Tenant Improvement (TI) & Leasing Commission (LC) Sizing in Commercial Loans
Tenant Improvements (TI) and Leasing Commissions (LC)—collectively known as TI/LCs—represent the substantial capital expenditures required to build out commercial suites for incoming tenants and pay broker commission fees. In commercial loan underwriting, sizing, reserving, and funding TI/LCs is critical for maintaining property occupancy and preventing refinancing capital shortfalls.
Indicative Underwriting Matrix
TI/LC expenditures vary widely based on local market concessions, tenant creditworthiness, and lease term length. Longer 10-year leases justify higher upfront TI allowances than 3 to 5-year terms.
Anatomy of Tenant Improvement and Leasing Commission Expenses
Whenever a commercial lease expires or a new tenant is recruited, the landlord must invest capital to customize the physical space and compensate leasing brokers:
1. Tenant Improvements (TI Allowances): Cash allowances provided by the landlord (or turnkey construction work performed by the landlord) to build out the tenant’s suite. This includes interior partition walls, specialized medical plumbing drops, acoustic ceiling tiles, energy-efficient lighting, electrical wiring, and flooring.
2. Leasing Commissions (LCs): The transaction brokerage fees paid to licensed real estate brokers who negotiate the lease. Standard market rates range from 4% to 6% of the gross aggregate lease value for new leases (typically 3% to the tenant representative broker and 2%–3% to the landlord’s listing broker), and 2% to 3% for lease renewals.
How Commercial Lenders Underwrite and Escrow TI/LCs
Commercial underwriters account for TI/LC liabilities through two distinct mechanisms:
• Below-the-Line Normalization Reserve: Lenders do not assume tenants will stay forever without cost. Underwriters calculate an annual actuarial TI/LC reserve (e.g., $1.00 to $2.50 per square foot annually across the building) and deduct it from Net Operating Income to size maximum debt service coverage.
• Ongoing Rollover Escrow Deposits: On properties facing substantial lease expirations during the loan term, lenders require the borrower to make monthly cash deposits into a dedicated "Rollover Reserve Account." These funds are held by the servicer and disbursed exclusively to reimburse the borrower as new leases are executed and suite buildouts are completed.
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
What is the difference between a TI Allowance and a Turnkey Buildout?
A TI allowance provides a fixed dollar amount per square foot (e.g., $50/SF) with the tenant paying any cost overruns, whereas a turnkey buildout requires the landlord to deliver completed space to agreed specifications at the landlord's sole financial risk.
Lenders strongly prefer fixed TI allowances because turnkey construction contracts expose the landlord to budget overruns and supply chain inflation that can erode debt service reserves.
Review TI/LC Sizing Guidelines →How do lenders release escrowed TI/LC funds to the borrower?
Lenders disburse escrowed TI/LC funds upon receipt of an executed lease agreement, tenant estoppel certificate confirming space acceptance, paid contractor invoices, and unconditional lien waivers.
This ensures that tenant improvement funds are verified as physically installed in place before loan proceeds are released from the servicing escrow account.
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