What follows are our general observations and opinions about tenant improvement allowances as they are negotiated in Los Angeles commercial leases. This is not legal advice, it is not a definitive statement of California law, and every deal depends on its own facts.
A tenant improvement allowance is the landlord’s contribution toward building out your space, and the number quoted in the letter of intent is almost never the number you end up with. In our experience the two questions that decide whether a TI package is actually worth what it appears to be worth are how the money reaches you and what happens to it if the lease ends early.
The short version: an allowance stated as a lump sum per square foot is usually reimbursed rather than advanced, meaning you fund the construction and get paid back on conditions; and where the landlord has amortized part of the allowance into the rent, leaving early can trigger a clawback that is considerably larger than most tenants expect. Both of those live in the work letter and the default provisions, not in the headline number.
Allowance, turnkey, or amortized — they are not the same deal
Three structures show up repeatedly in the Los Angeles market, and they allocate risk very differently.
- A straight allowance. A dollar figure per rentable square foot that you draw against. You carry the construction risk and any cost above the allowance.
- Turnkey. The landlord delivers the space built to an agreed plan. Cleaner for the tenant, but the plan and the specification level become the whole negotiation, and change orders are where it unravels.
- Amortized TI. The landlord funds an additional sum and recovers it through the rent over the term, usually with interest. This is a loan with a lease wrapped around it, and it should be evaluated as one.
A great many deals mix these. It is common to see a base allowance plus additional amortized dollars, and in our view the amortized portion is the part that most often gets agreed to without anyone calculating the effective interest rate.
Reimbursement conditions are where the money actually sits
Where an allowance is reimbursed rather than advanced, the tenant funds the work first and submits for payment. That is manageable if you have planned for it and painful if you have not, particularly for a small business that budgeted the allowance as though it were cash at signing.
The conditions attached to the draw request deserve a careful read. We routinely see requirements for unconditional lien releases from the general contractor and every subcontractor, a recorded notice of completion, a certificate of occupancy, evidence of payment for all work, final approved plans, and — in the more aggressive drafts — that the tenant not be in default under any provision of the lease at the time of the request. That last one is worth pausing on. In our experience an unrelated technical default, of the kind that would otherwise be cured quietly, can become the reason a six-figure reimbursement is withheld.
Two things we generally push for: a clear outside date by which the landlord must fund after a complete request, and a stated remedy if it does not fund — most usefully, the right to offset against rent. Without a remedy, the obligation is real but slow, and a tenant who has already paid the contractor is in a poor position to wait.
What happens if you leave early
This is the provision that surprises people. Where the allowance was amortized into the rent, the lease will usually provide that on a default and termination the unamortized balance accelerates and becomes immediately due, on top of the landlord’s other damages. Two years into a ten-year term, the unamortized balance on a substantial build-out can dwarf everything else in the claim.
The same mechanic often appears in a termination-option provision. A right to terminate at year five sounds valuable until you read that exercising it requires repaying unamortized TI plus unamortized leasing commissions plus unamortized free rent, sometimes with a termination fee stacked on top. We are not suggesting those provisions are unreasonable — the landlord did spend the money — only that the option should be priced with the repayment obligation included rather than treated as an escape hatch.
Where a personal guarantee sits behind the lease, this matters more again, because the clawback flows through to the guarantor. If you have signed one, it is worth understanding how the two provisions interact before you build out.
Terms we generally try to change
Every deal has its own leverage, and market conditions in a given LA submarket drive a lot of it. That said, the items we most often raise are: a defined funding deadline with an offset remedy; removing “no default under any provision” as a condition to funding, or at least limiting it to uncured monetary defaults; making clear which soft costs — architectural, permitting, project management — are allowance-eligible, since permit timelines in the City of Los Angeles can be long and the associated costs are not trivial; and confirming what happens to unused allowance, which many drafts simply let the landlord keep.
We would also ask early who is responsible if the space cannot be delivered on time, and whether the improvements are yours or the landlord’s at the end of the term. A restoration obligation requiring you to remove the build-out you paid for is a real cost that belongs in the analysis at the start rather than in year ten.
Before you sign the work letter
The work letter is frequently treated as an exhibit that the broker and the contractor will sort out. In our experience it carries as much money as the rent schedule does, and it is easier to negotiate before the lease is signed than to interpret afterward.
If you are working through a TI package on a Los Angeles space, we are happy to read the lease and the work letter together and tell you where the money is genuinely at risk. Call us at (310) 556-9692. Commercial lease review is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we begin.
Related reading: our commercial lease negotiation resources, plus why a lease review before signing matters, personal guarantees in commercial leases, and who pays for HVAC and roof repairs.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If you are negotiating a tenant improvement package, please speak with a lawyer about your particular deal.
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