TI Allowance or Free Rent: What an Orange County Landlord Should Offer

A TI allowance is cash the owner pays out near the start of the lease, and when it buys improvements the next tenant can reuse, such as restrooms, HVAC, electrical service or a storefront, part of its value stays with the building. Free rent costs the owner no cash but is income that never comes back, so the better offer usually depends on how reusable the build-out is, how much capital the owner wants at risk before rent starts, and how the two packages compare on a net effective rent basis.

Many retail tenants need some of each, money to build and time to ramp up, so the real question is the mix. This guide looks at it from the owner's side, with a worked example and a checklist. For the tenant's view of the same terms, see our posts on the tenant improvement allowance and rent abatement.

What does each concession cost the owner, and when is it paid?

A TI allowance is a cash outlay. It is usually paid when the work is finished, or in draws as it progresses, which means the owner's money goes out before the first rent check arrives. If the tenant fails early, the cash is gone, although the improvements remain. The allowance may also need your lender's approval, so check your loan documents before you offer it.

Free rent costs nothing up front. The owner gives up base rent for a set number of months, usually early in the term. What matters most is what gets abated. If only base rent is abated, the tenant keeps paying its share of taxes, insurance and common area maintenance, and those costs stay covered. If the abatement is gross, the owner pays the suite's share of those charges out of pocket during the free period. Free rent also matters in a sale, since a buyer may ask for a credit for free rent still to come.

How does a TI allowance add to the property compared with free rent?

Free rent leaves nothing behind. A TI allowance can, depending on what it buys. Improvements most retail users need, such as accessible restrooms, a working HVAC system, upgraded electrical service, a grease interceptor for food users, demising walls and a storefront, tend to stay useful after the first tenant leaves. That second-generation space can be easier to lease again. Brand-specific work, such as custom millwork and decor, has little value to the next tenant and may need to be removed.

So ask what the allowance will pay for. An owner can limit it to building systems and base improvements, approve plans before committing money, or build the reusable work as landlord's work and give a smaller allowance for finishes. If a suite has been vacant a while and you are not sure the concessions are the problem, the vacancy diagnosis tool ranks the likely reasons, from price and exposure to layout and the concession package.

How do you amortize TI into the rent?

When a tenant needs more improvement money than the owner wants to give outright, the owner can fund the extra amount and recover it through higher rent over the term, with interest. In effect, the owner is lending money backed only by the lease and any guaranty.

For example, take a hypothetical 1,500 SF suite where the tenant asks for $30,000 more than the base allowance. Amortized over a 60-month term at a hypothetical 8% annual rate, the monthly payment is about $608.29, or roughly $0.41 per SF per month added to base rent. Over the term the tenant pays about $36,498, of which about $6,498 is interest. The rate is negotiated, so ask your CPA or lender what rate reflects your cost of capital and this tenant's risk.

Two drafting points help. Show the TI rent as its own line in the rent schedule, so the unamortized balance is easy to calculate at any point. And tie that schedule to the default section, so the balance can be recovered if the tenant leaves early.

How can an owner protect a TI allowance?

Most of the protection comes from when and how the money goes out. Disburse the allowance after the work is complete and the tenant has opened, or in draws against invoices with a holdback until the end. Condition each payment on lien releases from the contractor and the major subcontractors and suppliers. California sets out the conditional and unconditional waiver and release forms for progress and final payments in Civil Code sections 8132 through 8138, and a waiver given for payment is unenforceable unless it is in substantially the statutory form. Before the final payment, ask for unconditional final releases, the final permit sign-off, paid invoices and the tenant's written acceptance of the premises. Paying the contractor directly or by joint check is another option.

Our post on the mechanic's lien clause explains how releases and the notice of nonresponsibility fit together. Civil Code section 8444 lets an owner who did not contract for the work give a notice of nonresponsibility. Whether that notice helps when the owner is funding the work through an allowance is a question for your attorney.

Then plan for default. The lease can provide that if the tenant defaults and the lease ends early, the unamortized portion of the allowance, calculated on a stated schedule over the initial term, is part of the owner's damages. Include the same amount in the scope of any personal guaranty. Set an outside date for the tenant to claim the allowance, and condition payment on the tenant not being in default. How much can be recovered depends on the lease and California law, so have your attorney draft these clauses.

How can an owner protect free rent?

