The TI Allowance Fine Print: How the Money Moves
A tenant improvement (TI) allowance is a reimbursement, not a check you get at signing. You pay your contractor, submit a draw package, and the landlord repays you 30 to 45 days later. The headline number on the LOI gets all the attention, but the draw schedule, the eligible-cost definition, the supervision fee, and the use-it-or-lose-it deadline decide how much of it reaches your bank account. Negotiate the mechanics in the LOI, not the lease.
The LOI says $85 per square foot on 4,000 feet: a $340,000 tenant improvement allowance. It goes into the financial model as if the landlord hands you a check the day you sign. Then construction starts, your contractor bills you monthly, and you find out how the money moves.
I've negotiated TI language across 200+ leases, and the pattern holds. The headline number gets all the negotiating attention, while the disbursement mechanics buried three pages deeper decide whether you collect all of it, most of it, or a lot less than you planned for. This post is about those pages.
How does a TI allowance get paid?
A TI allowance is a reimbursement. Your contractor bills you, you pay, you put together a documentation package, you submit it, and the landlord funds you 30 to 45 days after they receive a package they consider complete. Every word in that sentence is doing work, and "consider complete" is doing the most.
The working capital math: a $600,000 build-out with a $340,000 allowance. Your GC bills roughly $100,000 a month for six months, payable in 30 days. If the lease pays TI in a single disbursement at completion, which is the default in many landlord drafts, you front the entire $600,000 and wait for $340,000 back at the end, plus the 45-day processing tail.
At the peak, you're floating $200,000 or more of money your model counted as covered. If you raised against that model, the TI structure just opened a working capital hole in months three through six of construction, right when you're also buying equipment and hiring staff.
This is the single most common surprise I see in a first lease, and it's avoidable. Progress draws, meaning monthly reimbursement against completed work, are negotiable in most deals. Landlords default to completion-based funding because it protects them, and they'll move off it for a credible tenant who asks before signing. Almost nobody asks.
What's in a TI draw package?
Whether you have progress draws or one payment at the end, the money moves only when the package is complete. A typical lease asks for:
- The contractor's application for payment, usually in AIA G702/G703 format
- Conditional lien waivers for the current draw, from the GC and the major subs
- Unconditional lien waivers for everything you've already paid
- The architect's certification of percent complete
- Sometimes the landlord's own inspection sign-off
One missing waiver from one electrical sub restarts the 30-day clock. I've watched a $250,000 draw sit for nine weeks over paperwork the GC's office manager could have produced in a day, if anyone had owned the task. Treat draw packages like accounts receivable: one named person assembles them, tracks them, and chases them, every cycle.
What gets deducted from your TI allowance?
The $340,000 was never going to arrive whole. Three clauses take a piece of it.
The supervision fee. Many leases let the landlord take a construction administration or supervision fee, 1 to 5 percent of the allowance, off the top, for reviewing your drawings and walking the site now and then. On $340,000 that's up to $17,000 for work your own project manager is already doing. Cap it, or strike it.
The eligible-cost definition. Landlord drafts often limit TI to hard construction costs. Architecture and engineering fees, permits, low-voltage and IT cabling, and FF&E get excluded. In a healthcare build those categories run 25 to 35 percent of the project, so a clinic with a $600,000 budget might have only $420,000 of "eligible" spend. That matters enormously if your allowance is close to or above your hard costs.
The deadline. Use-it-or-lose-it language gives you 12 to 18 months from lease commencement to draw the allowance, and unused dollars evaporate after that. Healthcare timelines blow through 12 months routinely; permitting alone can eat half of it. Unused TI converts to rent credit only if your lease says so, and the landlord's draft never says so.
Is amortized TI a good deal?
At some point a landlord will offer you more TI in exchange for higher rent: another $50 a foot, amortized into the lease at "a market rate." Run the math before you nod. That rate is usually 8 to 12 percent, compounding across the full term, secured by a personal or corporate guaranty you've already signed.
