TI Costs - New

Definition of TI Costs - New

TI Costs - New (Tenant Improvement Costs for new leases) refers to the specific capital expenditures required to customize, build out, or renovate a commercial space for a first-time occupant or a new tenant moving into a vacant unit. In commercial mortgage underwriting, these costs represent the financial commitment a landlord must make to prepare a "shell" or "second-generation" space to meet the functional requirements of a new lease agreement.

Detailed Description

In the context of commercial real estate finance, "TI Costs - New" are distinguished from "Renewal TIs," which are smaller concessions given to existing tenants to stay in place. Because new tenants often require significant changes to the floor plan, electrical systems, plumbing, and finishes, these costs are a primary factor in determining the net effective rent and the overall feasibility of a loan.

Lenders and investors view New TI Costs through several lenses:

• Loan-to-Cost (LTC) Considerations: Lenders factor these costs into the total project budget. For a property that is not yet fully stabilized, the mortgage may include a "TI/LC Facility" or reserve to fund these specific improvements as the building is leased up.
• Tenant Improvement Allowance (TIA): This is the most common structure, where the landlord provides a fixed dollar amount per square foot (e.g., $50/SF) to the tenant. If the build-out exceeds this amount, the tenant pays the difference, protecting the lender and landlord from cost overruns.
• Turnkey Build-Outs: In some cases, the landlord agrees to deliver the space completely finished to the tenant's specifications. This represents a higher risk for the mortgage provider because the landlord is responsible for all construction management and potential price spikes in materials or labor.
• Value Creation: While TI costs are an upfront expense, they are viewed as value-add investments. A high-quality build-out can justify a higher rental rate and attract credit-worthy tenants, which increases the property's Net Operating Income (NOI) and its eventual appraised value.

Lenders typically require a detailed breakdown of these costs before releasing funds from a reserve escrow. These requirements often include copies of executed lease agreements, lien waivers from contractors, and certificates of occupancy. By monitoring "TI Costs - New," lenders ensure that the capital is being used specifically to enhance the collateral and secure the long-term cash flow necessary to service the debt.

The magnitude of these costs depends heavily on the asset class. For example, medical office or laboratory spaces typically command much higher New TI Costs than standard "plug-and-play" office suites or warehouse shells due to the complexity of the specialized infrastructure required.