What is a tenant improvement (TI) allowance, and how is it typically accounted for in pro forma?

• A. TI is a loan to the tenant; expensed upfront
• B. TI funds are paid upfront and fully expensed in year of move-in
• C. TI allowance funds improvements; amortized over the lease term; included in pro forma as a reduction in effective rent or as a one-time credit
• D. TI is a tax credit that reduces property taxes only

Answer: (C)

A tenant improvement (TI) allowance is money provided by the landlord to fund the tenant’s leasehold improvements. It isn’t a loan the tenant repays, nor is it a tax credit. The landlord uses it to finance the space fit-out, and the accounting treats those improvements as leasehold improvements that are amortized over the lease term.

In pro forma, the TI benefit is shown by recognizing the cost of the improvements over time rather than expensing it all at once. This is typically presented as a reduction in the tenant’s “effective rent” each year due to the amortization of the TI, or as a one-time credit at move-in. For example, if the TI allowance is $100,000 on a 5-year lease, you would amortize $20,000 per year, reducing the annual rent by that amount in the pro forma. This approach aligns the upfront incentive with the periodic rental expense, giving a clearer picture of the tenant’s true cash flows and the lease economics.