The build out of a tenant space is one of the most negotiated points in any lease: who will manage construction, who is responsible for the cost, what materials are being used, etc. The process is complicated. There are two common lease options that address fit outs: the tenant improvement allowance and turnkey.
In a T.I. allowance situation, a tenant and a landlord will negotiate the amount that the landlord will contribute to the improvement and customization of the space. Anything over and above the agreed upon T.I. allowance is the tenant’s responsibility. The price is usually on a square foot basis and can range in amount. The T.I. allowance will usually increase with the number of years in the lease term and the amount of square feet. The space involved in a T.I. allowance will typically already have interior walls, paint, electrical outlets, flooring, etc.
The concept of a turnkey lease is that all the tenant has to do is “turn the key” to open for business. The landlord is responsible for paying for all of the improvements and leaving only minor costs (furniture, phone, etc), if any, for the tenant. The tenant needs to provide completed and specific plans and cost estimates. The advantage here is that the landlord reduces the risk of having the tenant fit-out their space, and the tenant does not have to pay for the improvements. However, tenants should carefully consider the quality of work that will be done, and how the landlord is compensating the build out costs in the tenant’s rent.
Related– Common Commercial Lease Clauses