TI money can make a building work for your business, but only if the amount, the scope, the payout rules and the overrun plan are settled before you sign.
A tenant improvement allowance is a fixed sum, usually quoted per square foot, that a landlord contributes toward building out your leased space. On industrial leases it typically pays for office, lighting, electrical and dock work. The landlord releases it against paid invoices and lien waivers, and you cover anything above it unless the lease says otherwise.
Key takeaways
- A tenant improvement allowance (TI) is a capped landlord contribution. On a turnkey deal, the landlord delivers agreed work and carries the overrun risk for that scope.
- Industrial TI usually covers office build-out, lighting, electrical, dock and floor work. It does not cover furniture, trade fixtures or equipment you take with you.
- CompStak’s August 2026 industrial report put average landlord work value at about $4.65 per square foot in major U.S. markets, and about $3.15 for REIT-owned portfolios.
- In California, landlords usually pay the allowance against invoices and statutory lien waivers, and your project can trigger code work such as accessibility upgrades.
- Settle the overrun plan, the deadline to use the money and restoration duties in the letter of intent, not after the lease is drafted.
What is a tenant improvement allowance?
It is the landlord’s contribution toward improving your space, quoted per square foot. At $4.00 per square foot, a 30,000-square-foot building carries a $120,000 allowance.
Landlords fund TI because improvements help lease the building and usually stay with it. Link Logistics, a large U.S. industrial landlord, says the landlord typically funds the allowance, keeps ownership of the finished work and recovers the cost through rent. That is why TI, rent and lease term are negotiated together. For how rent is quoted, see how industrial rent is quoted in California.
The details sit in a work letter attached to the lease. AIR CRE, whose forms many California industrial deals use, publishes a standard Work Letter addendum.
What does TI pay for in an industrial building?
Industrial build-outs are lighter than office or retail work, but the line items add up. Link Logistics lists office construction, dock door changes, concrete floor upgrades, electrical capacity, racking infrastructure, fire suppression and EV or fleet charging as typical items. Furniture, trade fixtures, removable equipment and signage are usually excluded.
- Office and restroom build-out or refresh for a distribution or service tenant
- LED high-bay lighting and controls, which must meet California’s Title 24 energy code when permitted
- Electrical service upgrades, panels and distribution for production equipment or EV fleets (see power for industrial users)
- Dock levelers, seals and new dock or grade-level doors
- Floor repair and sealing, striping, yard paving or fencing
- Fire sprinkler changes tied to the tenant’s storage plan
Specialized improvements are a separate conversation. An ag cold-storage user in Delano, Kern County, for example, often pays for its insulated rooms and refrigeration itself, because that work is specific to the business and costly to remove.
Turnkey, allowance or as-is: which structure is best?
It depends on how well defined your scope is and who should carry the cost risk. On a turnkey deal, attach drawings and a specification list, or expect a dispute over what was included.
| Structure | How it works | Who carries overrun risk | Best fit |
|---|---|---|---|
| Turnkey | Landlord builds agreed plans and delivers the space complete | Landlord, for the agreed scope | Simple, well-defined scopes; tenants who do not want to manage construction |
| TI allowance | Landlord pays up to a fixed amount; tenant or landlord manages the work | Tenant, above the allowance | Tenants who want control of design, contractor and schedule |
| Landlord work plus allowance | Landlord completes base items such as roof, HVAC or docks, then funds a smaller allowance | Split by item | Second-generation buildings that need repairs plus tenant-specific work |
| As-is with a rent concession | No construction money; free or reduced rent instead | Tenant | Users who need little work or want to control cash timing |
For the rent-credit alternative, see free rent, concessions and net effective rent.
How much TI can you expect on industrial space?
Less than office tenants, as a rule, because warehouse build-outs are lighter. CompStak’s August 2026 review of industrial leases in major U.S. markets found landlords averaging about 2.6 months of free rent and $4.65 per square foot in work value. REIT-owned portfolios averaged 2.4 months and $3.15 per square foot. These are national figures from big markets, not Bakersfield or Kern County data.
Concessions have been growing. A national brokerage’s 2026 industrial outlook noted that many landlords are offering larger allowances and longer free-rent periods to encourage early renewals. In Bakersfield, a regional brokerage reported 9.55% industrial vacancy in Q2 2026, and logistics buildings faced more pricing pressure than specialized and flex space. A well-qualified tenant has room to ask.
