Landlord’s Guide to Leasehold and Tenant Improvements

Tenant improvements (TIs), also called leasehold improvements, are often the key to closing a deal with a new tenant. But for landlords, it often feels like a necessary headache. From negotiating allowances to navigating permit approvals, delivering TIs can be a costly, time-consuming, and frustrating process.

It’s common to not feel like an expert on such a complex process, but with the right information, you can manage TIs more strategically.

The Basics of Tenant Improvements (or Leasehold Improvements)

What is a Tenant Improvement or Leasehold Improvement?

Tenant improvements (TIs) are alterations, renovations, or customizations made to a leased property to accommodate a tenant's operations.

TIs matter because:

• They ensure the tenant’s full operational needs are met
• They boost the landlord’s property value
• They attract and retain tenants

TIs are typically negotiated as part of the lease and revert to the landlord at lease end. By negotiating and planning TIs strategically, you can avoid delays, control costs, and create adaptable spaces that grow in value.

How do Tenant Improvements Vary by Asset Class?

The type, scope, and cost of TIs vary significantly depending on the type of building:

• Offices: Often require new layouts (open vs. private offices), conference rooms, AV infrastructure, IT cabling, and upgraded finishes.
• Retail: Emphasizes customer experiences like storefronts, dressing rooms, signage, display areas, and sometimes specialized HVAC or electrical.
• Industrial: May involve high-load flooring, utility upgrades, warehouse office inserts, and tenant-specific safety systems.

Each asset type also comes with different permitting timelines and inspection requirements, which can impact how you plan and deliver improvements.

What Qualifies as Tenant Improvements? (And What Doesn’t?)

Tenant improvements typically include:

• Permanent of semi-permanent changes such as shelving, flooring, ceilings, lighting, HVAC, electrical wiring, and plumbing.

Tenant improvements do NOT include:

• Furniture, fixtures, and equipment (FF&E) such as desks, chairs, moveable shelving (these are typically owned by the tenant).
• Core system upgrades like roofing, structural work, elevators, and shared restrooms (these are typically owned by the landlord, but not part of TIs).

What is Due Diligence and Why is it Important?

Due diligence takes into account all the different factors (first-gen vs second, asset class, etc.) and provides a clear understanding of requirements, timelines, and feasibility upfront. Before finalizing a lease or starting design, the most important things to know for feasibility are:

• Understanding local permitting requirements and timelines
• Confirm zoning and use compatibility
• Assess utility availability and capacity
• Identify any required code upgrades (ADA, fire, etc.)

This upfront feasibility work helps to prevent costly redesigns, delays in permitting, and unexpected code-triggered upgrades, which saves time and unexpected costs.

Managing Build-Outs with Different Tenants

Depending on their size and the space they’re interested in, different tenants have different expectations and needs.

Typical Delivery Methods for Build-Outs

• Cold Shell: also referred to as “grey shell,” is a bare space with minimal systems (no ceiling, lighting, HVAC, etc.) for the tenant to build out.
• White Box: also referred to as “vanilla shell” or “warm shell,” is when the landlord delivers a partially finished space with electrical, plumbing, walls, and HVAC.
• Build-to-Suit: Landlord delivers a custom space with tenant input, and typically involves a longer lease and more up-front collaboration.
• Turnkey: landlord manages and delivers a fully built space based on tenant requirements.

Different Expectations of Small vs Large Tenants

Smaller tenants are owner-operated companies with a few employees. These are often local boutiques, quick-serve restaurants, independent health clinics, or smaller firms or offices. They often:

• Require more guidance on construction or permitting
• Expect white-box or turnkey delivery due to limited capacity or resources
• Need help understanding scope, timeline, and approvals

Larger tenants are corporate, franchise, or institutional-scale companies. They’re often national retail or food and beverage chains, medical groups or surgery centers, or enterprise companies with large office campuses or regional HQs and will typically:

• Bring their own team of architects, general contractors, and product managers
• Prefer cold shell or custom delivery so they have more control over the build out
• Expect more TI concessions in exchange for lease term or rent

Differences between First-Gen and Second-Gen Build-Outs

First-gen spaces are being occupied for the first time and typically start as a cold shell or white box. They require full infrastructure installation, which is more expensive and time-consuming. These projects often require longer permitting timelines due to the scope of work involved.

