Landlord as Bank: The Hidden Cost of "Convenient" TI Financing

The cost to build office space is at an all-time high, forcing companies to make deliberate decisions about how tenant improvements are funded. These decisions directly impact cash, balance sheet, and EBITDA—and should not be left solely to the real estate team.

For companies where valuation matters, structure matters. A business preparing for a sale, for example, may choose to fund all or a portion of the improvements with cash to preserve EBITDA, given valuation is often tied to an EBITDA multiple.

Sometimes when there is a shortfall between the tenant improvement allowance a landlord has offered as a concession to the lease and the total cost to build the space, the landlord will offer to finance the difference.

At first glance, this may appear to be an efficient solution. But the details matter.

If structured as a true loan—separate from the lease—the tenant can capitalize the improvements, record debt, and keep rent lower. This is typically more favorable from an EBITDA perspective.

But most landlords aren’t truly interested in acting as a lender. Their real motivation is to optimize for asset value.

They do so by embedding the additional funding into the lease as rent. This step makes the cost of the financing more expensive to the tenant while turbo-charging the value it creates for the landlord. How? By adding the loan value to rent, it becomes subject to the annual rent escalations common in most leases (typically 3%), further compounding the cost of the loan. Most importantly, the increased rent drives higher net operating income, which directly increases the landlord’s asset value upon sale.

Tenants must carefully assess the implications of landlord offers to finance additional tenant improvements, as the proposed structures often carry hidden costs.