Four things move the number: term length, your credit, how long the space has been vacant and whether the work will help the landlord re-lease the building.
How is a TI allowance actually paid out?
Rarely as a check at lease signing. Most work letters pay contractors directly as the job progresses or reimburse the tenant after completion. Either way, the landlord wants proof the work is finished and paid for, so it does not inherit a mechanics lien. Expect to deliver:
- Paid invoices from the general contractor and major subcontractors
- California statutory lien waivers, conditional and unconditional, on progress and final payments (Civil Code sections 8132 to 8138), in substantially the statutory form
- Final permit sign-off from the City of Bakersfield or Kern County building department, and a certificate of occupancy where required
- As-built drawings and a recorded notice of completion, if the work letter calls for them
Notice before work starts
Under Civil Code section 8444, an owner can record a notice of nonresponsibility within 10 days of learning of the work. That protection may not be available to a landlord that requires or funds the tenant’s work, so landlords who pay TI usually rely on lien waivers and bonds instead. AIR CRE’s 2017 multi-tenant net lease form asks for 10 days’ notice before work starts. It also lets the landlord require a lien and completion bond of 150% of estimated cost before approving alterations.
Deadlines and leftover money
Most work letters set a deadline to use the allowance. If the letter is silent or says the balance is forfeited, you lose it. Ask for the right to apply unused allowance to rent or moving costs, up to a stated cap.
What happens if the build-out costs more than the allowance?
You pay the difference. You can pay cash as the work proceeds or, if the landlord agrees, borrow it through an additional allowance repaid as extra rent. That repayment is a loan in substance, so negotiate the interest rate and what happens to the unpaid balance if you leave early.
Watch the soft costs too. Design, engineering, permit fees and a landlord supervision fee can all come out of the allowance unless the work letter says otherwise.
Which California rules can push a TI budget over?
Three come up most often on industrial projects in Kern County.
- Accessibility path of travel. When you alter a primary function area, California Building Code Section 11B-202.4 requires upgrades to the accessible path of travel serving it. The priority order starts with the entrance, the route to the altered area and restrooms. The Division of the State Architect set the 2026 valuation threshold at $209,208 for projects submitted after Jan. 19, 2026. When adjusted construction cost is at or below the threshold, path-of-travel spending is generally capped at 20% of construction cost. The code defines “adjusted construction cost” narrowly and the threshold resets each January, so an architect or Certified Access Specialist typically scopes it early. A related read: CASp inspections in a commercial lease.
- Title 24 energy code. Permit applications filed on or after Jan. 1, 2026 must meet the 2025 California Energy Code, which affects lighting, controls and HVAC work.
- Fire and life safety. Storage heights and commodities can trigger sprinkler and high-piled storage requirements that cost far more than an office refresh. See ESFR sprinklers and high-piled storage permits.
Separate existing conditions from your work
Ask the landlord to warrant the building’s code compliance at delivery and to pay for problems that existed before your work. AIR CRE’s 2017 multi-tenant net form includes a compliance warranty with a notice deadline of six months after the start date. Miss that window and the cost can shift to you.
Who owns the improvements, and do you have to remove them?
Under the AIR CRE forms, alterations a tenant makes become the landlord’s property at lease end, unless the landlord gives notice before expiration requiring their removal. If you are building a large office, a cold room or heavy electrical, decide at the letter-of-intent stage which improvements stay and which come out. Restoration bills can surprise tenants at move-out.
Ownership also drives taxes. The income exclusion for construction allowances in Internal Revenue Code Section 110 applies only to retail space, as the Journal of Accountancy explained in 2014. For industrial tenants, who owns the improvements is the question to settle before signing. This article does not cover depreciation or bonus rules.
How do you negotiate a better TI package?
- Price your scope with a contractor before the letter of intent is final.
- Keep landlord repairs to roof, HVAC and docks separate from your allowance.
- Ask for progress draws rather than one reimbursement after completion.
- Cap the supervision fee if you manage the work.
- Let unused TI convert to a rent credit, and settle restoration obligations up front.
- Trade term for TI. An extra year or two often funds more improvements.
A tenant rep broker can run these numbers, and the full process is laid out in how to lease industrial space.
