Tenant Improvement Allowance Explained for Utah Tenants

Most commercial space does not fit your business the day you tour it. Walls need to move, offices need to be built, a warehouse needs a break room or a better electrical panel. The money and the rules for that work usually come down to one line in your lease: the tenant improvement allowance, or TI allowance.

Here is how a TI allowance works and how it changes what your lease really costs.

This is general information, not legal or tax advice. Have a Utah attorney and CPA review your lease and any tax questions before you sign.

What a TI allowance is

A TI allowance is money the landlord agrees to put toward building out your space. It is usually quoted per square foot of the space you lease, so the total grows with the size of the suite. It is a one-time amount, separate from rent.

Investopedia describes leasehold improvements, also called tenant improvements or build-outs, as changes that customize a rental space for a specific tenant, and notes they generally belong to the landlord when the lease ends unless the lease says otherwise. You are improving a building you do not own.

Turnkey vs. allowance vs. as-is

Landlords usually handle build-out one of three ways.

Approach	What it means	Who carries cost overruns
Turnkey	The landlord builds the space to an agreed plan and hands you the keys	Usually the landlord, within the agreed plan
Allowance	The landlord contributes a set amount; you or the landlord manage the work	Usually you, for anything above the allowance
As-is	You take the space in its current condition, with no build-out money	You

With turnkey, anything not on the plan and finish list attached to the lease may be extra. An allowance gives you more control, and more risk. As-is space can work if it already fits, and may come with other concessions, such as free rent.

What it usually covers, and what it often does not

Read the lease definition, not the headline number. Many allowances cover hard costs (the physical construction) and a capped share of soft costs (design, engineering, permit fees, project management).

Items that are commonly excluded or capped:

Furniture and equipment. Desks, racking and machinery are usually yours.
Data and phone cabling. Often the tenant's cost, or capped.
Signage. Often excluded, and it needs its own city sign permit.
Moving costs and anything you will take with you at move-out.

If an item matters, get it named in the lease as an allowed use.

How the money is paid

A TI allowance is rarely a check up front. Most landlords pay it as a reimbursement against invoices, at completion or in stages.

Landlords also want lien waivers, proof that the people who did the work were paid, so nobody files a lien on the building. Under Utah Code Section 38-1a-802, a contractor's or supplier's waiver of lien rights is enforceable only if it is signed and the claimant actually receives the payment it covers. Expect to deliver signed waivers from your general contractor and major subcontractors with each draw request.

Watch for these points in the payment clause:

Deadlines. Many leases say unused allowance is lost if not requested by a set date. Ask for enough time to finish and gather paperwork.
Unused money. Ask whether leftover allowance can be applied to rent.
Retainage and final payment. The last payment may wait for a certificate of occupancy, final lien waivers and as-built drawings.
Your cash flow. If you pay the contractor first, you carry that gap until reimbursed.

Amortized above-standard TI

If your build-out costs more than the allowance, you can pay the difference yourself or ask the landlord to fund the extra and add it to rent over the lease term with interest. This is often called amortized or above-standard TI.

Example: A hypothetical company leases 10,000 square feet for five years. The allowance is $300,000 and the build-out is priced at $400,000, leaving a $100,000 gap. If the landlord funds that gap and amortizes it over 60 months at 8% interest, rent goes up by about $2,028 a month. Over the term that adds about $121,700, or roughly $21,700 more than paying the gap up front. The numbers only illustrate the math.

Amortized TI protects your cash today, but it costs more over time, and the unpaid balance is usually due if you default.

Who manages construction

When the landlord manages the project, check whether it charges a construction management fee and whether that fee comes out of your allowance. When you manage it, you pick the architect and contractor, but the landlord usually still approves plans, contractors and insurance. Either way, the lease should say what happens if construction delays your rent start date.

Permits and building code in Utah

Build-out work needs permits from the city or county where the space sits. Utah applies a statewide construction code. Utah Code Section 15A-2-103 adopts the International Building Code by reference, with state and local amendments, as the standard for construction, alteration, remodeling and repair.

A change in use or a larger remodel can trigger added exits, restrooms, fire sprinklers or ventilation. Before you sign, find out who pays for required code upgrades and whether they count against your allowance.

ADA obligations during build-out

If your space is open to the public, the Americans with Disabilities Act applies to both you and the landlord. The Department of Justice's Title III Technical Assistance Manual explains that a lease can split ADA duties between landlord and tenant, but that split only works between the two of you, and both sides remain responsible for compliance.

Alterations bring an added rule. When you alter a primary function area, such as offices or a sales floor, the route to that area and the restrooms serving it generally must also be made accessible. Under 28 CFR 36.403, that path-of-travel work is treated as disproportionate when it exceeds 20% of the cost of the alteration to the primary function area. Your architect should flag this early, and your lease should say whose budget pays for it.

A quick note on taxes

Tax treatment depends on who owns the improvements and how the lease is written. One narrow federal rule, 26 U.S.C. Section 110, lets a tenant exclude certain construction allowances from income, but only for retail space under a lease of 15 years or less, and only up to the amount actually spent on qualifying improvements that revert to the landlord. This is not tax advice; ask your CPA.

How TI changes the real cost of a lease

Two spaces with the same asking rent can cost very different amounts once build-out is counted. A bigger allowance can be worth more than a lower rate, or less, depending on your build-out cost and how long you stay. Our compare two sites worksheet has a field for the landlord's TI allowance, alongside rent, operating costs, free rent and your own build-out cost, so you can see the full picture side by side.

If you are still at the proposal stage, our post on going from letter of intent to signed lease covers where TI terms first get negotiated. You can also start at the Utah Site Selection home page.

This article is general information, not legal or tax advice. Have a Utah attorney and CPA review your lease before you sign.

Start your Utah site search

If you are weighing build-out terms or comparing two spaces with different allowances, we can help you price them side by side before you commit. Call or text 801-664-3370 to talk with Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.

Sources

Spot something wrong or out of date? Email stockton@teamutahcre.com or call 801-664-3370 and we'll correct it.

General education only, not legal, tax, investment or appraisal advice. Information is believed reliable but not guaranteed. This article was drafted with the help of AI from the sources listed. Published by Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.