The direct answer
Free rent and tenant improvement (TI) allowance are different concessions in a commercial lease. Free rent reduces cash collections during the concession period; a TI allowance funds agreed improvements. Compare their economic cost by present value, timing, tenant obligations and the quality of improvements retained by the property.
Calculate rent forgone
Multiply abated rent by relevant months, distinguishing base rent from expense reimbursements where the lease does not abate both.
To apply the approach to an editable scenario, use the Commercial Rent Calculator. For the neighboring question, explore NNN Lease Calculator.
Track TI funding and ownership
A landlord TI allowance may require upfront cash, reimbursements after construction or amortization into rent. Improvement value and tax treatment can vary.
Discount differing cash-flow timing
Two packages with identical nominal dollars can have different present values when money is advanced today versus rent waived later.
Worked example
On a $20,000 monthly base-rent lease, three months free costs $60,000 in nominal foregone rent. A $60,000 TI allowance has the same headline dollars but potentially different payment timing and residual property benefit.
Common mistakes and limitations
Do not compare concessions on nominal dollars alone or count TI cost twice in both initial cash and NOI.
Lease definitions of rentable area, CAM, exclusions, caps and reconciliations vary by contract.
Frequently asked questions
Is free rent a cash expense?
It is foregone revenue, unlike a directly funded TI allowance.
Which concession is better for a tenant?
It depends on fit-out needs, liquidity and lease terms.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
- Appraisal Institute — Basic Formulas — Income CapitalizationIncome/cap-rate/value relationships, gross income multiplier and debt-coverage formula references.
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