A tenant improvement is the construction that turns a leased commercial space into one that fits your business: walls, ceilings, lights, air ducts and finishes. The landlord usually pays part of it through a tenant improvement allowance, a fixed amount per square foot, and you pay the rest. The work letter in your lease decides who pays for what.
Key takeaways
- A tenant improvement allowance is usually quoted per square foot and multiplied by the space's rentable area to give a fixed budget.
- Anything above the allowance is normally the tenant's cost, paid in cash or added to rent over the lease term.
- Most allowances are paid back after the work is done, once inspections pass and the contractor's bills and lien releases are in.
- The work letter is the contract inside the lease. It lists landlord work, tenant work, approvals, deadlines and how the allowance is paid.
- Texas adds its own steps: most build-outs need a city permit, and projects of $50,000 or more must be registered for a state accessibility review.
What a tenant improvement is
What is a tenant improvement (TI)?
A tenant improvement, often shortened to TI, is the interior construction done to make a leased commercial space usable for a specific tenant. It covers the work inside the building shell: partition walls, ceilings, lighting, air distribution, power and data, restrooms, doors and finishes. It applies to office, retail, medical and industrial space alike. The landlord owns the building, but the layout belongs to the business that will use it, so almost every new lease involves some TI. In our tenant improvement work, the first question is always the same: what state is the space in today, and what has to change for your team to work there?
What is a turnkey buildout, and how is it different from an allowance?
A turnkey buildout means the landlord builds the space to an agreed plan and hands you the keys, while an allowance means the landlord gives you a budget and you manage the build. With turnkey, the landlord hires the contractor and carries the risk of cost overruns on the agreed scope. With an allowance, you or your project team hire the contractor, choose the finishes and carry any overrun. Turnkey is simpler for standard office space. An allowance gives you more control when your work is unusual. We compare the 2 in detail in turnkey build-out or tenant improvement allowance.
How the allowance works
What is a tenant improvement allowance, and how is it calculated?
A tenant improvement allowance is the amount the landlord agrees to contribute toward your build-out, usually stated in dollars per square foot and multiplied by the rentable area. Rentable area includes your share of shared spaces like lobbies and corridors, so it is usually a little larger than the area you actually use. The figure is set during lease negotiation and depends on the lease length, the condition of the space, the market and your credit. Longer leases and empty, never-built spaces tend to attract larger allowances. As a 2026 planning range, Texas office allowances on new 5- to 10-year leases often run from about $25 to $100 per square foot. Pricing moves with the market, so treat any number as a starting point to test.
Who pays for what between landlord and tenant?
The landlord typically pays for the building shell and its main systems, and the tenant pays for everything specific to its own use, minus the allowance. The shell includes the structure, roof, outer walls, main electrical service and the building's base air conditioning and fire sprinkler systems. The tenant side covers the layout, finishes, furniture, data cabling, signs and special equipment. Accessibility is shared by law: under the federal ADA rules, both the landlord and the tenant of a public space are responsible, and the lease can only divide that responsibility between them. Read the lease for the details, because every landlord draws the line differently.
What happens if the buildout costs more than the allowance?
If the build-out costs more than the allowance, the tenant normally pays the difference. That extra amount is often called the overage. It can be paid in cash as the work goes, paid at the end, or in some leases added to the rent and spread over the term. Overages usually come from late design changes, an old space that needs more work than expected, or a contractor price that came in high. The best protection is a priced test fit, meaning an early floor plan with a cost estimate, before the lease is signed, so the allowance is negotiated against a real number.
- Typical office build-out cost$300,000–$750,000At $60–$150 per sq ft
- Typical allowance on a new 5–10 year lease$130,000–$500,000At $25–$100 per sq ft
Planning ranges only. The gap between the 2 lines is the overage you may need to fund.
Planning ranges, not a project quote. Cost and timing vary with owner decisions, project complexity, market conditions, and jurisdiction workload.
Is the allowance paid up front or reimbursed after completion?
