How should leasing commissions and tenant improvements (TI) be handled in a pro forma?

• A. Treat as operating expenses.
• B. Amortize TI over the lease term and capitalize and depreciate leasing commissions.
• C. Treat as capex or upfront adjusters; amortize over the lease term or capitalize and depreciate; reflect as cash outlays and reduce net cash flow.
• D. Ignore them.

Answer: (C)

Leasing commissions and tenant improvements are upfront investments that enable the property to generate revenue, not regular operating expenses. In a pro forma you treat them as capital expenditures or upfront adjusters to the asset rather than ongoing costs.

Record the cash outlay when it occurs. Then allocate the benefit over time through amortization or depreciation. Tenant improvements are typically amortized over the lease term (or over the asset’s useful life if they extend beyond the current lease) and leasing commissions are capitalized and amortized over the lease term or the life of the asset. This approach reflects that the cost supports revenue over a period, rather than being a repeating monthly expense.

In practical terms, you’d show the initial cash outlay in the signing period, and then include amortization or depreciation expense in the income statement each year, which reduces pretax income and creates a tax shield, while the cash impact shows up upfront. If the TI or commissions impact a longer-lived asset, you might capitalize and depreciate accordingly.

So the correct handling is to treat them as capex or upfront adjustments, amortize or depreciate over the applicable period, and reflect the cash outlay upfront while recognizing non-cash amortization/depreciation in the years that follow.