Commercial Lease Construction & Tenant Improvements: TI Allowances, Draws & the Complete Build-Out Guide (2026)

Tenant Improvements by the Numbers

The build-out phase is one of the most capital-intensive stages of any commercial lease. These figures reflect current market conditions and illustrate why getting the TI provisions right is critical to your bottom line.

For a 10,000 SF office build-out at $80 per square foot, you’re looking at $800,000 in total construction costs. If the landlord provides a $50/SF TI allowance ($500,000), the tenant is on the hook for the remaining $300,000 out of pocket—before furniture, IT infrastructure, and moving costs. Getting these numbers wrong can cripple a business before it even opens the doors.

What Are Tenant Improvements and TI Allowances?

Tenant improvements (TIs) are modifications made to a commercial space to customize it for the tenant’s specific business needs. These can range from simple cosmetic updates—paint, carpet, and lighting—to full gut renovations involving demolition, new walls, plumbing, electrical systems, HVAC modifications, and specialized infrastructure like server rooms or commercial kitchens.

A TI allowance is the dollar amount the landlord agrees to contribute toward these improvements, typically expressed as a per-square-foot figure. The allowance is not free money—it is amortized into the base rent over the lease term, meaning the landlord recoups the investment through higher monthly payments. A larger TI allowance generally means higher rent, and understanding this trade-off is essential to evaluating any lease deal.

Types of TI Arrangements

Not all TI deals are structured the same way. The arrangement you negotiate determines who controls the construction process, who bears the financial risk, and how much flexibility you have in designing your space.

TI Allowance (Most Common)

The TI allowance model is the most prevalent arrangement in today’s market. The landlord provides a fixed dollar amount per rentable square foot, and the tenant manages the design and construction process. Any costs exceeding the allowance are the tenant’s responsibility. This model gives tenants maximum control over their build-out but also exposes them to cost overrun risk.

Turnkey Build-Out

In a turnkey arrangement, the landlord agrees to deliver the space fully built out to mutually agreed-upon specifications. The landlord bears all construction cost risk, but the tenant sacrifices control over contractor selection, material choices, and construction management. Turnkey deals are common in multi-tenant office buildings where the landlord has established relationships with contractors.

Building Standard vs. Custom Build-Out

Building standard refers to the base level of finishes the landlord provides—typically including standard ceiling tiles, fluorescent lighting, building-standard carpet, painted drywall, and a basic HVAC distribution. Anything beyond building standard is considered a custom improvement and usually comes out of the TI allowance or the tenant’s pocket.

The Construction Draw Process

Once construction begins, TI allowance funds are disbursed through a structured draw process. Understanding how draws work is critical—delays in draw approvals can stall construction, and documentation errors can leave you paying contractors out of pocket while waiting for reimbursement.

How Draws Work

The general contractor submits periodic draw requests (typically monthly) using AIA Document G702/G703 or a similar standardized format. Each draw request itemizes work completed during the billing period, broken down by trade and line item. The landlord’s representative (or the tenant, depending on who controls construction) reviews the request, inspects the work, and approves payment.

1. Contractor submits draw request with supporting documentation (invoices, receipts, progress photos)
2. Architect certifies that work has been completed in accordance with approved plans
3. Landlord reviews and approves (typically within 15–30 days)
4. Retainage is withheld (5%–10% of each draw held until final completion)
5. Payment is released to contractor or tenant for reimbursement

Draw Documentation Requirements

Most landlords require the following with each draw request:

• Completed AIA G702 Application for Payment
• AIA G703 Continuation Sheet with line-item detail
• Conditional lien waivers from the GC and all subcontractors
• Unconditional lien waivers for previously paid amounts
• Architect’s certification of work completed
• Updated construction schedule showing progress against milestones
• Evidence of insurance (if not already on file)
• Change order log with approved change orders

Retainage

Retainage (also called retention) is the portion of each draw payment that the landlord or tenant holds back as security until the project is fully complete. Standard retainage is 10% of each progress payment, reduced to 5% once the project reaches 50% completion in some contracts. Retainage is released only after substantial completion, punch list resolution, and receipt of final lien waivers from all parties.

Substantial Completion vs. Beneficial Occupancy

These two terms are among the most consequential in any construction-related lease provision because they directly determine when your rent clock starts ticking.

Substantial completion is the point at which the build-out is sufficiently finished for the tenant to use the space for its intended purpose, even if minor punch list items remain. Most leases define this as the date the architect issues a certificate of substantial completion or the date the municipality issues a certificate of occupancy (CO) or temporary certificate of occupancy (TCO).

Beneficial occupancy is an earlier milestone where the tenant is permitted to access the space—typically for furniture installation, IT cabling, or equipment setup—before the build-out is formally complete. The critical question is whether beneficial occupancy triggers rent commencement.

