You signed a letter of intent. The landlord offered $45 per square foot in tenant improvement allowance, and it felt like a win. Then the architect’s fee, the data cabling, and the reception desk all landed outside the allowance, and the “free” build-out started costing real money.
That gap is the reason this article exists. We’ll cover how landlords fund the allowance, what it pays for, how the work letter changes the math, how to stretch it, and how it hits your books. Then we’ll get specific about what a general contractor needs from your lease before pricing a single wall.
Stop Calling It Free Money
A tenant improvement allowance (TIA, or just TI) is money a landlord pays a tenant as reimbursement for building leasehold improvements, usually quoted per rentable square foot or as a lump sum. Tenant improvements are the walls, ceilings, lighting, plumbing, and finishes that turn a raw or previously occupied suite into your restaurant, clinic, salon, or office. Commercial tenant improvements are the same thing; nobody negotiates a TI on an apartment.
Here’s the thing. The landlord isn’t giving you anything. The allowance covers improvements that remain the property of the landlord after the lease expires, and the landlord recovers the money through the rent and the term. A common brokerage rule of thumb puts a reasonable allowance at 25% to 150% of one year’s base rent. Longer term, bigger allowance. Landlords say so openly: they’re more willing to offer substantial allowances in exchange for longer lease terms.
So the honest description is landlord capital, amortized inside your rent, spent on assets the landlord keeps.
Take the allowance anyway. Just treat it like a construction budget with strings attached, because that’s what it is.
Allowance, Turnkey, or Free Rent: Which Deal Is Yours?
Landlords fund build-outs three ways, and the paperwork is different for each.
The cash allowance. You hire the architect and the contractor, you carry the cost, and the landlord reimburses you. You submit a draw package with paid invoices and lien waivers, and the landlord cuts a check within 30 to 60 days. Some leases pay in stages. Others hold everything until you have a certificate of occupancy.
A landlord-drafted clause might pay within thirty (30) days after each of the following items are fulfilled: a general contractor’s affidavit and lien waiver, waivers from every subcontractor and supplier, and the CO. The tenant-friendly version in the same guide pays half the allowance when the work is half built.
Turnkey. The Commercial Real Estate Development Association glossary defines turnkey as a landlord’s agreement to provide and pay for improvements to a tenant’s premises. The landlord’s contractor builds to an approved plan and you walk in. You give up control of the contractor, the schedule, and often the finish level. You also carry no construction float.
Rent abatement. Free rent instead of cash. It reduces overlapping occupancy costs while the space is being improved, which matters when you’re still paying rent somewhere else. The catch: leases usually set a fixed construction period, and rent commences regardless of whether the tenant’s work is complete.
Most DFW deals blend two of the three. In its 4Q 2025 office report, Bradford Companies observed that North Texas landlords had largely maintained face rents while offering concessions in the form of elevated tenant improvement allowances and free rent packages, with asking rents near $32.45 per square foot.
CBRE’s second-quarter 2026 figures, as reported by CRE Daily, showed over 92% of new DFW office leases went to Class A space. That tells you which landlords are motivated to negotiate. Cushman & Wakefield saw the same thing nationally: Class A tenant improvement allowances are increasing as landlords compete for high-credit tenants and respond to higher build-out costs.
What the Allowance Pays For, and What It Won’t
Ask a landlord what the allowance covers and you’ll hear “improvements.” Ask the lease and you’ll get a list.
Usually in: demising walls, doors and framing, flooring, ceilings, paint, lighting and electrical, HVAC distribution, basic plumbing, and often permits and architectural drawings. Usually out: furniture, fixtures and equipment (FF&E), signage, IT cabling, AV and security systems, and moving costs.
The soft-cost line is where budgets crack. Some landlords fund hard costs such as labor, materials and building systems and either exclude or cap soft costs such as architectural and consulting fees. Others restrict the allowance to building improvements, excluding office furniture or technology equipment that do not increase the property’s value.
Cabling counts as technology. So does your phone system.