Tie the free rent to opening. Make the abatement conditional on the tenant opening for business by an outside date, and define rent commencement as the earlier of opening or a fixed number of days after delivery. That way the free months support a tenant that is open and building sales, and a slow build-out cannot push rent back indefinitely. Spreading the abated months over the first year or two, rather than taking them all at once, also means less of the concession is used up if the tenant fails early.

The lease can also make the free rent conditional, so that abated rent becomes due if the tenant defaults and the lease is terminated. Tenants often resist this, so treat it as a point to negotiate and have your attorney draft it. And abate base rent only, so the tenant keeps paying its share of NNN charges during the free months.

How do you compare two offers using net effective rent?

Net effective rent spreads the concessions over the term so two different packages can be compared on one number. A simple version is total base rent over the term, minus free rent, minus the TI allowance, divided by the number of months and the square footage.

For example, take a hypothetical 1,500 SF suite on a 60-month NNN lease with two offers. In both, the tenant pays NNN charges throughout and only base rent is abated.

Offer A: $3.00 per SF per month, four months of free base rent, no TI allowance. Total base rent is 1,500 × $3.00 × 60 = $270,000. Free rent is 1,500 × $3.00 × 4 = $18,000. Net rent is $252,000, and $252,000 ÷ 60 months ÷ 1,500 SF = $2.80 per SF per month.

Offer B: $3.25 per SF per month, no free rent, and a $30 per SF TI allowance, or $45,000. Total base rent is 1,500 × $3.25 × 60 = $292,500. Net rent is $292,500 minus $45,000, or $247,500, and $247,500 ÷ 60 ÷ 1,500 = $2.75 per SF per month.

On this basis Offer A is worth $0.05 per SF per month more, or $4,500 over the term. The single number leaves out three things. Timing: Offer B's $45,000 goes out before rent starts, while its higher rent arrives over five years, so discounting future rent at the owner's cost of capital would widen the gap in Offer A's favor. Residual value: if the $45,000 buys restrooms and HVAC the next tenant can use, Offer B leaves a more leasable suite, and if it buys brand-specific finishes, it does not. Early-failure risk: if the tenant stops paying after month 12, Offer A has collected eight months of rent, $36,000, with no cash spent on improvements, while Offer B has collected $58,500 but paid out $45,000, leaving $13,500 before any recovery under the guaranty or recapture clause.

Which should an Orange County owner offer?

TI tends to make sense when the improvements are reusable, the tenant's credit supports the capital at risk, and the owner has the cash or lender approval to fund it. Free rent tends to make sense when the tenant is paying for its own build-out, when the suite is already second generation and needs little work, or when the owner would rather preserve cash. Many deals use both, a modest allowance for base improvements plus a short abatement tied to opening.

Market conditions matter too. CBRE reported Orange County retail availability at 3.7% in Q2 2026, down 20 basis points from the prior quarter, with average net asking rent of $2.55 per SF per month NNN. A countywide figure does not decide an individual suite, though. An end cap in a grocery-anchored center and a hidden inline suite face different demand. The tenant mix planner can help you decide which categories to pursue, which shapes what build-out a suite should be ready for, and the LOI term sheet builder lays out rent, TI, free rent and guaranty terms in one place. Weighing these trade-offs suite by suite is a large part of our landlord representation work.

Checklist: choosing and protecting a concession

• Get a preliminary budget and sort the work into reusable improvements and brand-specific finishes.
• Check whether your loan documents require lender approval or reserves for TI.
• Decide whether abatement covers base rent only or NNN charges as well.
• Run net effective rent for each offer, then weigh timing, residual value and early-failure exposure.
• If amortizing extra TI, agree on the rate and show TI rent as a separate line.
• Disburse TI on completion or in draws, against statutory lien releases, with a final holdback.
• Require final permit sign-off, paid invoices and unconditional final releases before the last payment.
• Add recapture of unamortized TI, and of conditional free rent, to the default section and the guaranty.
• Tie free rent to opening by an outside date, with rent commencement at the earlier of opening or a fixed date.
• Have your attorney review the work letter, default and guaranty language, and your CPA review the tax treatment.

Talk to us about your property

If you are weighing a TI request against free rent on a vacancy, we are glad to run the numbers with you and talk through what the suite needs. You can read more about how we work with owners on our landlord representation page, or call Parker & Associates at (425) 233-0769 or email leasing@digitalre.com.