The Punch List Process

A punch list is a documented inventory of construction deficiencies, incomplete items, and cosmetic imperfections identified during a walk-through of the completed space. Proper punch list management protects the tenant from accepting substandard work and ensures the contractor completes all obligations before receiving final payment.

Creating the Punch List

Within 5–10 days of the contractor’s notice of substantial completion, the tenant (ideally accompanied by their architect or project manager) should conduct a thorough walk-through and document every deficiency. Common punch list items include:

• Paint touch-ups, scuffs, and uneven finishes
• Misaligned door hardware or cabinet pulls
• Damaged or improperly installed flooring seams
• HVAC balancing issues (hot/cold spots)
• Electrical outlets that don’t work or are improperly wired
• Ceiling tile alignment or staining
• Plumbing leaks or slow drains
• Caulking gaps around windows, countertops, or fixtures

Punch List Resolution Timeline

Negotiate a specific deadline—typically 30 to 45 days—for the contractor to complete all punch list items. If items remain unresolved past the deadline, the tenant should have the right to hire another contractor to complete the work and deduct the cost from retainage. This “self-help” provision is critical leverage.

Construction Timelines and Rent Commencement

The relationship between construction timelines and rent commencement is one of the most financially significant issues in any build-out. If construction runs behind schedule, who bears the cost of delay? This depends entirely on how the lease allocates responsibility.

Landlord-Caused Delays

If the landlord controls construction (turnkey or landlord-managed build-out), the tenant should negotiate that rent commencement is delayed day-for-day for any landlord-caused construction delays. Common landlord-caused delays include slow permit processing, failure to deliver base building systems, delayed approval of plans, and contractor scheduling conflicts with other tenant build-outs in the building.

Tenant-Caused Delays

Landlords will attempt to accelerate rent commencement if construction is delayed due to tenant actions, such as late plan submissions, excessive change orders, or slow approvals. A “deemed substantial completion” clause specifies that if the space would have been substantially complete but for tenant-caused delays, rent commences on the date it would have started absent those delays.

Cost Overruns and Change Order Management

Construction cost overruns are the single biggest financial surprise in any build-out. According to industry data, approximately 35% of commercial build-outs exceed their original budget, with the average overrun running 12%–18% above initial estimates. Effective change order management is the primary defense against uncontrolled costs.

What Triggers Cost Overruns

• Scope creep: Tenant-requested changes to approved plans during construction
• Unforeseen conditions: Asbestos, outdated wiring, structural deficiencies discovered during demolition
• Material price escalation: Supply chain delays that increase costs between bid and purchase
• Design errors: Architectural or engineering mistakes requiring field corrections
• Permit requirements: Code compliance issues discovered during inspection

Change Order Controls

Every change order should be documented in writing, priced before work begins, and approved by both the tenant and the landlord (if the landlord is funding the TI allowance). Negotiate the following protections:

• No work begins on any change order until written approval is obtained
• Change orders must include a fixed price (not time-and-materials) whenever possible
• The contractor must provide pricing within 5 business days of a change order request
• The tenant has the right to reject any change order and revert to the original scope
• Landlord-directed change orders are capped at 5% of the total project budget

Lien Waivers and Mechanics’ Liens

Mechanics’ liens are one of the most dangerous risks in any tenant improvement project. If a contractor or subcontractor is not paid, they can file a lien against the property—and depending on state law and your lease terms, the tenant may be responsible for resolving it, even if the landlord was supposed to pay the contractor.

Types of Lien Waivers

• Conditional lien waiver (progress): Waives lien rights for the current draw, conditioned on receipt of payment
• Unconditional lien waiver (progress): Waives lien rights for previously paid draws, regardless of payment status
• Conditional lien waiver (final): Waives all remaining lien rights, conditioned on receipt of final payment
• Unconditional lien waiver (final): Waives all lien rights permanently—submitted after final payment is received

ADA Compliance in Tenant Improvements

Any tenant improvement project must comply with the Americans with Disabilities Act (ADA) and applicable state and local accessibility codes. ADA compliance is not optional, and violations can result in lawsuits, fines, and forced remediation at the tenant’s expense.

Key ADA considerations in a build-out include:

• Accessible doorway widths (minimum 32” clear opening)
• Accessible restroom design (grab bars, turning radius, sink height)
• Reception counter height (34” max for accessible section)
• Path-of-travel requirements (no steps, adequate width)
• Signage (tactile and Braille on permanent rooms)

A critical lease question is whether ADA compliance costs are covered by the TI allowance or treated as a separate landlord obligation. In most leases, the tenant bears ADA compliance costs for improvements within the premises, while the landlord is responsible for base building accessibility (elevators, building entrances, common-area restrooms). Negotiate clearly to avoid disputes.

Ownership of Improvements at Lease End

One of the most frequently overlooked issues in tenant improvement negotiations is who owns the improvements when the lease expires. In the vast majority of commercial leases, all tenant improvements become the landlord’s property upon installation, regardless of whether the tenant or the landlord paid for them.

