A Tenant Improvement Allowance (TI) is a landlord contribution — typically expressed as dollars per square foot — to fund a new tenant's build-out of leased commercial space. TI is a negotiated lease term and is treated as a lease incentive under FASB ASC 842.
A Tenant Improvement Allowance is the landlord's upfront capital contribution toward customizing leased space for the incoming tenant. TI covers eligible costs: flooring, paint, walls, electrical, plumbing, HVAC modifications, built-in fixtures, and sometimes furniture. Non-eligible costs (movable trade fixtures, equipment, inventory) are typically tenant-funded. TI amounts range widely — $10–$30/sq ft for basic office retrofits to $100+/sq ft for restaurant or medical build-outs with heavy MEP (mechanical, electrical, plumbing) requirements. For the tenant, TI is either disbursed directly (landlord pays contractors, reimbursement model) or deducted from initial rent obligations. For the landlord, TI is an up-front investment recouped through the lease term — it implicitly raises the break-even rent. This is why TI and base rent are co-negotiated: a tenant who accepts lower TI may earn lower base rent, and vice versa. Under FASB ASC 842 (effective for most entities after 2021 — fasb.org/page/pagecontent?pageId=/standards/accounting-standards-codification.html), TI allowances received from landlords are treated as lease incentives that reduce the lessee's right-of-use (ROU) asset on the balance sheet. The lessee records the ROU asset net of any TI allowance received. The FASB guidance is in ASC 842-20-30 — entities moving from ASC 840 to ASC 842 needed to reclassify previously off-balance-sheet TI accounting. For SBA lending, TI projects may be eligible uses of SBA 7(a) loan proceeds (as leaseholder improvements) — subject to the requirement that the improvements are permanently attached to real estate and have a useful life matching or exceeding the loan term. SBA SOP 50 10 guidance at sba.gov/document/support-sba-sop-50-10 governs eligible use of proceeds.
Generally no, under IRS Rev. Rul. 2009-39 — TI allowances received from landlords for improvements that become landlord property (fixtures permanently attached to the leased space) are excluded from tenant gross income. However, TI received for improvements that remain tenant property (trade fixtures, removable equipment) may be taxable. Consult a tax advisor for jurisdiction-specific treatment.
Most commercial leases require the tenant to repay some or all of the TI allowance on a pro-rata basis if the lease is terminated early. This TI clawback obligation is a material liability and must be disclosed to lenders if any SBA or conventional loan is secured by lease rights. Review your lease termination clause before applying for financing that depends on continued occupancy.
Yes — leaseholder improvements are an eligible use of SBA 7(a) loan proceeds, provided the improvements are permanently attached to the real property and have a useful life at least equal to the loan term. The SBA requires documentation that the lease term (including renewal options) is at least as long as the loan maturity. TI allowance should be disclosed as an offset to the total project cost in the SBA application.