their vacancy risk. A five-year lease might secure a $30 per square foot TIA, while a ten-year lease could increase that to $50 or more. Consider whether a longer commitment aligns with your business goals and financial projections to maximize the allowance.

Step 3: Use Strong Financials as a Negotiation Tool

Landlords prefer tenants with solid financials, as they pose a lower risk. Be prepared to present financial statements, revenue projections, and a history of timely rent payments. Established businesses with strong credit profiles typically secure higher TIAs than startups with no leasing history. Highlight your business’s stability to strengthen your negotiation position.

Step 4: Justify a Higher TIA with a Detailed Cost Breakdown

Providing an itemized breakdown of your tenant improvement costs can help secure a higher allowance. Landlords are more likely to approve additional funds when they understand where the money will be spent. Clearly distinguish between:

• Hard costs (construction, HVAC, plumbing, electrical work, flooring).
• Soft costs (architectural and engineering fees, permitting, feasibility studies, legal expenses).

If your total improvements cost $100,000 but the landlord’s TIA offer only covers $75,000, presenting a clear breakdown may persuade them to bridge the gap.

Step 5: Negotiate Favorable Lease Clauses for TIA Utilization

Review lease agreement clauses carefully to ensure you maximize your TIA benefits. Key points to address include:

• Disbursement schedule: Secure timely fund releases, whether through phased payments or lump-sum reimbursements. Ask for direct payment to contractors if upfront costs are an issue.
• Restoration obligations: Clarify whether you must return the space to its original condition at lease end, which could create unforeseen costs.
• Flexibility for future modifications: Negotiate the ability to make additional improvements over time as your business evolves.

Step 6: Consider Alternative Incentives If TIA Is Limited

If the landlord is unwilling to increase the tenant improvement allowance, explore other financial incentives:

• Rent abatement: A few months of free rent can offset tenant improvement construction costs.
• Turnkey build-out: The landlord covers improvement costs directly, though this may limit your control over materials and contractors.
• Phased TI disbursements: Payments released at project milestones can ease cash flow concerns.

Step 7: Define Construction Responsibilities and Approval Timelines

Clarify whether the landlord or tenant will manage the build-out. If the landlord oversees tenant improvement construction, ensure you maintain approval rights over materials, design, and contractor selection to avoid low-quality finishes. If managing the project yourself, negotiate a reasonable timeline for landlord approvals to prevent unnecessary delays. Also, structure payment disbursement in multiple phases to ensure financial security throughout the project.

Step 8: Work with Lease Negotiation Experts

Engage a commercial real estate broker or tenant representative experienced in lease negotiations. Their market knowledge and industry connections can help you secure the most favorable terms. Additionally, legal counsel should review your lease agreement to protect your interests and ensure all agreed-upon TIA terms are accurately reflected.

By following these steps, you can negotiate a TI Allowance that not only supports business growth but also ensures a long-term, cost-effective leasing arrangement.

How to Budget for Tenant Improvement Projects

Budgeting is a crucial step in any tenant improvement project. A well-planned budget ensures that costs stay within expected limits and that the leased space meets business needs without overspending. Some essential steps to plan your budget are as follows: 

Step 1: Identify Your Topmost Requirements 

Before setting a budget, evaluate what improvements are required. Ask yourself:

• Does the space need structural changes?
• What kind of flooring, lighting, and partitions are required?
• Are plumbing and electrical upgrades necessary?
• What modifications are essential for your business operations?
• What areas of the leased space need the most upgrades?
• Are there any non-essential changes that can be postponed?

Example: A tech startup might prioritize open workspaces, modern wiring, and collaborative areas, while a law firm may focus on soundproof offices and formal meeting rooms.

