The tenant improvement allowance on a new office lease is doing more work than the stated rent, and most LP decks never show it clearly

The math you ran is right, and the effective rate framing is the correct lens. The assumption doing the most work in most LP decks is that rent commencement equals cash flow commencement, and those two dates can sit twelve to eighteen months apart once you stack free rent against TI disbursement timing.

One thing your post does not surface: TI funding sequence. Most sponsors draw TI from the construction line or a capital reserve, and the waterfall treatment of that draw matters enormously. If the TI comes out of a dedicated reserve funded at close, it was priced into the equity raise and you paid for it upfront. If it hits an operating line or gets funded from incoming rents on stabilized space elsewhere in the building, the dilution is real but deferred and harder to see in quarterly reporting until the reserve balance appears on a statement. The LP deck almost never distinguishes between these two, and the distinction changes your view of how much dry powder the deal actually has.

Your 40,000 sf scenario is worth extending. Three lease-up transactions in 24 months at similar TI loads, each with six months of abatement, means the building may be cash-flow negative or near zero for a prolonged stretch even while the sponsor reports signed leases as momentum. The leasing velocity metric looks healthy; the operating account tells a different story.

Two documents I would add to your list alongside the abatement schedule and TI reimbursement timeline: the capital reserve schedule showing how TI is funded and replenished, and the rent roll with actual cash commencement dates rather than lease commencement dates. Those two together let you rebuild the real cash-on-cash timeline rather than the one implied by the stated rent.

On the TI loads themselves, confirm with your lender or advisor what current market TI norms look like in that specific submarket before benchmarking the $75 per sf figure, because the range is wide right now between prime and secondary product.

What was the sponsor's stated reserve balance relative to the total TI exposure across all leases in the pipeline?

This is a genuinely useful breakdown, and the math you ran is the part most LP decks bury.

For anyone newer to this thread, a few quick definitions. TI, or tenant improvement allowance, is money the landlord pays to build out the space so a tenant will sign. Full service means the stated rent covers operating expenses, so $32 per sf sounds like the whole story. Free rent, sometimes called abatement, is exactly what it sounds like: months where the tenant pays nothing while the lease is technically live.

Your effective rate calculation is the right frame. The $375,000 in TI plus the forgone rent during abatement is real cash out the door before a single check clears at the full rate. Spread that across the lease term and the yield the deal actually produces is meaningfully lower than the headline rent suggests. At the building scale you describe, three leases done this way can consume more equity than the leverage itself, and that capital does not show up in a cap rate or a rent roll summary.

The two document requests you named, the abatement schedule and the TI reimbursement timeline, are exactly right. I would add one: ask how the sponsor accounts for TI in their cash-on-cash projections for the first three years, and whether they treat it as a capital expenditure or an operating cost. The answer tells you how conservative the underwriting actually is.

I cannot speak to what sponsors are doing intentionally versus what they assume a reader will infer. A licensed securities attorney would be the right person if you are weighing disclosure adequacy on a specific offering.

For anyone reading this and wondering how to evaluate office deals generally, the Guide tab on the office strategy page covers underwriting basics worth cross-referencing here.

What submarket is the building in, and is the TI on the new leases in line with what you are seeing in broker comps for that market right now?

The $75 per sf figure is what catches me because I have seen decks out of the San Antonio submarket running TI packages north of $90 on second-generation space that supposedly needed less work, and the sponsor justified it as competitive with Austin rates three years ago when that was barely true and is certainly not true now. The effective rate calculation you ran is conservative if the TI is being funded from a capital call rather than a construction reserve that was actually capitalized at close, which it usually is not. So the dilution hits the existing equity stack mid-hold, not at entry, and by the time an LP sees it in a quarterly it is already spent.

What I keep getting tripped up on with office paper, and I am not an office guy by any stretch, is that the seven year term on that lease looks like stability until you realize the tenant has a termination option at year four and the TI is not fully amortized until year five. I had a note on a small professional building outside New Braunfels where exactly that happened, tenant walked at the option window, landlord ate $40k of unrecovered TI basis and had to re-trade the space at a lower rate to a smaller user. The lease looked like a seven year hold and it ran thirty-eight months. What is the termination option language on the leases you pulled the abatement schedule from, because that is the next thing I would want to see before I believed any of the effective rate math.

The $26 effective rate is actually on the generous side of what I've been seeing modeled when I've run similar numbers on Akron and Canton retail comps, which aren't office but the TI mechanics are close enough. My landlord contacts up here were doing $55-60 per sf TI on mid-quality space and still quoting face rents like the concessions didn't exist, and once you spread that plus abatement the effective rate was landing closer to $22-23 on a stated $28. The thing that gets me about the deck framing you're describing is that rent commencement date presented without the abatement schedule is basically a different number wearing the same clothes. Six months free on a 7-year term is not a rounding error, it's 7 percent of the lease duration where your capital is sitting there fully deployed and working for nobody. I'm still on the sideline on office paper partly for this reason, because I can't get comfortable with how much of the "stabilized" story depends on leases that cost this much to sign. What's the typical TI reimbursement timeline in the deal you were reviewing, meaning how long before the sponsor actually pays that $375k out the door after the lease executes?

The assumption doing the most work in that deck is that the seven-year term gives enough runway for the effective rate to recover toward the face rate, but that only holds if the tenant actually stays through year seven. Office tenants in most submarkets right now are either contracting their footprint or negotiating early termination rights as a condition of signing, which means the TI package gets consumed and the amortization schedule becomes a stranded cost the moment they exercise an early out at year four. The effective yield calculation you ran assumes full term occupancy, and shaving even one year off the back end moves that $26 figure down again, because the landlord ate the buildout cost over fewer rent-paying months. There is also a second-order effect that LP decks almost never model: when the building needs to re-lease that same suite after an early departure, the market will expect a fresh TI package competitive with whatever the submarket is offering at that future date, and the sponsor is now doing the whole exercise again from a thinner equity base. The question I would press on is whether the lease contains a TI recapture provision tied to early termination, because that is the only structural offset that actually protects equity capital from the scenario where the concession package outlives the tenancy.

My cabin STR deal had the same structure problem, just smaller numbers.