Tenant Improvements & Leasing Commissions (TI/LC)

Tenant improvements (TI) and leasing commissions (LC) are the capital costs of putting a tenant in place. TI is the landlord's allowance for build-out and space fit-out (quoted in dollars per SF); LC is the commission paid to the leasing broker (a percentage of the lease's total rent). Together they're often called leasing capital.

How it's used: TI/LC is underwritten at every lease event — new leases and renewals — across the hold, weighted by the odds a tenant renews. It's heavy on multi-tenant office and industrial with frequent rollover, and minimal on a long single-tenant NNN lease where the tenant funds its own space.

Why it matters: TI/LC sits below NOI, so a going-in cap rate ignores it entirely — yet it's a real, recurring drain on levered cash flow. Steep TI/LC at frequent rollover can quietly turn an attractive headline yield into a mediocre return. A longer WALT is valuable precisely because it pushes these costs further out. Like replacement reserves, it belongs in the cash-flow model even though it's not an operating expense.

Formula (per lease): TI/LC ≈ (TI per SF × leased SF) + (LC % × total lease rent)

See how lease term shapes risk in the small-industrial underwriting guide.