It is really tempting to let the tenant pay for the capital improvement but I agree that this is a major improvement and there could be some issues or claims down the road… In short it just may not be worth the hassle. I would give the tenant the opportunity to get out the lease and simply get a new tenant. If they want to stay in the lease then that is fine. You may want to draw up some additional documentation that states you have given the tenant the preceding options and the tenant declined them.
