How Do I Finance a Buildout: TI Loan vs Landlord vs Cash?

Curated by Kory White · Fractional CRO, CRO Syndicate

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📅 Published Jun 21, 2026 · Updated Jun 21, 2026

Don’t get screwed.</text><text x="58" y="258" font-family="Arial,Helvetica,sans-serif" font-size="30" font-weight="600" fill="#6b5b4d">Leases, TI, NNN & buildouts — negotiated in your favor</text><g transform="translate(1010,86)" fill="none" stroke="#C0531F" stroke-width="9" stroke-linejoin="round"><rect x="20" y="40" width="150" height="130"/><line x1="20" y1="40" x2="95" y2="6"/><line x1="170" y1="40" x2="95" y2="6"/><rect x="50" y="80" width="36" height="36"/><rect x="104" y="80" width="36" height="36"/><rect x="74" y="128" width="42" height="42"/></g></svg>

How Do I Finance a Buildout: TI Loan vs Landlord vs Cash?

Direct Answer

You have three ways to pay for a buildout, and they rank by cost in a clear order: landlord-funded TI allowance is the cheapest capital (often "free" in headline terms but repaid through rent), a TI loan or SBA loan is the middle option, and cash is the most expensive once you account for opportunity cost — even though it carries no interest line.

The money move: take the largest landlord TI allowance you can negotiate first, finance the gap with the cheapest debt available, and preserve your cash for working capital.

Here's why cash is deceptively expensive. If your business earns a 20% to 30% return on capital, every $100,000 you sink into drywall and HVAC is $20,000 to $30,000/year of foregone profit. Financing that same $100,000 at 8% to 10% costs $8,000 to $10,000/year.

You come out ahead by two to three times keeping cash in the business and borrowing for the buildout. Cash only wins when you have no productive use for it or can't get reasonable financing.

The landlord option is subtle. A TI (tenant improvement) allowance of, say, $40 to $80 per square foot looks free, but the landlord recovers it by amortizing it into your rent — typically at 8% to 10% interest over the lease term. So "$50/sq ft of TI" on a 5-year lease at 8% adds roughly $12 to $13/sq ft/year to your effective rent.

It's debt wearing a costume. The advantage: it's off your balance sheet, requires no separate loan approval, and the landlord — who keeps the asset — has every reason to fund it.

A TI loan or SBA 7(a) sits in the middle: real interest (~9% to 10.5% on a 7(a), often lower on a bank TI loan), real underwriting, but you keep the improvements as a depreciable asset (QIP) and your rent stays lower. On a $300,000 buildout, the tradeoff is roughly: landlord-amortized TI adds ~$36,000/year to rent over 7 years; a 7(a) at 10% over 10 years runs ~$48,000/year in payments but builds equity and leaves you a 15-year tax deduction.

The Three Options Ranked by True Cost

flowchart TD A[How to fund the buildout?] --> B[Landlord TI allowance] A --> C[TI loan / SBA 7a] A --> D[Cash out of pocket] B --> B1[Repaid via rent at 8-10%] B --> B2[Off balance sheet, easy approval] C --> C1[Interest 9-10.5%, real underwriting] C --> C2[You own QIP, depreciate 15 yrs] D --> D1[No interest line] D --> D2[Opportunity cost 20-30% of capital] B1 --> E[Cheapest headline, landlord keeps asset] C1 --> F[Middle cost, builds your asset + tax deduction] D2 --> G[Most expensive in true terms]

Option 1 — Landlord TI allowance. The landlord pays for some or all of the buildout in exchange for your signed lease. Standard ranges: $15–$40/sq ft for second-generation/light retail, $40–$80/sq ft for office, $80–$150+/sq ft for restaurants and medical. It's cheapest because it requires no loan and the landlord prices the recovery into rent at a reasonable rate.

The catch: the landlord owns the improvements and depreciates them, and you don't get the tax deduction.

Option 2 — TI loan or SBA financing. A bank TI loan or SBA 7(a) (the right SBA tool for leased-space improvements) funds the buildout as debt you control. You own the improvements as Qualified Improvement Property — 15-year, bonus-eligible — so you capture the depreciation deduction the landlord would otherwise get.

Costs more in cash flow than landlord TI but keeps the tax benefit and keeps base rent lower.

Option 3 — Cash. Zero interest, instant, no underwriting. But the opportunity cost is the highest of the three for any business that can deploy capital productively. Reserve cash for the gap that financing won't cover, or for situations where speed matters more than cost.

The Smart Stack: Combine All Three

The best-run buildouts don't pick one — they layer.