JLL puts security, IT and AV at roughly 10 to 12% of total fit-out cost. If the lease excludes them, that’s a tenth of your project with no landlord money behind it.
Then there’s the deadline. Allowances are usually a fixed sum, with the tenant forfeiting any amounts not used within a reasonable time. Some tenants negotiate to apply the leftover toward rent. Most never ask.
The Work Letter Decides More Than the Dollar Figure
The allowance is one paragraph. The work letter is the exhibit that decides whether that paragraph is enough.
A work letter is a legal document that outlines the obligations of the landlord relative to the improvements necessary to prepare leased premises for a tenant’s occupancy. It splits the job into landlord’s work and tenant’s work.
In a typical split, the landlord constructs and provides the building shell, roof, exterior walls and foundation, and the tenant builds the interior. Everything the landlord promises to deliver is base building. Everything else comes out of your allowance.
Delivery condition sets the starting line. A cold shell is completely unfinished, with just exterior walls, bare floors, and exposed ceilings. A warm shell typically includes interior walls, electrical outlets and wiring, sealed concrete floors, finished ceilings, lighting, and HVAC.
Second-generation space was built out for a previous tenant; the glossary term is relet space. One brokerage’s published 2026 ranges tell the story in dollars: second-generation office at $10 to $30 per square foot, white box at $30 to $60, cold shell at $60 to $100, and restaurants at $100 to $250 and up.
Same allowance, different starting line, wildly different outcome. A $50 allowance on a warm shell might finish the job. On a cold shell, it’s a down payment.
Read the as-is language too. In an as-is lease, the lease contains no landlord representations or warranties regarding the condition of the leased premises. If the existing rooftop unit is undersized, that’s now your problem and your allowance.
How Experienced Contractors Stretch an Allowance
Let’s apply that. A contractor who has run tenant improvement work for a while doesn’t start by estimating. They start by reading the lease, because the lease is where the money leaks.
Prefer second-generation space when the layout is close. Shell space tends to come with higher tenant improvement allowances, but it costs more and takes longer; the same brokerage estimates second-generation build-outs finish about three months sooner than comparable shell work. A salon moving into a former salon inherits plumbing stubs; a cafe moving into a former cafe may inherit a grease interceptor. Real money you never have to spend.
Bid a fixed scope before the lease is signed. Soft costs, equipment, and unused funds should be settled while the LOI is still an LOI; one real estate attorney’s advice is that the key business assumptions underlying the allowance should be identified before lease drafting begins. A contractor who prices from drawings, trade by trade, hands you a number to negotiate against. Guessing hands you nothing.
Assume costs move. Cushman & Wakefield’s 2026 contractor survey found 79% of contractors expect labor and material costs to rise over the next six months, and none expect declines. JLL’s benchmark for a medium-quality corporate office fit-out is $295 per square foot, with a typical range of $230 to $375, though it notes Sun Belt markets have kept more competitive subcontractor pricing this cycle. DFW is one of those markets. Price it anyway, with an escalation line.
Run the draw package like a bank would. Landlords want contractor invoices, applications for payment, architect or contractor certifications, evidence of payment, and partial or final lien waivers. Miss one subcontractor waiver and the whole draw sits.
Know the local permit path before you build the schedule. In Plano, if any construction requiring a building permit is necessary, an interior finish-out building permit is required, not a simple Certificate of Occupancy permit, and the CO has to be approved before you stock merchandise or open to the public.
Dallas requires a new CO on a change of tenant, and its commercial permit checklist asks for proof that plans went to a Registered Accessibility Specialist for Texas Accessibility Standards review, plus an asbestos survey for the area being renovated. Statewide, projects under $50,000 in estimated cost aren’t required to register with TDLR, but still have to comply with TAS. None of that is an allowance rule, but all of it decides whether you hit the allowance deadline.
A tenant improvement contractor who does this every week treats the lease, the drawings, and the permit calendar as one document. That read is also the first step in our own process, before anyone draws a wall.
