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A tenant improvement (TI) is an improvement that a landlord/property owner makes to a property to suit the needs of a new tenant. A leasing commission (LC) is a percentage based commission that a leasing agent receives when they successfully close a deal between a landlord and a tenant.
Tenant improvements can include wall coverings, fire safety equipment, updating security systems, partitions, and HVAC systems, among many other building elements. Tenant improvements are most common for commercial properties, and are extremely rare in multifamily real estate. Not all tenant improvements are paid for by the landlord; instead, they are typically negotiated and split between the tenant and the landlord. In many cases, a landlord will allot a tenant improvement allowance and, much like a loan, will allow the tenant to repay the allowance over the life of their lease. In some situations, the landlord will pay the tenant’s contractor to complete the work, while larger landlords may hire a contractor to do the work themselves, and require that the tenant pay only if the cost of the work has exceeded a specific amount.
In some cases, a lender may require a certain portion of a commercial real estate loan to be reserved for potential tenant improvements. This is referred to as a holdback, and it protects the borrower from not having enough funds to improve the property, while simultaneously protecting the lender by reducing the chance of a loan default.
Leasing commissions are typically set at a certain amount of the overall cost of the lease, for as many years as the lease is set to continue. For instance, a five-year lease for 5,000 square feet at $30/sq. ft./year has an overall value of $750,000 (5,000 sq. ft. * $30/sq. ft./year * 5). If the leasing commission is set at 5%, the landlord/owner will pay about $37,500 in leasing commissions.