Tenant improvement allowance: check the work letter before budgeting

A tenant improvement allowance is a landlord contribution toward qualifying improvements under the lease and work letter. The headline amount does not tell you when cash becomes available, which expenses qualify, or what must happen before payment. Review the amount, eligibility, timing, and conditions together.

The American Bar Association's office lease drafting discussion identifies allowance funding and submission deadlines as separate drafting concerns. The worksheet below is an original budgeting exercise, not a statement of market-standard terms.

Calculate the allowance before comparing offers

Illustrative example: 2,400 square feet multiplied by a $50 per square foot allowance produces a $120,000 ceiling. A $165,000 construction budget would leave a $45,000 gap if every dollar qualified and the full allowance were paid.

Those assumptions need testing. If only $105,000 of the budget qualifies and unused allowance cannot be redirected, the contribution may be limited to $105,000, leaving $60,000 for the tenant. Check the eligible area and whether fees, design, equipment, permits, and moving expenses are included or excluded.

Label every budget line as eligible, ineligible, or unresolved. Ask for clarification on unresolved items before treating the ceiling as cash available to spend.

Build a cash schedule, not just a project total

A reimbursement after completion requires different working capital from progress payments during construction. Put expected contractor payments and allowance receipts on separate dated lines.

For example, $70,000 due to contractors before the first expected reimbursement creates a $70,000 interim funding need, even if the final tenant contribution is much lower. Test a delayed-payment scenario as well as the planned schedule. These are planning assumptions; the contract and actual project invoices determine obligations.

Review the work letter in six passes

• Scope: who designs, approves, performs, and pays for each item?
• Eligible costs: what categories qualify and what evidence is required?
• Payment: progress draws or completion reimbursement; recipient; review period.
• Conditions: approvals, inspections, lien documentation, insurance, and default-related provisions.
• Deadlines: completion, request submission, supporting documents, and any extension process.
• Changes: change-order approval, overruns, delays, and treatment of unused funds.

Quote the exact requirements beside the project task they affect. “Submit closeout package” is too vague for an operating checklist; identify each required document and the person who will obtain it.

Compare the work letter with the LOI and lease body

Look for inconsistent allowance rates, area figures, completion conditions, and payment deadlines. A rent-commencement provision in the lease body may interact with the construction sequence in an exhibit. Have the responsible professionals reconcile those provisions before finalizing the budget.

Use the LOI comparison worksheet to record a difference without assuming why it happened. Ask counsel to evaluate remedies for nonpayment; do not assume reimbursement can simply be deducted from rent.

Questions to bring to the project meeting

Can the tenant fund the first draw before reimbursement? Who confirms that the space is delivered in the required condition? Which approvals can affect the schedule? What happens to the allowance if completion or paperwork is late? Who retains proof that the request was delivered?

Record answers in the project budget and lease abstract. Then use the commencement and free-rent guide to check how construction timing affects occupancy costs.