Second-gen spaces have been previously occupied and may come with existing infrastructure or finishes. While this can reduce costs and construction time, demolition is often required to remove outdated or tenant-specific improvements. They can be trickier to permit: reusing older systems can trigger code compliance, change of use or occupancy.

Larger Tenants Involve Larger Teams

When working with smaller tenants or delivering a turnkey space, landlords typically have most of the control over pre-construction and construction details. Smaller tenants will usually rely on the landlord to permit, design, and build the space.

With larger tenants, coordination can become more complex. Larger tenants may be interested in sequential permitting, and bringing in their own architects-of-record (AORs) and general contractors (GCs), and require less hands-on involvement from the landlord.

Managing TIs in Multi-Tenant Buildings

In multi-tenant properties, one tenant’s build-out can affect others, especially when projects are happening simultaneously. Learn about the common problems landlords encounter, and how to prevent them from spiraling into costly delays.

Problem: Open permits from past tenants prevent new ones from being issued.

• Audit the space before signing a new lease by consulting with permit experts or checking city records to confirm all prior permits have been finalized and signed off.
• Build permit closure into your move-out process as a condition of final tenant payment or security deposit release.
• Keep a digital log of past permits, dates closed, and related inspections.

Problem: Multiple tenants rely on the same infrastructure, but it's unclear who maintains, upgrades, or modifies it during a build-out.

• Define scope boundaries in your lease and clarify who owns and maintains shared systems.
• Centralize and fund upgrades if the improvement benefits future tenants, like larger HVAC capacity.
• If infrastructure work requires downtime like electrical shutoffs, set scheduled time blocks to minimize disruption.

Problem: A single tenant’s change triggers ADA or fire safety upgrades for the whole building.

• Do a code impact assessment during lease negotiation, especially for restaurants, gyms, medical, or anything requiring high occupancy or specialized systems.
• Consult with experts early and ask: “Will this tenant’s use change push me into a new occupancy classification or square footage threshold?”
• Use conditional lease language that clarifies if a tenant’s improvements trigger building-wide upgrades, they may be required to share in the cost.

Problem: Overlapping construction schedules create on-site chaos and conflicts.

• Stagger construction windows to reduce stress on inspections and shared access.
• Appoint a build-out coordinator to be responsible for managing logistics between tenants. This could be your property manager, GC, or permitting lead.
• Require all GCs to comply with shared staging, debris removal, noise protocols, and inspection windows.

Pulley’s Tip: create documentation for a shared construction protocol

Create a short internal guide or handout that outlines:

• Who to contact for access issues or system shutdowns
• Rules for working hours, deliveries, and trash
• Protocols for submitting construction schedules and inspection requests

Managing the Cost of Tenant Improvements

Many different factors impact tenant improvement costs. While there are straight-forward construction costs, other factors come into play if projects are delayed, impacting rent commencement, holding costs, and change-order costs.

In order to best manage tenant improvements, be sure to incorporate accurate timelines, scope expectations, and budget structures into your lease negotiations and take proactive steps to prevent permit delays.

Different TI Funding Structures

Depending on the delivery method agreed upon, tenant improvement costs can be structured differently.

TI Allowances

Landlord provides a defined $/sf amount, and the tenant manages construction and pulls permits.

Pros: Easy to cap the cost for landlords, and tenants control their build.

Cons: Less landlord oversight, and requires more discussion if overages occur.

Turnkey Build-Out

Landlord handles the entire build, including the cost.

Pros: Landlord has full control over the cost and delivery.

Cons: More risk if tenant requirements shift.

Rent Credit

Tenant builds out and receives free rent or reduced rent instead of cash.

Pros: Flexible for the landlord and tenant takes full ownership of the build-out.

Cons: Less asset improvement control for landlord.

Best Practices for Funding TIs

• Clarify what reimbursable vs non-reimbursable expenses will be. Typically, reimbursable items are the ones “attached to the premises” and add lasting value to the property.
• Structure TI allowances around construction milestones, rather than releasing allowances all at once. Milestones often include: permit issuance, complete designs, inspections passed, and Certificate of Occupancy (CO) issued.
• Require lien waivers and proof of payment from contractors or subcontractors to protect yourself from any legal liability and title risk.
• Plan for cost overages but stating clearly who approves them, and who pays.

