TI and Leasing Commissions in REPE Interviews
Tenant improvements and leasing commissions in REPE underwriting: where they sit below NOI, how rollover destroys cash flow, and crisp interview answers with simple math.
REPE · 4 min read
Tenant improvements (TI) and leasing commissions (LC) are the costs interviewers use to see if you treat NOI as operating income or pretend every dollar above opex is free cash. In multifamily you hear less TI language, but you still have turnover costs, unit interiors, and leasing incentives. In office and industrial, TI/LC at rollover can dominate the cash flow story.
The short answer
"TI is the landlord cost to build out or refresh space for a tenant. Leasing commissions pay brokers for securing the lease. Both sit below NOI in most REPE models because they are tied to leasing events, not day-to-day operations. At rollover I budget TI per square foot, LC as a percent of gross rent over the term, and timing when cash actually leaves, usually near lease commencement. Ignoring TI/LC makes value-add and office deals look safer than they are."
Where TI and LC live in the stack
NOI
Stabilized operating cash flow after vacancy and opex. Usually excludes TI/LC.
Leasing costs
TI, LC, and sometimes tenant concessions capitalized or expensed per house convention.
CapEx reserves
Ongoing building systems, roofs, parking, not always tied to a single lease event.
Debt service
Interest and amortization after you have honest cash flow to the asset.
Simple office rollover example
Assume 10,000 rentable square feet, new rent $45 per square foot per year on a five-year term, TI allowance $60 per SF paid at commencement, LC at 6% of gross rent over the full term paid upfront.
Gross rent over the term is about $2.25 million. LC at 6% is roughly $135,000. TI is $600,000. Total leasing cost near $735,000 in year zero of that lease, before free rent abatements. Spread that against five years of NOI and the deal looks different from a headline cap rate on in-place rent.
TI
$60/SF
LC
6% of gross
Timing
Commencement
Interviewers care less about memorizing industry standard TI tables and more about logic: rollover frequency, downtime, who pays, and whether you tied costs to lease events.
Multifamily cousin: turnover and concessions
Multifamily models often use turnover cost per unit, interior renovation CapEx, and leasing concessions instead of TI/LC labels. Economics are the same: when a lease turns, cash leaves to re-lease at higher rent.
Pair this topic with Gross vs Net Effective Rent and NOI vs EBITDA. If you only know face rent, you will miss both concessions and turnover spend.
Value-add and repositioning
Value-add REPE underwrites business plans where TI/LC or renovation spend is intentional. The question is whether forward NOI and exit value justify the spend, not whether TI is zero.
Lower rollover, smaller TI/LC bumps, underwriting focuses on cap rate and debt sizing.
Heavy TI/LC or renovation in early years, then stabilized NOI later; returns depend on execution timing.
Say how you would phase costs in the pro forma. Lump-sum mistakes are a common modeling test trap.
What interviewers ask
| Question | Strong angle |
|---|---|
| Are TI/LC in NOI? | Usually no; below NOI as leasing or capital costs |
| When do you expense vs capitalize? | Follow firm convention; explain cash timing either way |
| What if TI is tenant-funded? | Still affects rent; net effective economics matter |
| Industrial NNN deal? | Tenant pays opex; landlord may still fund TI for credit-worthy tenants |
Common mistakes
- Capitalizing all TI without showing cash out the door in the hold period
- Using broker "market TI" without linking to your rollover schedule
- Forgetting LC on renewals vs new leases (rates differ)
- Treating free rent as opex instead of a rent concession in the lease stream
- Ignoring downtime months between tenants when TI/LC hits before new rent starts
Link to returns
TI/LC flow into unlevered and levered cash flow, then IRR and equity multiple. A deal can show attractive going-in NOI and still fail DSCR in year two if rollover clusters. Mention Cap Rate Bridge and DSCR interview questions when you explain why credit metrics break before NOI does.
When an interviewer pushes "walk me through rollover," narrate year by year: downtime, TI cash out, LC cash out, then new rent ramp. That verbal is often worth more than quoting a TI table from memory.
Practice on SheetRank
Build the habit on Project Sunbelt and Multifamily Pro Forma Academy. For commercial TI/LC language, review Industrial Logistics Underwriting and drill technical Q&A on /interview-prep/repe.
Practice on SheetRank
Apply what you learned with drills, guided Academy builds, and live deal underwriting.