Glossary
Tenant Improvements and Leasing Commissions (TI/LC)
TI/LC stands for tenant improvements and leasing commissions, the two main costs a commercial landlord pays to sign a lease. Tenant improvements are allowances for building out a tenant's space, and leasing commissions are fees paid to brokers. Underwriters deduct expected TI/LC from NOI to estimate net cash flow available for debt service.
Formula
Example
A landlord signs a 5-year, 10,000 square foot office lease at $30 per square foot per year. Total lease rent is 10,000 x $30 x 5 = $1,500,000. Tenant improvements of $40 per square foot cost $400,000, and a 6% leasing commission costs $90,000. Total TI/LC is $490,000, or about 32.7% of the lease's total rent, a major cost that NOI alone does not show.
How it is used in underwriting
For office, retail and industrial properties, TI/LC is often the largest cash expense outside operating costs. Underwriters model it lease by lease, using the rent roll's expiration schedule, an assumed renewal probability, and market TI and commission levels for new and renewing tenants. Renewals usually cost less than new leases. Lenders typically require ongoing TI/LC reserve deposits and sometimes upfront reserves for known rollover, such as a large tenant expiring early in the loan term. Underwritten net cash flow, after TI/LC and replacement reserves, is the figure lenders use for DSCR and debt yield.
Ignoring TI/LC is one of the most common errors in commercial real estate underwriting. A building can show strong NOI while requiring large cash outlays to retain tenants, especially in office markets where landlords compete with generous build-out allowances. Underwriters should compare net effective rent, rent after free rent and TI/LC amortized over the term, rather than face rent. Industrial and net lease properties generally have much lower TI/LC than office. For multifamily, leasing costs are small and are usually included in operating expenses rather than modeled separately.
Frequently asked questions
What is a tenant improvement allowance?
A tenant improvement allowance is the amount a landlord agrees to pay toward building out or renovating a tenant's space, usually expressed per square foot. The tenant may manage construction and be reimbursed, or the landlord may build the space. Allowances are larger for new tenants and longer lease terms.
How are leasing commissions calculated?
Leasing commissions are typically a percentage of the total rent over the lease term, or a fixed amount per square foot, paid to the tenant's and landlord's brokers. Rates vary by market, property type and whether the deal is a new lease or renewal. Commissions are usually paid at lease signing or occupancy.
Why do lenders require TI/LC reserves?
TI/LC costs are large and occur when leases roll, which may coincide with lower income if a tenant leaves. Reserves ensure cash is available to re-lease space and maintain occupancy, protecting the property's income and the lender's collateral. Lenders often size reserves to the lease expiration schedule.
Related terms
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