Prevent Costly Permit Delays

Permitting can be one of the most unpredictable parts of pre-construction, and delays can spiral into costly complications. Having permitting expertise on your side gives you the ultimate advantage in managing TI construction with less headaches and costly delays.

Common Reasons for Permit Delays

Change of Use or Change of Occupancy Complications

Use and occupancy classifications often pose issues when changing to a new tenant. A change of use could trigger lengthy zoning approvals that delay tenant turnover, while a change of occupancy can influence building code requirements that becomes costly. It’s important to understand both use and occupancy classifications during the due diligence phase to avoid complications down the road.

Variances Across Different Jurisdictions

Permitting processes and requirements are unique to every jurisdiction, from the signatures required to the specific forms or processes to follow. From unpaid parking tickets in Chicago to a missing Water Department signature in Tampa, every project brings a new permit lesson for teams. It’s not uncommon for your submittal to get rejected for unexpected reasons.

Difficulties Coordinating Between Stakeholders

Project teams can be large and highly cross-functional, which leaves more room for small errors. From missing forms and signatures to little mistakes on plans, it’s not surprising for permits to get delayed simply because coordinating everyone’s work is complicated.

How Pulley Mitigates Permit Delays

Accurate submittals

Pulley conducts all the due diligence needed, and provides a clear permit plan all necessary approvals and timelines. Our data enables 90% requirements accuracy with every submittal.

High visibility

Our software uses real-time data synced from 19,000+ city portals to build highly accurate forecasts, ensuring you can plan ahead with the most up-to-date timelines.

Powerful, organized workflow

Bring architects, engineers, general contractors, and project managers into one platform, with unlimited seats to manage tasks and create accountability.

Hands-on permit expertise

Pulley’s permit leads are licensed experts who double check all plans and submissions, engages with authorities, and takes proactive steps for faster reviews. 4 out of 5 Pulley projects are approved with ≤1 round of comments.

Learn more about how your team can break ground faster with Pulley.

TI Planning Checklist for Landlords

Use this checklist as a guide for your next tenant build-out to spot gaps in planning, improve communication and accountability, and avoid delays.

Site and Building Prep

☐ Is the space first-gen (never occupied) or second-gen (previously built out)?

☐ Are utility stubs (power, water, HVAC) installed and metered to the suite?

☐ Have all prior permits been closed out with the city?

☐ Is the current use/zoning compatible with the incoming tenant?

Scope and Delivery

☐ Is the TI delivery model clearly documented (turnkey, white box, cold shell)?

☐ Is scope ownership clearly split in writing (e.g., restrooms, fire alarms, demising walls)?

☐ Are shared systems (plumbing stacks, HVAC zones, electrical panels) accounted for?

☐ Is demo required? If so, who is responsible and when?

Budget and Legal

☐ Is the TI allowance amount, structure ($/SF), and payment schedule defined in the lease?

☐ Are reimbursable vs. non-reimbursable expenses itemized in the lease exhibit?

☐ Are disbursements tied to construction milestones (e.g., framing, CO)?

☐ Are lien waivers and proof of payment required before each draw?

☐ Is there a process in place for change orders and cost overruns?

☐ Has insurance and indemnity coverage been verified for tenant vendors?

Permitting and Design

☐ Will permits be submitted jointly (landlord + tenant) or sequentially?

☐ Has the AOR (Architect of Record) been assigned? Is a shared GC or separate GC being used?

☐ Have fire, ADA, zoning, and change-of-use triggers been reviewed with an expediter or city rep?

☐ Are any variances, special inspections, or deferred submittals anticipated?

Tenant Coordination

☐ Are any other tenants building out at the same time? If so, is staging/logistics coordinated?

☐ Has the tenant submitted a construction schedule for review?

☐ Are utility shutdowns, after-hours work, or noise-sensitive activities being communicated in advance?

☐ Are delivery and CO dates aligned with lease commencement and rent start?

☐ Is there a designated point of contact for construction issues or site access?

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