What to Do When Your Commercial Buildout Exceeds the Landlord's TI Allowance

The TI Gap: A Common Problem

You signed a lease for your new office, restaurant, clinic, or retail space. The landlord offered a tenant improvement allowance, and you thought it would cover the buildout. Then the bids came in, and the numbers tell a different story: your buildout will cost significantly more than the TI allowance provides.

This is one of the most common financial surprises in commercial real estate. In the Bay Area, where construction labor rates are among the highest in the country and code requirements are extensive, the gap between TI allowance and actual construction cost can range from $20,000 to $200,000 or more, depending on the size and complexity of the space.

The good news: you have options. The gap is manageable if you approach it strategically, and the decisions you make now will affect your business financials for the duration of the lease.

All pricing is approximate, reflects 2026 Bay Area market conditions, and is subject to change. Every project is unique. Final costs are determined on a project-by-project basis during our design phase.

Why Buildouts Exceed TI Allowances

Before solving the problem, it helps to understand what created it.

Scope Creep During Design

The most common culprit. Your initial space plan called for basic offices and a reception area. As the design developed, you added a conference room with AV equipment, a break room with plumbing, upgraded lighting, custom millwork at the reception desk, and acoustic treatment in the conference room. Each addition seemed reasonable on its own, but the cumulative cost pushed the project well beyond the TI budget.

Code Compliance Requirements

Building codes do not care about your budget. When you change the use of a space or trigger a threshold of improvement value, code requirements kick in that can add substantial cost:

• ADA compliance: California requires that a percentage of improvement costs be allocated to accessibility upgrades. For projects above a certain valuation, full ADA compliance is required: accessible entrances, clear paths of travel, compliant restrooms, and appropriate signage
• Fire suppression: If your buildout adds walls or changes room configurations, the existing sprinkler system may need to be reconfigured. New rooms need sprinkler heads. Fire alarm systems may need additional notification devices
• MEP upgrades: Adding a commercial kitchen, dental operatory, or server room requires significant mechanical, electrical, and plumbing work that the base building may not be equipped to support
• Seismic requirements: Bay Area buildings must meet seismic standards. Adding walls, heavy equipment, or second-floor loads may trigger structural upgrades

Underestimated Base Building Conditions

The “as-is” condition of the space affects buildout cost. If the previous tenant left the space in poor condition (damaged walls, outdated electrical, worn flooring), you may need to spend money bringing the space back to baseline before your improvements even begin. This restoration work is often not covered by the TI allowance, which is intended for new improvements, not repairs to existing conditions.

Unrealistic Initial Estimates

Some tenants rely on rough per-square-foot estimates when evaluating whether a TI allowance will be sufficient. These estimates rarely account for the specifics of the space: unusual floor plans, high ceilings that require more materials, buildings with limited electrical capacity, or spaces that need significant demolition before construction can begin.

Market Timing

Construction costs fluctuate. If your lease was negotiated six months ago but construction is starting now, material prices and labor rates may have increased. In volatile periods, a 5% to 10% increase over a six-month gap is not unusual.

Negotiation Strategies with Your Landlord

Before the Lease Is Signed

If you have not yet signed the lease, you have maximum negotiating power. Use it.

Get a preliminary cost estimate before signing. Engage a contractor or design-build firm to walk the space and provide a rough cost estimate for your intended buildout. Compare this estimate to the proposed TI allowance. If there is a gap, you know before you are committed.

Negotiate a higher TI allowance. In the current Bay Area market, office vacancy rates in many submarkets are high. Landlords are competing for quality tenants. Use this to your advantage. Present your cost estimate and ask for a TI allowance that matches the actual cost of the buildout. Be prepared to offer something in return: a longer lease term, a higher base rent, or a personal guarantee.

Negotiate a turnkey buildout. Instead of a dollar-per-square-foot TI allowance, ask the landlord to deliver the space “turnkey,” built out to your specifications at the landlord’s cost. This shifts construction risk to the landlord and eliminates the TI gap entirely. Landlords may agree to this arrangement for creditworthy tenants with long lease commitments.

Request a building condition report. Before signing, ask for documentation of the building’s MEP systems, fire suppression, ADA status, and structural condition. Understanding the base building conditions helps you estimate buildout costs accurately.

After the Lease Is Signed

Your negotiating position is weaker, but options remain.

Present documentation. Show the landlord a detailed cost breakdown from your contractor that clearly separates tenant-driven costs from code-driven costs. Many landlords will contribute additional funds for code compliance work (ADA, fire, seismic) that benefits the building, not just your tenancy.

Offer a lease extension. If the landlord is concerned about vacancy risk, offering to extend your lease by one to three years in exchange for additional TI funds can be compelling. The landlord gets long-term income security; you get the capital to build out the space properly.

Propose amortization. Ask the landlord to fund the gap and amortize the cost over the lease term through increased monthly rent. This is a common arrangement that both parties can structure to their benefit.

Value Engineering: Reducing Costs Without Gutting Your Vision

Value engineering is the systematic process of analyzing your buildout plan to find cost reductions that maintain the function and quality of the space. It is not about cutting corners. It is about spending smarter.

