Guide
Tenant improvement allowances and shell types, explained
Before you sign a commercial lease, you need to know what the landlord is building, what you are building, and who pays for each part. Here is how TI allowances, work letters, and delivery conditions fit together.
Start with the delivery condition
The condition the landlord delivers the space in sets the starting line for your finish-out. These terms are used loosely and differ from one landlord to the next, so treat this table as a typical example and rely on the written list in your lease.
| Delivery condition | Landlord usually provides | Tenant finish-out usually covers |
|---|---|---|
| Cold dark shell | Slab, exterior walls, roof, and utility stubs to the space | Nearly everything: HVAC distribution, restrooms, electrical, ceilings, walls, finishes |
| Warm / vanilla shell | Shell plus basic HVAC, code-required restrooms, lighting, and finished perimeter walls | Interior walls, layout-specific electrical and plumbing, finishes, signage, fixtures |
| Second-generation space | Whatever the previous tenant left, as-is or after landlord repairs | Demolition of what does not fit, modifications, code upgrades triggered by the change |
| Turnkey | The landlord builds the space to an agreed plan and hands it over ready to move in | Usually furniture, equipment, and low-voltage; the cost is built into rent |
The work letter is the real scope
The work letter splits the build-out into landlord's work and tenant's work, sets the allowance, and lays out approvals for plans, permits, and contractors. Read it for who pays for code upgrades the build-out triggers, such as accessibility, fire sprinkler, or fire alarm changes; whether the allowance can cover design, permit, and cabling costs or only construction; how and when the allowance is paid out; what happens to any unused allowance; and whether the landlord charges a construction management or supervision fee.
How the allowance actually gets paid
Many landlords reimburse the allowance after work is finished, often against lien waivers, a certificate of occupancy, and paid invoices, rather than paying as the work happens. That means the tenant or contractor may need to carry the cost until reimbursement. Ask how draws work before you plan cash flow.
Price against the work letter, not the brochure
We walk the space, read the work letter, and itemize the proposal line by line so every item is clearly marked as landlord work, tenant work, or allowance-eligible. That makes it easy to see where the allowance runs out and what to negotiate before signing. See what drives the number in our guide to tenant finish-out cost factors, and how the city side works in our Austin zoning guide and permit expediting guide.
Example project
Our ground-up Wahoo's Fish Tacos at South Shore shows how much a restaurant space has to add from the slab up: kitchen, bar, patio, and the systems behind them. For the full service, see commercial tenant finish-out in Austin or compare design-build vs. design-bid-build.
Questions
Common questions
What is a tenant improvement allowance?
A tenant improvement (TI) allowance is money the landlord agrees to put toward building out your space, written into the lease or its work letter. How it is paid, what it can be spent on, and what happens to any unused amount are all set by the lease language, so read those terms before you sign.
What is the difference between a cold shell and a vanilla shell?
A cold or cold dark shell is usually just the structure: slab, exterior walls, and roof, often without finished HVAC distribution, restrooms, or ceilings. A warm or vanilla shell usually adds basic HVAC, code-required restrooms, lighting, and finished perimeter walls. The terms are not standardized, so the work letter's written list of landlord work is what actually counts.
What is a work letter?
The work letter is the part of a commercial lease that spells out who builds what: the landlord's work, the tenant's work, the allowance, approval steps for plans and contractors, and the schedule. It is the document your contractor should price against.
Can I use my own contractor for a finish-out?
Often, yes, but many leases require the landlord to approve the contractor, the plans, insurance, and sometimes the subcontractors. Some landlords build the space themselves as a turnkey delivery. Check the work letter before you hire anyone.
Should I get a contractor involved before signing a lease?
Yes. A walkthrough before signing shows which existing systems can stay, what code items the space will trigger, and whether the landlord's work and allowance line up with what your build-out will actually take. That is the best time to negotiate.