Step 2: Understand Cost Factors

Several factors influence the cost of tenant improvements, including:

Factor	Impact on Cost
Size of the Space	Larger spaces require more materials and labor.
Scope of Work	Minor renovations (painting, flooring) cost less than structural changes (new walls, HVAC upgrades).
Location	High-demand cities (New York, San Francisco) have higher construction costs.
Material Quality	Standard finishes cost less than high-end, custom materials.
Labor Costs	Wages vary based on region and contractor expertise.
Permitting & Compliance	Some upgrades require city permits, adding to the total cost.

Step 3: Obtain Multiple Contractor Bids

Getting estimates from at least three competitive bids from contractors helps in:

• Comparing costs and quality of work.
• Avoiding overpricing or hidden charges.
• Understanding timelines and project feasibility.

Step 4: Calculate Your Estimated Budget

There are three common methods for estimating a Tenant Improvement Budget:

1. Cost Per Square Foot Approach

Landlords and contractors often price improvements per square foot. Below are average costs based on project complexity:

Type of Improvement	Cost per Square Foot
Basic improvements (paint, flooring, lighting)	$15 – $40
Mid-range improvements (partitions, upgraded finishes)	$40 – $75
High-end improvements (custom designs, premium materials)	$75 – $200

For example, if you’re leasing a 3,000 sq. ft. office and require mid-range improvements at $50 per sq. ft., your estimated budget would be:

3,000 sq. ft. × $50/sq. ft. = $150,000

2. Percentage of Annual Rent

Some tenants allocate 25% to 150% of their annual rent for TI projects. If your rent is $100,000 per year, your TI budget could range from $25,000 to $150,000.

3. Detailed Line-Item Budgeting

Break down each expense for greater accuracy. An example budget breakdown:

Expense Category	Estimated Cost
Architectural & Design Fees	$10,000
Demolition & Construction	$50,000
Flooring & Paint	$15,000
Electrical & Lighting	$20,000
HVAC & Plumbing	$25,000
Furniture & Fixtures	$30,000
Permits & Fees	$5,000
Total	$155,000

Step 5: Explore Funding Options

If your budget exceeds available capital, consider financing options:

• Tenant Improvement Allowance (TIA): Negotiate with your landlord for a contribution towards the improvements.​
• Business Loans: Explore options like SBA loans, bank loans, or lines of credit.​
• Grants & Incentives: Some cities offer grants for energy-efficient renovations.​

Step 6: Plan for Contingencies

Unexpected expenses are common in renovation projects such as code compliance upgrades, hidden structural issues, rising material or labor costs, or changes in scope. It is a best practice to allocate 10-20% of your total budget to cover contingencies. 

Step 7: Track Expenses and Monitor Progress

A budget should be a living document, and it is necessary to track expenses throughout the project:

• Schedule weekly budget reviews to keep a record of invoices and payments.
• Use project management tools to track progress and expenses.
• Adjust priorities if unexpected costs arise.

Planning a realistic tenant improvement budget ensures your project stays on track and creates a cost-effective workspace tailored to your business needs.

Strategies for Budgeting Tenant Improvements Efficiently 

Tenant improvements are a substantial investment, and without question, business owners would want to make the most out of their budget. Whether you’re customizing the interior of a leased property or upgrading systems, follow these key strategies to ensure your projects stay on track while maximizing value.

1. Define a Clear Scope and Realistic Budget

Start with a well-defined scope of work that details all necessary improvements, material specifications, and project goals. Document this information in a detailed lease agreement or TI allowance contract agreed by the landlord and the tenant. This clarity prevents scope creep and ensures accurate cost estimates from tenant improvement contractors. 

Establish a realistic budget by researching market rates for materials and labor, getting multiple quotes from reputable contractors to compare pricing, and including a contingency fund (typically 10-20%) for unforeseen expenses.

2. Prioritize Improvements That Matter The Most

It can be tempting to prioritize cosmetic touches but focus first on the electrical, plumbing, HVAC, and other upgrades critical to your business’s daily operations. If branding or customer experience is a priority, balance those elements with operational needs to maximize long-term benefits.