Negotiate the maximum landlord TI first. Every dollar the landlord funds is a dollar you don't borrow. Push hard; in a soft leasing market landlords will fund more to fill space.
Finance the overage with the cheapest debt. If your buildout is $80/sq ft and the landlord gives $50/sq ft, finance the $30/sq ft gap with a 7(a) or bank TI loan — and own that portion as your depreciable QIP.
Use cash only for what financing won't touch. Soft costs, FF&E, or a small final gap. Keep a working-capital cushion intact; running out of operating cash mid-buildout is the most common way new locations stall.

A worked example on a $80/sq ft, 4,000 sq ft buildout ($320,000 total): landlord funds $50/sq ft = $200,000; you finance $25/sq ft = $100,000 via 7(a) at 10% (~$16,000/year, deductible interest, plus QIP depreciation); you cash-fund the last $5/sq ft = $20,000 of soft costs.

Total out-of-pocket up front: $20,000 on a $320,000 buildout.

How to Negotiate a Bigger TI Allowance

The TI allowance is one of the most negotiable terms in a lease, and landlords expect to move on it.

Trade term for TI. Landlords amortize TI over the lease — a longer lease lets them offer more per square foot at the same recovery rate. Offer a 7- or 10-year term to unlock a bigger allowance.
Ask for "TI plus free rent." Stacking a construction/free-rent period (3–6 months) on top of the TI covers your ramp before revenue starts.
Get a "turnkey" build if you can. In a tenant-favorable market, push for the landlord to deliver the space finished to your spec, removing your construction risk entirely.
Cap your exposure with a "TI true-up." Negotiate that the landlord pays cost overruns up to a hard cap, or splits them — never sign an open-ended obligation to fund whatever the GC bills.

Reading the Real Cost of Landlord TI

flowchart LR A[Landlord funds $50/sq ft TI] --> B[Amortized into rent at 8%] B --> C[Over 5-yr lease term] C --> D[Adds ~$12-13/sq ft/yr to effective rent] D --> E[Compare vs base rent + your own loan payment] E --> F{Effective rent competitive?} F -- Yes --> G[Take the TI] F -- No --> H[Negotiate base rent down or self-fund + own QIP]

Always calculate effective rent, not base rent. A landlord offering $60/sq ft TI at $40/sq ft base rent may be more expensive than one offering $30/sq ft TI at $32/sq ft base rent once the TI amortization is folded in. Ask the landlord for the interest rate and term used to amortize the allowance — if they're charging 10%+, financing it yourself with an 8% bank loan and owning the QIP may be cheaper *and* gets you the tax deduction.

FAQ

Is a landlord TI allowance really free money? No. The landlord recovers it by amortizing it into your rent, typically at 8% to 10% over the lease term. It's effectively a loan baked into your lease.

It's still usually the cheapest option because the rate is reasonable, it's off your balance sheet, and approval is easy — but always calculate the effective rent including the TI recovery.

Should I pay cash for my buildout if I have it? Usually no, if your business earns a strong return on capital. Spending $100,000 cash costs you $20,000–$30,000/year in foregone profit at a 20–30% return, versus $8,000–$10,000/year to finance it at 8–10%. Keep cash for working capital and borrow the buildout — unless you have no productive use for the cash.

Who gets the tax deduction — me or the landlord? Whoever pays for and owns the improvements. If the landlord funds it via TI allowance, the landlord depreciates it. If you finance or cash-fund it, you own it as Qualified Improvement Property and take the 15-year, bonus-eligible depreciation.

The portion you fund out of pocket above the allowance is your deduction.

What's the right way to combine these? Stack them: negotiate the largest landlord TI allowance first, finance the gap with the cheapest debt (bank TI loan or SBA 7(a)), and use cash only for soft costs or a small final gap. That minimizes both up-front cash and total cost while keeping a working-capital cushion.

Sources

CBRE, "U.S. Tenant Improvement Cost Guide" (TI allowance benchmarks by property type)
JLL, office and retail leasing economics (effective rent and TI amortization)
U.S. Small Business Administration, 7(a) loan program (leasehold improvement financing)
IRS, Qualified Improvement Property and Section 168(k) bonus depreciation rules
IRS, treatment of construction allowances under qualified leases (Section 110)
RSMeans construction cost data (buildout cost per square foot)
Commercial lease negotiation guidance, NAIOP / BOMA tenant resources

Keep reading

<svg xmlns="http://www.w3.org/2000/svg" viewBox="0 0 1200 340" role="img" aria-label="How Do I Finance a Buildout: TI Loan vs Landlord vs Cash? — PULSE Buildouts"><rect width="1200" height="340" fill="#EBE9DE"/><rect width="14" height="340" fill="#C0531F"/><text x="58" y="116" font-family="Arial,Helvetica,sans-serif" font-size="32" font-weight="800" letter-spacing="3" fill="#C0531F">PULSE BUILDOUTS · COMMERCIAL REAL ESTATE</text><text x="56" y="198" font-family="Arial,Helvetica,sans-serif" font-size="60" font-weight="800" fill="#2b2b2b">Save money. Don’t get screwed.</text><text x="58" y="258" font-family="Arial,Helvetica,sans-serif" font-size="30" font-weight="600" fill="#6b5b4d">Leases, TI, NNN &amp; buildouts — negotiated in your favor</text><g transform="translate(1010,86)" fill="none" stroke="#C0531F" stroke-width="9" stroke-linejoin="round"><rect x="20" y="40" width="150" height="130"/><line x1="20" y1="40" x2="95" y2="6"/><line x1="170" y1="40" x2="95" y2="6"/><rect x="50" y="80" width="36" height="36"/><rect x="104" y="80" width="36" height="36"/><rect x="74" y="128" width="42" height="42"/></g></svg>