ASC 842 in Plain English: The Allowance Shrinks Your Asset
Skip this section if you run cash-basis books. If your company reports under U.S. GAAP, the allowance lands on the balance sheet, and your CPA will want the lease in hand.
Under ASC 842, a tenant improvement allowance is a lease incentive. RSM’s accounting brief on the topic says it plainly:
PwC’s leases guide spells out the math. The right-of-use asset starts with the lease liability, adds any lease payments made to the lessor at or before the commencement date, minus any lease incentives received, then adds initial direct costs. Bigger allowance, smaller asset.
Reimbursement-style allowances are messier, because the landlord owes you nothing until you’ve spent the money. RSM points out that ASC 842 does not directly address these contingent incentives, so companies make a policy election: estimate the incentive at commencement when you’re reasonably certain to earn it, or net the expected receipts against rent payments so both the liability and the asset come down. Either way, the improvements themselves sit as a separate leasehold-improvement asset, amortized over the shorter of their useful life or the remaining lease term.
One more wrinkle from that same brief. If the lease requires you to build specific improvements you can’t remove without the landlord’s consent, the accounting may treat the landlord as the owner, and the payment stops being an incentive at all. Ownership language in the work letter has a balance-sheet consequence, so show your CPA the lease before you sign it.
What We Need From Your Lease to Price It Right
I’m Sara Bannat, founder and CEO of MASACO Construction. We’re a woman- and minority-owned commercial general contractor headquartered in Plano, and tenant improvement work across Dallas-Fort Worth is the core of what we do. Here’s what I ask for before we price a build-out.
The work letter and the delivery condition. The actual exhibit, with the landlord’s work spelled out. It tells us where the landlord’s scope stops, so we don’t price a demising wall the landlord already owes you, or miss one it doesn’t.
The eligible-cost list and the exclusions. We organize every fixed-scope proposal by trade, with allowances called out, so you can lay it next to the lease and see which lines the landlord funds and which ones you do. If cabling and FF&E are excluded, they get their own lines instead of hiding inside “electrical.” If you’re still choosing between renovating an existing suite and starting from shell, we compared the two in commercial renovation vs. build-out.
The draw schedule, the documentation list, and the outside date. We collect conditional and unconditional lien waivers with every pay application, because a draw package with one missing waiver is a draw package that doesn’t get paid. On Fade & Style in Allen, a 1,500 SF barber shop we took from shell to open in 6 weeks, the fire marshal questioned the PVC station walls. We produced the documentation and kept the opening date. Same discipline, different reader.
Landlord approval windows and building rules. How many days does the landlord have to approve drawings? Are there hours when demolition is off limits? At Calibration Brain & Body in Frisco, a 4,250 SF conversion into a wellness and media studio, we finished in 5 weeks on an expedited schedule that included a podcast studio, acoustic panels, a custom front desk, and a water filtration fountain. Every one of those items had a lead time, and the schedule only held because approvals were mapped before demo started.
The rent commencement date. If rent starts on a fixed day whether or not you’re open, the schedule is the budget. Pizza Twist in Irving was a 2,000 SF franchise restaurant with a full kitchen install and utility connections, built in 6 to 8 weeks while the restaurant stayed open. Cielo Beauty Bar in Celina was 2,600 SF of high-end salon finishes held inside a controlled budget, built in 8 weeks. Different sectors, same job: open on the date the lease assumes.
Bottom line: the allowance is the landlord’s number. The scope is yours to control.
What you get from us is built around that: 3D renderings so you can see the space before a wall moves, a proposal by trade you can hold against the lease, one project manager with weekly written photo updates, and a close-out package with as-builts, permits, inspections, the CO, and warranties, which happens to be most of what a landlord’s final draw request asks for anyway.
If you’re weighing a lease in Plano, Frisco, Dallas, or anywhere else in North Texas and want a fixed-scope number before you sign, book a consultation. Bring the work letter. We’ll tell you what the allowance really buys.
