Tenant improvement (TI) allowance is the dollar amount the NYC commercial landlord contributes to a tenant's build-out — typically office space, sometimes retail. For Class A Manhattan office leases, TI allowances are 30-50% of total leasing cost (rent concessions, free rent, TI, broker commissions). Getting TI structure right materially affects landlord-tenant alignment and the lease's true economics.
TI Magnitude by Asset Class
Manhattan Class A office: $80-$150/SF on 10-15 year terms. Manhattan Class B office: $40-$80/SF. Manhattan retail: $40-$200/SF depending on build-out complexity. Industrial: typically minimal (5-15/SF) for warehouse, higher for last-mile or specialty industrial. The magnitude scales with rent — typically TI is 7-12% of total lease NPV.
Build-Out vs Allowance
Two structures dominate. Landlord-managed build-out (the landlord designs, contracts, and delivers the space, with the tenant approving the design) — common for first-generation or stripped-back spaces, gives the landlord control over standards. Tenant-managed allowance (the landlord provides a cash allowance after the tenant's build-out is complete) — common for sophisticated tenants, gives the tenant control over design. Most Class A Manhattan office uses tenant-managed allowance.
Amortization Treatment
TI allowance can be amortized into the lease rent (the tenant pays it back through higher base rent) or paid upfront (the landlord eats the cost). Amortized TI looks like higher face rent (better for cap rate-based valuation) but the same effective rent. Upfront TI is cleaner for accounting but reduces NOI in year 1. NYC landlords typically prefer amortized TI for the face-rent benefit.
TI vs Free Rent Trade-off
Both TI and free rent are concessions; they're economically equivalent if the dollar amounts match. But they differ for valuation purposes (face rent stays higher with TI), tenant cash flow (TI doesn't help with early-tenancy cash burn the way free rent does), and tax treatment. NYC tenants often prefer free rent to TI (cash now is better than build-out spend); landlords often prefer TI (controls space quality, supports face rent).
- Calculate effective rent across the full lease term including TI, free rent, and all concessions.
- Match TI allowance to the tenant's actual build-out cost — don't over- or under-fund.
- Negotiate amortization vs upfront based on landlord cash flow and tenant credit.
- Skyline advises NYC commercial owners on lease structure including TI optimization.
Robert Khodadadian and Skyline Properties advise NYC commercial owners on lease structure and TI strategy. The firm has closed $976M+ in NYC commercial real estate. Email info@skylineprp.com for confidential leasing advisory.