# How Do I Finance a Buildout: TI Loan vs Landlord vs Cash?

## Direct Answer

You have three ways to pay for a buildout, and they rank by cost in a clear order: **landlord-funded TI allowance is the cheapest capital** (often "free" in headline terms but repaid through rent), **a TI loan or SBA loan is the middle option**, and **cash is the most expensive** once you account for opportunity cost — even though it carries no interest line. The money move: **take the largest landlord TI allowance you can negotiate first, finance the gap with the cheapest debt available, and preserve your cash for working capital.**

Here's why cash is deceptively expensive. If your business earns a **20% to 30%** return on capital, every **$100,000** you sink into drywall and HVAC is **$20,000 to $30,000/year** of foregone profit. Financing that same $100,000 at **8% to 10%** costs **$8,000 to $10,000/year**. You come out ahead by **two to three times** keeping cash in the business and borrowing for the buildout. Cash only wins when you have no productive use for it or can't get reasonable financing.

The landlord option is subtle. A **TI (tenant improvement) allowance** of, say, **$40 to $80 per square foot** looks free, but the landlord recovers it by **amortizing it into your rent** — typically at **8% to 10% interest** over the lease term. So **"$50/sq ft of TI" on a 5-year lease at 8%** adds roughly **$12 to $13/sq ft/year** to your effective rent. It's debt wearing a costume. The advantage: it's **off your balance sheet**, requires no separate loan approval, and the landlord — who keeps the asset — has every reason to fund it.

A **TI loan or SBA 7(a)** sits in the middle: real interest (**~9% to 10.5%** on a 7(a), often lower on a bank TI loan), real underwriting, but **you keep the improvements as a depreciable asset (QIP)** and your rent stays lower. On a **$300,000** buildout, the tradeoff is roughly: landlord-amortized TI adds **~$36,000/year** to rent over 7 years; a 7(a) at 10% over 10 years runs **~$48,000/year** in payments but builds equity and leaves you a 15-year tax deduction.

## The Three Options Ranked by True Cost

```mermaid
flowchart TD
    A[How to fund the buildout?] --> B[Landlord TI allowance]
    A --> C[TI loan / SBA 7a]
    A --> D[Cash out of pocket]
    B --> B1[Repaid via rent at 8-10%]
    B --> B2[Off balance sheet, easy approval]
    C --> C1[Interest 9-10.5%, real underwriting]
    C --> C2[You own QIP, depreciate 15 yrs]
    D --> D1[No interest line]
    D --> D2[Opportunity cost 20-30% of capital]
    B1 --> E[Cheapest headline, landlord keeps asset]
    C1 --> F[Middle cost, builds your asset + tax deduction]
    D2 --> G[Most expensive in true terms]
```

**Option 1 — Landlord TI allowance.** The landlord pays for some or all of the buildout in exchange for your signed lease. Standard ranges: **$15–$40/sq ft** for second-generation/light retail, **$40–$80/sq ft** for office, **$80–$150+/sq ft** for restaurants and medical. It's cheapest because it requires no loan and the landlord prices the recovery into rent at a reasonable rate. The catch: **the landlord owns the improvements** and depreciates them, and you don't get the tax deduction.

**Option 2 — TI loan or SBA financing.** A bank TI loan or **SBA 7(a)** (the right SBA tool for leased-space improvements) funds the buildout as debt you control. You own the improvements as **Qualified Improvement Property** — 15-year, bonus-eligible — so you capture the **depreciation deduction** the landlord would otherwise get. Costs more in cash flow than landlord TI but keeps the tax benefit and keeps base rent lower.

**Option 3 — Cash.** Zero interest, instant, no underwriting. But the **opportunity cost** is the highest of the three for any business that can deploy capital productively. Reserve cash for the gap that financing won't cover, or for situations where speed matters more than cost.

## The Smart Stack: Combine All Three

The best-run buildouts don't pick one — they layer.

