What is the typical purpose of tenant improvements (TI) allowances, and how are they amortized in rent measurements?

• A. TI allowances fund tenant customization; amortized as a reduction in rent or as a capex recovery over the lease term
• B. TI allowances are refundable deposits
• C. TI allowances increase property taxes
• D. TI allowances are used for exterior lighting only

Answer: (A)

TI allowances are funds provided by the landlord to help the tenant customize or build out the leased space. They cover the costs of improvements like walls, electrical, lighting, finishes, and other fit-out work so the space can be used as the tenant desires. These allowances aren’t refundable deposits, don’t affect property taxes, and aren’t restricted to exterior lighting.

When it comes to rent measurements, the TI allowance is treated as a financing mechanism for the improvements and is spread over the lease term. This means the benefit of the improvements shows up as a reduction or credit in rent over time (often described as net effective rent) or as a capex recovery built into the rent schedule. In other words, the tenant gets the improvements funded upfront, and the landlord recovers that cost gradually through the rent over the term of the lease.