Tenant Improvement Allowances: Hidden Risks Costing Landlords $50K+
Learn how excessive TI allowances and rent credit conversions drain landlord profits. Plus proven mitigation strategies.
Critical Alert
TI allowances >$50/sq ft without proper controls can reduce property NOI by 15-25% over 10 years.
Tenant improvement allowances seem like standard negotiating tools, but poorly structured TI provisions are silently draining millions from commercial real estate portfolios.
The $50K+ Risk Factors
1. Excessive Per-Square-Foot Allowances
Market Benchmarks:
- • Office: $25-$40/sq ft
- • Retail: $15-$35/sq ft
- • Industrial: $5-$15/sq ft
Red Flag Levels:
- • Office: >$50/sq ft
- • Retail: >$40/sq ft
- • Industrial: >$20/sq ft
Example: 10,000 sq ft @ $75/sq ft = $750K + $1.2M opportunity cost over 10 years
2. Rent Credit Conversions
Allowing unused TI allowances to convert to rent credits creates double financial exposure.
Risk Scenario:
- • $200K allowance granted
- • Only $100K used
- • $100K becomes rent credit
Total Exposure:
Cash + future rent loss
3. Vague Scope Definitions
Dangerous Language:
- • "Standard improvements"
- • "Reasonable buildout"
- • "Customary allowances"
Typical Overruns:
- • High-end finishes
- • Structural changes
- • Technology upgrades
Proven Protection Strategies
1. Use-It-Or-Lose-It Provisions
"Any unused TI allowance expires 180 days after lease commencement and cannot be converted to rent credits, cash, or future improvements."
2. Specific Allowable Items
Include:
- • Standard flooring (specify grade)
- • Basic lighting fixtures
- • Standard paint/wall coverings
- • Non-structural HVAC mods
Exclude:
- • Structural modifications
- • Premium finishes
- • Technology infrastructure
- • Furniture and equipment
3. Documentation Requirements
- • 3+ contractor bids required
- • Architectural plans pre-approved
- • Landlord approval for work >$10K
- • Receipts and invoices
- • Completion certificates
- • Contractor lien waivers
Market Benchmarks
Regional Office TI Ranges:
Case Study: $420K Loss
The Setup:
- • 15,000 sq ft law firm
- • $50/sq ft allowance ($750K)
- • Vague "professional office" language
What Happened:
- • Tenant claimed $75/sq ft "standard"
- • High-end finishes included
- • Custom millwork added
The Damage:
- • Actual costs: $1.125M
- • Overrun: $375K
- • Legal fees: $45K
Preventable with proper language and controls
Protect Your TI Investments
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