Sometimes it's the right trade. Landlord money can be cheaper than dilution, a point I made in Cost of Capital: Why Your Lease is a Better Financing Tool than Your Cap Table. But it's a borrowing decision, and it deserves a borrowing decision's diligence: ask for the amortization rate in writing, compare it against your other capital sources, and check whether the amortized portion survives if you terminate or assign early. The answer to that last question has surprised more than one founder at exit.
What should you negotiate before you sign?
- Progress draws. Monthly or milestone-based reimbursement, not a single payment at completion. This is the highest-value ask on the list.
- A payment clock with teeth. Thirty days from a complete package, with the right to offset unpaid TI against rent if the landlord misses. Without the offset, the clock is decorative.
- A broad eligible-cost definition. Soft costs, permits, low-voltage, and FF&E written in by name. In healthcare, this clause alone can be worth six figures.
- A capped, defined supervision fee. If the landlord insists on one, cap it at 1 to 2 percent and define what supervision covers.
- A long fuse. Twenty-four months to draw, with unused allowance converting to rent credit. Your timeline risk shouldn't turn into the landlord's windfall.
All five belong in the LOI, not the lease draft. By the time you're in lease documentation, the leverage has moved to the landlord's side of the table, the dynamic I covered in The Founder's Guide to the LOI. And remember what the allowance looks like from the other side: the landlord's math treats TI as an investment they recover through your rent. They've modeled the mechanics. You should too.
The headline number on the LOI is marketing. The draw mechanics are the deal. A $340,000 allowance with completion-based funding, narrow eligible costs, and a 12-month fuse is worth less than a $280,000 allowance with monthly draws, broad costs, and an offset right.
Key takeaways
- A TI allowance is a reimbursement paid 30 to 45 days after a complete draw package, not cash at signing.
- Completion-based funding can force you to float six figures of working capital mid-build; ask for progress draws before you sign.
- Draw packages stall on missing lien waivers. Put one named person in charge of assembling and chasing them.
- Supervision fees, narrow eligible-cost definitions, and use-it-or-lose-it deadlines all shrink the headline number. Negotiate each.
- Amortized TI is a loan at 8 to 12 percent. Treat it like one, and check whether it survives an early exit.
Frequently asked questions
Is a TI allowance paid upfront or as a reimbursement?
Almost always as a reimbursement. You pay your contractor first, assemble a draw package, and the landlord repays you 30 to 45 days after receiving a package they consider complete. Many landlord drafts pay the full allowance in a single disbursement at project completion, which can force you to float a large share of the build cost for months. Progress draws, paid monthly against completed work, are negotiable and usually worth more than a bigger headline number.
What is a TI draw package?
It's the documentation a landlord requires before releasing TI funds. A typical package includes the contractor's application for payment in AIA G702/G703 format, conditional lien waivers for the current draw, unconditional lien waivers for prior payments, the architect's certification of percent complete, and sometimes a landlord inspection sign-off. A single missing waiver restarts the payment clock, so one person should own assembling and tracking every package.
What costs does a TI allowance usually exclude?
Landlord drafts often limit TI to hard construction costs and exclude soft costs: architecture and engineering fees, permits, low-voltage and IT cabling, and furniture, fixtures, and equipment (FF&E). In a healthcare build those categories can be 25 to 35 percent of the project. Negotiate a broad eligible-cost definition that names soft costs explicitly, or a large allowance can cover far less of your real budget than it appears to.
Should you accept amortized TI for a higher rent?
Only after you run it as a financing decision. Amortized TI is a loan, typically at 8 to 12 percent compounding over the lease term and secured by your guaranty. It can still beat raising dilutive equity, but ask for the rate in writing, compare it to your other capital, and confirm whether the amortized balance survives an early termination or assignment.
Negotiating a TI Allowance Right Now?
I review TI structures before LOIs get signed: disbursement mechanics, eligible costs, and the clauses that decide whether the headline number ever reaches your bank account.
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