Materials Substitution

• Walls: Standard painted drywall instead of glass partitions saves $30 to $80 per linear foot. Use glass strategically in high-visibility areas (conference rooms, reception) and drywall everywhere else
• Flooring: Luxury vinyl plank (LVP) instead of hardwood saves $4 to $10 per square foot with comparable durability and appearance. Polished concrete, where the slab is in good condition, eliminates flooring cost entirely
• Countertops: Quartz instead of natural stone saves $20 to $40 per linear foot with lower maintenance requirements
• Lighting: Standard LED fixtures instead of custom architectural lighting can save 40% to 60% on the lighting budget

Layout Optimization

• Open plan where possible: Every enclosed room requires framing, drywall, a door, electrical outlets, lighting, and HVAC distribution. Reducing the number of enclosed rooms can save $3,000 to $8,000 per room
• Exposed ceilings: Leaving the ceiling open (exposed ductwork, painted structure) instead of installing a drop ceiling saves $3 to $8 per square foot. This aesthetic works well for creative offices, restaurants, and retail spaces
• Shared utility walls: Locating plumbing-heavy rooms (kitchenettes, restrooms) adjacent to each other reduces piping runs and costs

Phased Construction

Not everything needs to be built on day one. Identify elements that can be deferred:

• Secondary conference rooms or collaboration spaces
• Decorative finishes and accent walls
• Custom millwork and built-in furniture
• Outdoor seating areas or patios
• Signage and branding elements

Build the essential operational space first, open your business, and complete the deferred items as cash flow allows.

Competitive Bidding

If your contractor provides the buildout cost as a lump sum, ask for a breakdown by trade. Then evaluate whether specific trades (electrical, plumbing, HVAC, flooring, millwork) can be bid competitively to multiple subcontractors. The difference between the highest and lowest subcontractor bid on a major trade can be 15% to 30%.

Amortization: Spreading the Cost Over the Lease

Amortization is a financial arrangement where the landlord pays for buildout costs beyond the TI allowance and recovers the money through increased monthly rent over the remaining lease term.

How It Works

The landlord funds the gap (for example, $60,000 in excess buildout costs). The cost is amortized over the lease term (for example, 5 years) at an agreed interest rate (typically 6% to 10%). The resulting monthly payment is added to your base rent.

Example calculation:

• Excess buildout cost: $60,000
• Lease term remaining: 5 years (60 months)
• Interest rate: 8%
• Monthly amortization payment: approximately $1,217

Your rent increases by $1,217 per month for the remaining 60 months of the lease.

When Amortization Makes Sense

Amortization is attractive when:

• You want to preserve your upfront capital for business operations
• The monthly increase is manageable within your business budget
• The buildout improvements will generate revenue (a better restaurant layout, a more functional clinic, a more impressive office that helps recruit talent)

When It Does Not

Amortization is less attractive when:

• The interest rate is high (above 10%)
• Your lease term is short (the monthly payments are larger on shorter amortization periods)
• The improvements are primarily cosmetic rather than revenue-generating
• You are uncertain about the long-term viability of the location

Tax Considerations

Amortized TI costs may be deductible as a business expense. The tax treatment depends on whether the improvements are classified as leasehold improvements (depreciable over 15 years under current tax law) or as additional rent. Consult with your accountant to understand the implications for your specific situation.

Budgeting Beyond the TI Allowance

If you are funding the gap from your own capital, structure the spending carefully.

Separate Your Budgets

Maintain separate budgets for:

1. TI-covered work: Improvements funded by the landlord’s allowance
2. Tenant-funded improvements: Work you are paying for out of pocket
3. Furniture, fixtures, and equipment (FF&E): Items that are not part of the construction but are necessary for operations
4. Soft costs: Design fees, permit fees, inspections, insurance

This separation keeps your accounting clean and ensures you know exactly what you are spending in each category.

Maintain a Construction Contingency

Carry a contingency of 5% to 10% of the total buildout cost beyond the TI allowance. Commercial construction, like residential, encounters surprises: hidden conditions behind walls, code requirements discovered during inspection, and material lead times that require substitutions.

Understand What You Keep vs. What Stays

Improvements attached to the building (walls, flooring, plumbing, electrical) typically become the landlord’s property when the lease ends. Movable items (furniture, equipment, trade fixtures) remain yours. Knowing this distinction affects how you allocate your capital. Spending heavily on permanent improvements in a short-term lease may not be a wise investment.

How Design-Build Controls Commercial Buildout Costs

The design-build model provides a significant advantage for commercial tenants facing a TI gap, because it gives you accurate cost information before construction begins.

At Custom Home Design and Build, our commercial buildout process works like this:

1. Space evaluation: We assess the existing conditions, identify code compliance requirements, and flag potential cost drivers before design begins
2. Budget-aligned design: We design to your budget, not to a wish list. If the TI allowance is $80 per square foot and the initial design comes in at $120 per square foot, we value engineer during design rather than discovering the gap after bids come in
3. Transparent pricing: Our cost estimate is detailed by trade and line item, giving you full visibility into where the money goes and where reductions are possible
4. Single point of accountability: One contract, one team, one price. No gaps between the architect’s design and the contractor’s bid

This approach eliminates the most common cause of TI shortfalls: discovering that the design costs more than the budget after the architect has already been paid and the lease clock is ticking.

Close the Gap and Open Your Doors

A TI allowance that falls short of your buildout cost is not a deal-breaker. It is a planning challenge with multiple solutions. Negotiate for more, value engineer where you can, amortize if it makes financial sense, and fund the remainder from business capital.

The key is knowing the true cost of your buildout before you commit. An accurate estimate from an experienced commercial contractor gives you the information you need to negotiate with your landlord, align your design with your budget, and open your business on time and on solid financial footing.

If you are planning a commercial buildout in the Bay Area and need accurate pricing before you finalize your lease, contact Custom Home Design and Build. We specialize in tenant improvements for offices, restaurants, retail spaces, and medical facilities across the Bay Area.