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In the Spotlight: Tenant Improvement Allowance — Two Perspectives

By William Crowe
October 06, 2004

How a tenant is permitted to apply its tenant improvement allowance for its build-out is frequently a controversial topic during lease negotiations.

From the landlord's perspective, the landlord is “giving” an allowance to the tenant in order to finance the tenant's construction of certain improvements to the landlord's space. These improvements are theoretically beneficial to the landlord at the end of the tenant's lease term. Because of this perspective, the landlord usually requires that the allowance be spent entirely on costs directly attributable to actual leasehold improvements, such as the hard costs of construction and certain circumscribed soft costs such as design and construction management fees. This requirement provides the landlord with the comfort of knowing that the entire amount of the allowance is invested in the landlord's building.

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