This means the tenant cannot remove built-in walls, flooring, electrical upgrades, plumbing modifications, HVAC improvements, or other permanent alterations at lease end. However, trade fixtures—items installed by the tenant for business operations, such as shelving, equipment, signage, and specialized machinery—typically remain the tenant’s property and must be removed at lease expiration.

Restoration Obligations

A restoration clause requires the tenant to return the space to its original “vanilla box” or base building condition at lease expiration, removing all tenant improvements at the tenant’s expense. Restoration costs can be substantial—often $15 to $50 per square foot—and many tenants fail to account for this liability until it’s too late.

For a 10,000 SF space with significant custom improvements, restoration could cost $150,000 to $500,000. Some landlords use vague restoration language as leverage during lease-end negotiations, demanding full demolition of improvements that the next tenant might actually want to keep.

Negotiating Restoration Provisions

• Full waiver: Landlord waives all restoration obligations (best case)
• Limited restoration: Only non-standard or specialized improvements must be removed
• Identification at signing: Landlord must specify which items require removal when the lease is signed
• Cost cap: Restoration costs are capped at a fixed dollar amount or $/SF figure
• Landlord election: Landlord must notify tenant at least 6–12 months before expiration which items to remove

TI Negotiation & Build-Out Checklist

Use this 12-point checklist to ensure you’ve covered every critical aspect of the tenant improvement process before signing your lease or starting construction.

• TI allowance amount — Confirm $/SF, total amount, and whether it covers soft costs (architecture, permits, project management) or only hard construction costs
• Allowance disbursement method — Clarify whether funds are paid as draws during construction, as a lump sum upon completion, or as rent credits
• Construction control — Determine whether tenant or landlord manages the build-out, selects contractors, and controls the construction timeline
• Plan approval timeline — Establish deadlines for landlord review and approval of construction drawings (typically 10–15 business days)
• Substantial completion definition — Ensure the lease clearly defines substantial completion and ties rent commencement to this milestone, not beneficial occupancy
• Delay penalties and protections — Negotiate day-for-day rent commencement delay for landlord-caused construction delays
• Change order process — Require written approval for all change orders with fixed pricing and a cap on landlord-directed changes
• Retainage terms — Confirm retainage percentage (5%–10%), release conditions, and timeline for retainage payment after punch list completion
• Lien waiver requirements — Require conditional and unconditional lien waivers from the GC, all subcontractors, and material suppliers with every draw
• Unused TI allowance — Negotiate the right to apply unused TI dollars toward rent, furniture, moving costs, or IT infrastructure rather than forfeiting them
• Ownership and removal — Clearly define which improvements belong to the landlord and which are removable trade fixtures, documented in a lease exhibit
• Restoration obligations — Negotiate a waiver or limitation on restoration requirements, with all items requiring removal identified at lease signing

The Full Construction Timeline: LOI to Move-In

Understanding the typical timeline from Letter of Intent to move-in helps tenants plan ahead and avoid costly delays. Here’s what a realistic schedule looks like for a mid-range 10,000 SF office build-out:

1. LOI negotiation & execution — 2–4 weeks
2. Lease negotiation & execution — 4–8 weeks
3. Space planning & design — 3–6 weeks
4. Construction drawings & engineering — 4–6 weeks
5. Landlord plan approval — 2–3 weeks
6. Permitting — 2–8 weeks (varies widely by jurisdiction)
7. Contractor bidding & selection — 2–3 weeks
8. Construction — 8–16 weeks
9. Punch list & final inspections — 2–4 weeks
10. Furniture installation & IT setup — 1–3 weeks

Total estimated timeline: 28–57 weeks (7–14 months). Most tenants underestimate this timeline by 30%–50%. Start the process at least 12 months before your target move-in date for any space requiring significant build-out.

Frequently Asked Questions

Final Thoughts

The tenant improvement process is where commercial lease negotiations meet physical reality—and where the largest non-rent financial commitments are made. A poorly negotiated TI provision can cost a tenant hundreds of thousands of dollars through inadequate allowances, uncontrolled change orders, ambiguous completion definitions, and surprise restoration obligations at lease end.

The most successful tenants approach the build-out process with the same rigor they bring to the financial terms of the lease. They negotiate clear TI allowance amounts with defined disbursement procedures, insist on precise definitions of substantial completion tied to rent commencement, establish strict change order controls, collect lien waivers religiously, and address restoration obligations before the lease is signed—not when it expires.

Whether you’re a first-time tenant building out your first office or a portfolio operator managing dozens of simultaneous build-outs, the construction provisions of your lease deserve as much attention as the rent, escalation, and renewal terms. Get them right, and your build-out becomes a smooth process that delivers the space you need on time and on budget. Get them wrong, and you’re looking at cost overruns, construction delays, lien exposure, and a rent clock that starts ticking before your space is ready.