Example: a 30,000 SF Bakersfield warehouse with an office refresh
A regional parts distributor leases a 30,000-square-foot Bakersfield building for five years. It needs a 2,500-square-foot office refresh, LED lighting, two new dock levelers and electrical work. The contractor estimates $175,000. Because that is under the 2026 valuation threshold, the architect budgets up to 20%, or $35,000, for path-of-travel upgrades. The landlord offers $4.00 per square foot. All figures are illustrative assumptions, not market data.
The gap is $90,000. In Option 1 the tenant pays it in cash during construction. In Option 2 the landlord funds the extra and amortizes it into rent over 60 months at 8%. That adds $1,824.88 a month (about $0.061 per square foot) and roughly $19,493 of interest over the term.
Option 2 protects cash but costs more, and the unamortized balance is usually due if the tenant leaves early. Running both scenarios before the letter of intent makes it easier to ask for a larger allowance or more free rent instead.
| Item | Amount |
|---|---|
| Contractor estimate | $175,000 |
| Path-of-travel contingency (up to 20%) | $35,000 |
| Total project budget | $210,000 |
| TI allowance ($4.00 x 30,000 SF) | $120,000 |
| Tenant’s share | $90,000 |
| Option 2 monthly repayment (60 months at 8%) | $1,824.88 |
| Option 2 total interest over the term | $19,493 |
Frequently asked questions
Is a TI allowance paid to the tenant in cash?
Usually not up front. Most work letters pay the contractor directly as work progresses or reimburse the tenant afterward. The landlord wants paid invoices, lien waivers and final permit sign-off first. Leftover money can go toward rent only if the work letter says so.
Can unused TI allowance be applied to rent?
Only if you negotiate it. Many work letters treat the unused balance as forfeited after a deadline. Tenants often ask for a rent credit or reimbursement of moving, cabling, signage or security costs, usually with a cap. Raise it in the letter of intent so it carries into the lease.
Does a TI project trigger accessibility upgrades in California?
It can. Altering a primary function area brings in the accessible path of travel to that area, including the entrance, the route and restrooms. For 2026, spending is generally capped at 20% of construction cost when adjusted construction cost falls at or below $209,208. An architect or CASp typically scopes it before the job is priced.
Who owns tenant improvements when the lease ends?
It depends on the lease. Under the AIR CRE forms, alterations usually become the landlord’s property unless the landlord requires removal by notice. Agree up front which items can stay, since restoring offices, cold rooms or heavy electrical can be expensive.
Is a tenant improvement allowance taxable?
Sometimes. Section 110 of the Internal Revenue Code excludes qualifying allowances only for retail space on leases of 15 years or less. For industrial tenants the answer generally turns on who owns the improvements. Allowance money spent on landlord-owned work is generally not tenant income, while money spent on tenant-owned work generally is. Review it with your CPA before signing.
Planning a build-out in a Bakersfield or Kern County industrial building? Kern CRE can help you price the scope, structure the TI request and keep the work letter in line with your budget. Call Kern CRE at 855-KERN-CRE (855-537-6273) or contact us. Get Kern County CRE news monthly: subscribe to the Kern CRE report.
Sources
- What Is a Tenant Improvement Allowance? A Guide to Who Pays for Warehouse Buildouts, Link Logistics, June 2026.
- 2026 Industrial Gateway Market Overview: Rents, Concessions, and the Lease Expiration Wall, CompStak, August 2026.
- U.S. Real Estate Market Outlook 2026: Industrial, CBRE, 2026.
- Bakersfield, CA Industrial Market Report Q2 2026, Lee & Associates, July 2026.
- Valuation Threshold Update for 2026, California Division of the State Architect, January 2026.
- Path of Travel 20 Percent Rule: California’s Hidden Cost Trigger, CASp California, undated.
- 2025 Building Energy Efficiency Standards, California Energy Commission, effective Jan. 1, 2026.
- California Construction Payments: The What and Why of Conditional Waivers & Releases, Liebert Cassidy Whitmore, January 2023.
- California Civil Code section 8444, FindLaw, current as of 2026.
- Standard Industrial/Commercial Multi-Tenant Lease – Net (form MTN-26.10), AIR CRE, revised Nov. 1, 2017.
- AIR CRE Commercial Real Estate Contracts List, AIR CRE, undated.
- Qualified lessee construction allowances, Journal of Accountancy, October 2014.
About this article
Kern CRE prepared this article with help from AI research and writing tools. An editor reviewed the draft, checked its facts against the sources linked above and edited it for accuracy and clarity. It is general information, not legal, tax, investment or financial advice; talk with a qualified professional about your situation.