Most allowances are reimbursed after completion, not paid up front. The tenant or its contractor pays for the work, then submits invoices, proof of payment, final inspections, the certificate of occupancy and lien releases to the landlord. A lien release is a signed statement from each contractor and supplier that they have been paid and give up the right to claim the property. Texas law gives unpaid builders lien rights on the property, which is why landlords insist on those releases. Some leases pay in monthly draws as work progresses. Either way, plan your cash flow for the gap.
What is amortised TI, and what does it do to my rent?
Amortised TI is extra build-out money the landlord fronts and you repay through higher rent over the lease term. Instead of writing a large check for the overage, you add a set amount per square foot to each year's rent. Landlords usually add a financing charge for fronting the money, so you repay more than the amount borrowed. The added rent continues even if you leave early, because most leases make the unpaid balance due on default. Compare the total cost over the full term against paying the overage in cash before choosing.
What the lease says
What is the difference between landlord work and tenant work in a lease?
Landlord work is construction the landlord performs and pays for before handing over the space, and tenant work is everything the tenant builds after that, usually funded partly by the allowance. Landlord work might be a new restroom core, a demising wall, meaning the wall that separates your suite from a neighbor, or upgraded air conditioning. Tenant work is the rest of the interior. The split matters because landlord work does not come out of your allowance. In retail leases this line is drawn especially sharply, as explained in who builds what in a Texas retail lease.
What is a work letter, and what should it say?
A work letter is the attachment to the lease that describes the construction, who does it, who pays and when. A good work letter lists the landlord work and its delivery date, the allowance amount and what it can pay for, whether design fees and cabling count, how and when the allowance is paid, the approval process for drawings, and what happens if either side is late. It should also say whether the landlord charges a construction management fee, often a percentage of the cost, for overseeing your build. Vague wording here is where most build-out disputes begin.
Protecting yourself at both ends
What are the tenant's obligations at the end of the lease?
At the end of the lease, the tenant usually must return the space in the condition the lease describes, which can include removing improvements the landlord did not approve as permanent. This is called restoration. Common items are server room cooling, special flooring, signs and cabling. If the lease does not say which improvements stay, the landlord may ask you to remove them at your cost. Ask for a written list, at signing, of improvements you will not have to remove.
What should a tenant have reviewed before signing a lease with a buildout in it?
Before signing, a tenant should have the space, the work letter and a priced test fit reviewed by someone who builds these projects. In practice that means checking the floor plan fits your headcount, the building systems can carry your loads, the allowance covers a realistic budget, the delivery date allows time for design and permits, and Texas accessibility rules are covered. Under the state's Architectural Barriers program, projects of $50,000 or more must be registered and reviewed. On the tax side, retail tenants should ask their accountant about Section 110 of the tax code, which covers construction allowances on retail leases of 15 years or less.
How it works in Texas metros
Greater Houston
In Houston, nearly every tenant improvement needs a city permit before work starts, and the space needs a certificate of occupancy before you move in. A first-time build-out of an empty shell goes through full plan review under the city's Buildout Permit, which lists 15 business days per review cycle. Most office projects need 2 cycles, so the permit often sets the move-in date. Our guide to Houston office build-out permit timing walks through it.
Austin
In Austin, tenant finish-outs are reviewed by the city's Commercial Plan Review division, which checks remodels and changes of use against the adopted building code. Small, simple finish-outs may qualify for a faster review track, while larger or medical projects go through full review. Confirm the current track and timing with the City of Austin before setting a delivery date in the lease.
San Antonio
In San Antonio, the Development Services Department permits commercial finish-outs, and each tenant space in a multi-tenant building needs its own certificate of occupancy for its approved use. A change of use can trigger a new certificate, so tell the city early if your business differs from the last tenant's. Confirm the permit path for your suite with the department before signing.
Talk to us before you sign
The cheapest time to fix a tenant improvement deal is before the lease is signed. Architecture and engineering come from one team at Temelar, so a test fit, a cost picture and a work-letter review can happen together. If you are weighing a space, contact us and send the floor plan and the draft lease.
