Playbook: Negotiating the TIA and Construction Letter

Why This Stage Matters

For most tenants, the Tenant Improvement Allowance (TIA) negotiation is where a lease deal either creates long-term value or hidden financial pain. Your allowance, build-out process, and construction letter define how your space will actually get built, who pays for what, and what happens when something goes wrong. Yet many tenants treat these as minor attachments to the lease. They aren’t.

The TIA and construction work letter determine:

• How much money you’ll get to build out your space
• Who controls the construction timeline and design
• How change orders and delays are handled
• Whether your move-in aligns with your business plan

Getting this stage right can save you months of delay and tens of thousands in overages. Getting it wrong can cripple your opening budget before you even turn the lights on.

Step 1: Understand the Purpose of the TIA

The Tenant Improvement Allowance (TIA) is the landlord’s contribution toward building out or modifying the leased space to meet your needs. It’s typically expressed as:

• A dollar amount per rentable square foot, or
• A lump-sum contribution to the tenant’s project budget

Common Allowance Types

Pro Tip:

Always request an itemized budget or “work letter exhibit” showing how the TIA is allocated (architectural, mechanical, finishes, etc.). Vague allowances hide overruns.

Step 2: Clarify Scope, Standards, and Delivery Condition

Before agreeing on a tenant improvement allowance, you need to understand what you’re actually building on top of. The “base building condition” determines how much work (and money) it will take to get the space ready for your business.

Base Building Condition
Not all spaces start from the same point. Landlords use a few common terms to describe what they’re delivering:

• As-Is: The space is delivered exactly as it sits today, with no additional work by the landlord. You take it with all existing finishes, fixtures, and quirks. Good for tenants planning a full remodel, but risky if hidden issues exist.
• White Box (or Vanilla Box): A clean, partially finished space with basic walls, ceiling, lighting, HVAC, and electrical in place, but no custom finishes. It’s a blank canvas ready for your layout and décor.
• Shell Condition: A raw space that may have little more than structure and utilities.
  • Cold Shell means you’re starting from a bare structure with minimal mechanical or electrical service.
  • Warm Shell includes basic systems like HVAC stub-outs or lighting but still requires significant build-out.

Understanding these conditions upfront helps you avoid surprises later. A $50-per-square-foot allowance goes much further in a white box than in a cold shell.

Existing Systems
Before you accept the landlord’s estimates, have your contractor verify the HVAC, plumbing, and electrical capacity. Confirm whether upgrades to meet your use are already included in the allowance or will be an additional expense.

Code and Permits
Ensure that compliance upgrades (ADA accessibility, sprinklers, or restroom improvements) are treated as landlord responsibilities unless they’re unique to your use. These are often base building costs, not tenant improvements.

If the landlord is delivering a partially finished space, make sure the work letter exhibit spells out exactly what counts as “Landlord’s Work” versus “Tenant’s Work.” Clarity here prevents cost disputes once construction begins.

Checklist:

• Obtain existing condition drawings and MEP (mechanical, electrical, plumbing) plans
• Verify who pays for code-required upgrades
• Clarify if demolition costs come out of your allowance
• Ask for construction photos or walkthrough before signing

Step 3: Negotiate Timing, Payments, and Control

Even a generous allowance can hurt you if the timing or control terms are wrong.

Key Leverage Points:

• Payment Structure: Seek progress draws rather than a lump sum after completion.
• Reimbursement Window: Cap landlord reimbursement delays to 30 days after submission of invoices and lien waivers.
• Contractor Selection: Fight for the right to select your own licensed contractor, subject to landlord approval.
• Project Oversight: Require landlord to respond to plan approvals within a fixed period (5–10 business days).
• Substantial Completion Definition: Tie rent commencement to actual occupancy readiness, not a certificate of completion alone.

Pro Tip:
If your landlord insists on using their preferred general contractor, negotiate for competitive bidding or at least the right to review bids.

Step 4: Know What the Work Letter Actually Does

The Work Letter Exhibit is legally binding; it governs how improvements get built and paid for. It should cover:

Tenant Strategy:
Ask your contractor to review the work letter before signing. Many tenants skip this step and only realize mid-project that certain improvements are “not covered” by the allowance.

Step 5: Anticipate Overages and Hidden Costs

Landlords often quote a per-square-foot allowance that sounds generous until the real costs surface.
A good rule of thumb is to assume the true turnkey cost of a commercial interior build-out runs between $60–$120 per SF depending on use and quality level.

If your allowance is $40/SF, you’re already exposed. Plan for overages early.

Watch for:

• Landlord markups on materials or contractor fees
• Permitting delays that trigger early rent commencement
• Change orders for items that “should have been included”
• Upgrades required for code compliance

Step 6: Protect Your Move-In Timeline

Construction delays are one of the biggest hidden costs in leasing.
Negotiate rent abatement if landlord-caused delays push back your occupancy. Tie rent commencement to actual delivery of the premises as defined in the work letter.

Sample Language to Request:

“If substantial completion is delayed beyond the scheduled delivery date due to causes within landlord’s control, rent commencement shall be deferred one day for each day of delay.”

Also confirm:

• Who manages permits and inspections
• How delays due to force majeure are handled.
  • These are uncontrollable events (i.e. war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business
• Whether temporary access is allowed for FF&E (furniture, fixtures and equipment) installation

Case Example: The Café Build-Out Trap

A small café negotiated a $50/SF TIA in a retail center. The landlord provided “as-is” shell space that required plumbing, venting, and electrical upgrades; all charged against the allowance. Final build-out cost $115/SF.

Because reimbursement came only after completion, the tenant fronted over $150,000 before receiving any funds. They opened three months late and burned through their opening capital.

What would have helped:

• Pre-bid walk-through by a contractor
• Reimbursement in progress draws
• Excluding base building upgrades from the allowance

Step 7: Get it in Writing Before You Sign

Do not rely on verbal commitments. Any promises about timing, scope, or reimbursement must appear in the lease exhibits.
If your landlord says “we’ll work it out later,” assume it will not happen.

Attach:

• A final construction budget or exhibit
• A defined timeline with milestones
• The TIA payment schedule
• Any special provisions (e.g., rent abatement for delay)

Step 8: Coordinate TIA with Your Lease Economics

Remember, TIA money isn’t free, it’s priced into your rent. A high allowance often means a higher base rate or longer term. Run the math:

• Compare effective rent (base rent minus amortized TIA value)
• Ask what the rent would be without the allowance
• Negotiate flexibility: sometimes a lower rent and self-funded build-out is better

Key Takeaways

• Treat the TIA and work letter as core financial documents, not appendices.
• Verify delivery condition, approvals, and timing before signing.
• Structure reimbursement to protect cash flow.
• Tie rent commencement to actual readiness.
• Get every construction term in writing before execution.