- **Negotiate the maximum landlord TI first.** Every dollar the landlord funds is a dollar you don't borrow. Push hard; in a soft leasing market landlords will fund more to fill space.
- **Finance the overage with the cheapest debt.** If your buildout is **$80/sq ft** and the landlord gives **$50/sq ft**, finance the **$30/sq ft gap** with a 7(a) or bank TI loan — and own that portion as your depreciable QIP.
- **Use cash only for what financing won't touch.** Soft costs, FF&E, or a small final gap. Keep a working-capital cushion intact; running out of operating cash mid-buildout is the most common way new locations stall.

A worked example on a **$80/sq ft, 4,000 sq ft** buildout (**$320,000** total): landlord funds **$50/sq ft = $200,000**; you finance **$25/sq ft = $100,000** via 7(a) at 10% (~**$16,000/year**, deductible interest, plus QIP depreciation); you cash-fund the last **$5/sq ft = $20,000** of soft costs. Total out-of-pocket up front: **$20,000** on a $320,000 buildout.

## How to Negotiate a Bigger TI Allowance

The TI allowance is one of the most negotiable terms in a lease, and landlords expect to move on it.

- **Trade term for TI.** Landlords amortize TI over the lease — a **longer lease** lets them offer more per square foot at the same recovery rate. Offer a **7- or 10-year term** to unlock a bigger allowance.
- **Ask for "TI plus free rent."** Stacking a **construction/free-rent period** (3–6 months) on top of the TI covers your ramp before revenue starts.
- **Get a "turnkey" build if you can.** In a tenant-favorable market, push for the landlord to **deliver the space finished** to your spec, removing your construction risk entirely.
- **Cap your exposure with a "TI true-up."** Negotiate that the landlord pays cost overruns up to a hard cap, or splits them — never sign an open-ended obligation to fund whatever the GC bills.

## Reading the Real Cost of Landlord TI

```mermaid
flowchart LR
    A[Landlord funds $50/sq ft TI] --> B[Amortized into rent at 8%]
    B --> C[Over 5-yr lease term]
    C --> D[Adds ~$12-13/sq ft/yr to effective rent]
    D --> E[Compare vs base rent + your own loan payment]
    E --> F{Effective rent competitive?}
    F -- Yes --> G[Take the TI]
    F -- No --> H[Negotiate base rent down or self-fund + own QIP]
```

Always calculate **effective rent**, not base rent. A landlord offering **$60/sq ft TI** at **$40/sq ft base rent** may be more expensive than one offering **$30/sq ft TI** at **$32/sq ft base rent** once the TI amortization is folded in. Ask the landlord for the **interest rate and term** used to amortize the allowance — if they're charging **10%+**, financing it yourself with an **8% bank loan** and owning the QIP may be cheaper *and* gets you the tax deduction.

## FAQ

**Is a landlord TI allowance really free money?**
No. The landlord recovers it by **amortizing it into your rent**, typically at **8% to 10%** over the lease term. It's effectively a loan baked into your lease. It's still usually the cheapest option because the rate is reasonable, it's off your balance sheet, and approval is easy — but always calculate the **effective rent** including the TI recovery.

**Should I pay cash for my buildout if I have it?**
Usually no, if your business earns a strong return on capital. Spending **$100,000** cash costs you **$20,000–$30,000/year** in foregone profit at a 20–30% return, versus **$8,000–$10,000/year** to finance it at 8–10%. Keep cash for working capital and borrow the buildout — unless you have no productive use for the cash.

**Who gets the tax deduction — me or the landlord?**
Whoever **pays for and owns** the improvements. If the **landlord** funds it via TI allowance, the landlord depreciates it. If **you** finance or cash-fund it, you own it as **Qualified Improvement Property** and take the 15-year, bonus-eligible depreciation. The portion you fund out of pocket above the allowance is **your** deduction.

**What's the right way to combine these?**
Stack them: negotiate the **largest landlord TI allowance** first, finance the **gap** with the cheapest debt (bank TI loan or SBA 7(a)), and use **cash only** for soft costs or a small final gap. That minimizes both up-front cash and total cost while keeping a working-capital cushion.

## Sources

- CBRE, "U.S. Tenant Improvement Cost Guide" (TI allowance benchmarks by property type)
- JLL, office and retail leasing economics (effective rent and TI amortization)
- U.S. Small Business Administration, 7(a) loan program (leasehold improvement financing)
- IRS, Qualified Improvement Property and Section 168(k) bonus depreciation rules
- IRS, treatment of construction allowances under qualified leases (Section 110)
- RSMeans construction cost data (buildout cost per square foot)
- Commercial lease negotiation guidance, NAIOP / BOMA tenant resources

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How Do I Finance a Buildout: TI Loan vs Landlord vs Cash?

How Do I Finance a Buildout: TI Loan vs Landlord vs Cash?

Direct Answer

The Three Options Ranked by True Cost

The Smart Stack: Combine All Three

How to Negotiate a Bigger TI Allowance

Reading the Real Cost of Landlord TI

FAQ

Sources

What does the score mean?