Two documents attached to a commercial lease quietly determine how much your build-out will cost you: the work letter and the tenant improvement (TI) allowance. Tenants often skim them and negotiate the rent instead. That is usually a mistake.
What the work letter actually is
The work letter is the exhibit that spells out the construction responsibilities between landlord and tenant. It answers questions like:
- What condition will the space be delivered in — warm shell, cold shell, or as-is?
- Who designs the improvements, and who has to approve the drawings?
- Which base-building systems does the landlord bring to the space, and which does the tenant extend?
- Who hires the contractor, and does the landlord get approval over the choice?
- What are the deadlines for design submission, and what happens if they slip?
Every one of those answers has a dollar figure behind it. A space delivered as-is with a previous tenant’s layout still in place can mean tens of thousands in demolition that a warm-shell clause would have avoided.
How the TI allowance works
The allowance is the amount the landlord contributes toward your improvements, almost always quoted as dollars per square foot. On a 10,000 square foot space, a $45 per foot allowance is $450,000 toward the build.
Key points tenants miss:
- The allowance rarely covers everything. It typically applies to hard construction costs. Design fees, permits, cabling, furniture, security, and signage may be excluded or capped.
- It is reimbursed, not prepaid. You usually pay the contractor and submit lien releases and invoices to draw the allowance down. Plan the cash flow.
- Unused allowance can be lost. Some leases let you apply a remainder to rent; many do not. If you are not going to use all of it, negotiate that now.
- Overages are yours. Anything above the allowance is tenant capital. This is why an accurate budget before signing matters so much.
Get a real number before you sign
The single most useful thing you can do during lease negotiation is have a contractor price your actual program against the actual space. A test fit plus a preliminary budget takes a week or two and tells you whether the allowance covers the build or whether you are about to commit six figures of your own money.
That number also becomes leverage. If the build is $30 per foot over the allowance, that gap is a legitimate item to negotiate — as additional allowance, as free rent, or as a landlord-performed scope.
Questions to ask before signing
- What exactly is the delivery condition, in writing?
- Does the allowance cover design, permits, and low-voltage, or only hard costs?
- How and when is the allowance disbursed?
- Can we choose our own contractor?
- What happens to unused allowance?
- Who is responsible for base-building code compliance triggered by our work?
We regularly price spaces for tenants who are still in lease negotiation. Send us the space and your program and we will tell you where the allowance lands before you commit.