The direct answer
Tenant improvement allowances and free-rent periods are lease concessions that reduce a tenant’s effective occupancy cost or help fund build-out. They should be modeled across the lease term rather than ignored because they do not always appear in the face rental rate.
Separate face rent from concessions
Face rent can overstate the economic rent when the tenant receives free months, landlord-funded improvements or other incentives. Track each concession explicitly.
To apply the approach to an editable scenario, use the Commercial Rent Calculator. For the neighboring question, explore NNN Lease Calculator.
Match TI treatment to the lease economics
A landlord-paid TI allowance is a capital outlay and may be tied to reimbursement rules, construction scope or amortization. It is not the same as simply reducing monthly rent.
Calculate effective rent over a defined term
Spread rent and concessions over the same analysis period, while keeping the timing of cash flows visible for DCF analysis.
Worked example
A five-year lease at $30 per square foot with six months of free rent and a $40 per square foot TI allowance can have a materially lower economic return to the landlord than the $30 face rate suggests.
Common mistakes and limitations
Do not compare leases only by face rent when concession packages differ materially.
Lease definitions of rentable area, CAM, exclusions, caps and reconciliations vary by contract.
Frequently asked questions
Does free rent reduce the stated lease rate?
Usually the contractual face rate can remain unchanged while effective rent is lower because of the concession.
Is a TI allowance the same as free rent?
No. TI generally funds improvements, while free rent waives or reduces rent for specified periods.
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.
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