For example, if you’re opening a dental office, investing in specialized plumbing for treatment rooms and sterilization areas upfront will ensure you meet health code requirements.

3. Explore Cost-Effective Solutions

Tenant improvements don’t have to break the bank if you implement effective cost-saving strategies. 

• Source reclaimed or surplus materials for unique aesthetics without high costs. 
• Negotiate bulk discounts with suppliers to yield cost savings. 
• Explore multipurpose solutions like modular partitions or convertible spaces that adapt over time.

These budgeting tactics reduce costs while preserving design integrity, helping you strike a balance between practicality and visual appeal.

4. Invest in Energy Efficiency

Energy-efficient upgrades, including LED lighting, programmable thermostats and modern HVAC systems, and water-saving fixtures, reduce operational costs while increasing the property’s value. While these improvements may require a higher initial investment, they often qualify for tax incentives and lower long-term expenses.

5. Engage Stakeholders and Negotiate with Landlords

Many landlords are open to negotiating TI allowances or cost-sharing arrangements, especially if the tenant improvement construction boosts property value. Before signing a lease, discuss potential contributions, such as:

• Increased TI allowances for structural upgrades.
• Rent abatements during the renovation period.
• Landlord-provided contractors or materials at reduced rates.

6. Choose the Right Tenant Improvement Contractor 

Hiring experienced tenant improvement contractors and designers is essential. Look for professionals with a strong track record in commercial renovations, Check their client references and verify licensing as well as insurance. Ensure contracts are detailed and transparent to avoid unexpected expenses.

By implementing these strategies, businesses can optimize their tenant improvement budgets, creating functional, attractive, and cost-efficient spaces that support long-term success.

Conclusion

Tenant improvements are a crucial investment in creating a functional and appealing commercial property. By negotiating a strong Tenant Improvement Allowance (TIA), budgeting wisely, and prioritizing essential upgrades, property managers can maximize value while minimizing costs. Working with experienced contractors ensures high-quality workmanship, smooth project execution, and compliance with regulations. Whether you’re transforming the interiors of an office, bringing a retail space up to code, or upgrading HVAC systems of a leased warehouse, working with skilled contractors ensures that every dollar spent contributes to a more productive workspace.

If you’re planning tenant improvements for your leased commercial space, let Constructive Solutions Inc. bring your vision to life. Contact us today to discuss your requirements! 

FAQs

What is the difference between tenant improvement and renovation?

Tenant improvements are modifications made to a leased space to suit a tenant’s needs, whereas renovations refer to general upgrades or restorations that enhance the property’s overall condition.

Who pays for tenant improvements?

Tenant improvements can be paid for by the landlord, the tenant, or both, depending on the lease agreement and whether a Tenant Improvement Allowance (TIA) or other incentives are provided.

How does a tenant improvement allowance work?

A tenant improvement allowance (TIA) is a sum provided by the landlord to cover renovation costs, usually reimbursed after expenses are incurred, with any excess cost paid by the tenant.

What is tenant improvements coverage?

Tenant improvements coverage is an insurance policy that protects modifications made to a leased space in case of damage, ensuring the tenant’s investments are covered.

How do you account for tenant improvements?

Tenant improvements are recorded as leasehold improvements on the tenant’s balance sheet and amortized over the lease term or their useful life, whichever is shorter.

Are tenant improvement allowances considered taxable income for the tenant?

Tenant improvement allowances may be considered taxable income for tenants if they own the improvements. However, under Section 110 of the Internal Revenue Code, such allowances can be excluded from taxable income if the lease term is 15 years or less and the funds are used for qualifying real property improvements, with specific tax implications. Hence, consulting a tax professional is advisable.

Relevant Resources:

• Tenant Improvement Allowance (TIA): Get Your FAQs Answered
• How to Choose the Right Tenant Improvement Contractor in San Francisco?