Who Pays for Tenant Improvements—Landlord or Tenant?

‍A practical guide to understanding how buildout costs get divided in commercial leases

If you're signing a commercial lease for the first time, one of the most confusing parts is figuring out who pays to build out the space. The short answer: it depends. The longer answer involves understanding tenant improvement allowances, negotiation leverage, and how landlords think about these costs.

Here's how it actually works.

The Basics: What Are Tenant Improvements?

Tenant improvements (TI) are the construction work that customizes a commercial space for your specific business needs. This includes interior walls, flooring, ceilings, lighting, HVAC modifications, electrical and data, restrooms, and any specialty buildout your operation requires.

When you tour a space, you're often looking at a shell or a previous tenant's buildout. Either way, you'll likely need construction work before you can move in and operate.

Three Ways TI Costs Get Handled

1. Landlord Provides a Tenant Improvement Allowance (TIA)

This is the most common arrangement in competitive markets. The landlord offers a dollar amount per square foot toward your buildout—typically anywhere from $15 to $75+ per square foot depending on the market, building class, lease term, and how badly they want you as a tenant.

Example: You're leasing 3,000 SF and the landlord offers $40/SF in TI allowance. That's $120,000 toward your buildout. If construction costs $150,000, you cover the $30,000 difference.

The allowance is essentially a loan baked into your lease—landlords amortize it over your lease term and recover it through rent. A larger allowance often means higher base rent.

2. Tenant Pays for Everything (Vanilla Shell or As-Is)

In some situations, the tenant takes the space "as-is" and funds the entire buildout independently. This is more common with:

• Shorter lease terms where landlords can't justify the investment
• Strong tenants who want full control over construction
• Spaces where the existing condition already works
• Secondary or industrial buildings with lower rents

The tradeoff: you're spending more cash upfront, but you may negotiate lower rent since the landlord isn't financing your buildout.

3. Landlord Builds to Suit (Turnkey)

Occasionally, especially with larger or credit tenants, the landlord handles the entire buildout and delivers a move-in ready space. The tenant approves a space plan and finish selections, and the landlord manages construction.

This shifts risk and hassle to the landlord but also gives you less control over contractors, timeline, and quality. The costs still get built into your rent.

What Affects How Much Allowance You Get?

Landlords aren't just picking numbers out of thin air. TI allowances depend on:

Lease term length. A 10-year lease justifies a larger investment than a 3-year deal. Landlords need time to recoup buildout costs through rent.

Your credit and business strength. National tenants with strong financials get better allowances than startups. Landlords are taking less risk.

Market conditions. In a tenant's market with high vacancy, landlords compete with generous allowances. In a landlord's market, good luck!

Building class and competition. Class A buildings in prime locations often offer higher allowances to attract quality tenants and justify premium rents.

The space's current condition. If it's already partially built out or in warm shell condition, the landlord may offer less since your costs are lower.

How to Think About This as a Tenant

Don't just look at the allowance number, look at the total deal. A $50/SF allowance with $32/SF rent might cost you more over the lease term than $30/SF allowance with $26/SF rent. You need to run the numbers. Being able to cover your rent when operating is right up there with payroll and taxes.

Also consider:

Will the allowance actually cover your buildout? Get a rough construction estimate before you commit. A $40/SF allowance sounds great until you realize your buildout requires $65/SF.

This is easier said than done—construction costs depend on dozens of variables, and most tenants don't know where to start. One option: AI tools like ChatGPT can help you think through scope and get ballpark numbers. They won't replace a real estimate, but they can help you pressure-test whether an allowance is in the right range before you sign.

The key is starting with a clear scope of work. We've built a template that walks you through what to include — download it here.

What's excluded? TI allowances typically don't cover furniture, data cabling, security systems, signage, or equipment. Know what you'll need to fund separately.

When does the money flow? Most landlords reimburse TI costs after construction is complete and invoices are submitted. You may need to front the money and wait for reimbursement.

What happens if you're under budget? This is in your negotiations. Some leases let you apply unused allowance to rent, furniture, or moving costs. Others don't. I'd say negotiate the heck out of it. If you saved their allowance by $10,000 but you increased your rent so they could recoup it, you want that money back. Include unused allowance in your negotiations and agreement.

How to Think About This as a Landlord or Property Manager

Offering competitive TI allowances helps attract quality tenants and reduce vacancy. But you need to protect your investment:

Require construction oversight. You're funding someone else's construction project. Make sure the work is done properly and permitted. And the contractor selected has a license and great insurance. And make sure the business the building is in is llisted as additionally insured on their COI.

Align allowance to lease term. Structure deals so you recover buildout costs before the lease expires or include clawback provisions if the tenant leaves early.

Consider the re-tenanting cost. If this tenant's buildout is highly specialized, you may face white boxing costs before the next tenant. Factor that into the deal.

A Note on Negotiation

Everything is negotiable. Tenants often accept the first TI allowance offered without pushing back. If you're a quality tenant with options, you have leverage.

Strategies that work:

• Get competing proposals from other buildings
• Commit to a longer lease term in exchange for higher allowance
• Ask for the allowance to cover soft costs (architect, permits) not just construction
• Request that unused allowance apply to rent or moving costs
• Negotiate who manages construction—sometimes tenant-managed buildouts are more efficient

And my favorite tool for negotiations: BE ABLE TO WALK AWAY. The one with most leverage to walk away, generally wins.

The Bottom Line

There's no universal rule for who pays for tenant improvements. It's a negotiation that depends on market conditions, lease terms, tenant strength, and what both parties need from the deal.

Before signing a lease, understand exactly what buildout costs you're responsible for and whether the allowance realistically covers your needs. If you're unsure, get a contractor involved early—during lease negotiations, not after.

Mark Allan Contracting helps commercial tenants and landlords throughout Metro Atlanta navigate buildout planning and construction. Whether you need a rough budget for lease negotiations or a full tenant improvement buildout, we can help. [Contact us] for a consultation.

‍