Tenant Improvements

Tenant improvements (TIs), also known as leasehold improvements, refer to the structural changes or alterations made to a rental space to meet the specific needs or requirements of a tenant. These can include changes to walls, floors, ceilings, and lighting, or the installation of furniture or specific equipment. The cost and responsibility of these improvements are usually a point of negotiation between the tenant and the landlord when a lease agreement is being drawn up.

In commercial real estate, tenant improvements are often a significant part of the lease negotiation. Landlords may offer a tenant improvement allowance (TIA), which is a specific amount of money that the landlord is willing to contribute towards the cost of the improvements. The TIA can be a key factor for tenants when deciding whether to lease a particular space, especially for businesses with specific space requirements.

From a landlord's perspective, the cost of tenant improvements can be substantial. However, these improvements can also make the space more desirable to potential tenants, allowing the landlord to charge higher rent or secure a longer lease term. In a real estate financial model, tenant improvements would typically be considered a capital expenditure and depreciated over the life of the asset.

It's important to note that while tenant improvements can increase the functionality of a space for a specific tenant, they may not necessarily increase the overall value of the property, especially if the improvements are highly specific to the tenant's needs. When the tenant eventually vacates the space, additional costs may be incurred to remove or modify the improvements for the next tenant.