Vanilla Shell vs. Tenant Improvements: What to Offer, What to Protect

Every commercial landlord eventually faces the same question: how much should the space be finished before I start leasing it?

The answer has real dollar consequences. Deliver too little and you can't attract tenants at target rent. Deliver too much for a specific use and you narrow your tenant pool. Offer a TI allowance without the right structure and you can lose tens of thousands of dollars with little recourse.

This guide covers the full decision — from the spectrum of delivery conditions to how to structure TI agreements, what happens when tenants leave, and what high-customization users like breweries and coffee roasters mean for your re-leasing strategy. If you haven't read the lease-up failure modes overview, start there for context on where TI mistakes fit in the bigger picture.

The Delivery Condition Spectrum

"Vanilla shell" is one point on a spectrum. Understanding where your space sits — and where target tenants expect it to sit — is the starting point for any TI negotiation.

Most small commercial, flex, and storefront product is delivered as vanilla shell or white box. Cold shells and turnkey buildouts are both unusual in smaller multi-tenant commercial.

What Vanilla Shell Actually Includes

There is no universal standard, but a vanilla shell for a small commercial or flex space typically includes:

• Demised walls (framed and drywalled between units)
• HVAC with ductwork and diffusers — functional but not tenant-specific
• Electrical panel with adequate service (100–200A for most small commercial; verify this is appropriate for the likely tenant uses)
• Plumbing roughed in — at minimum a floor drain and stub-outs, not finished fixtures
• A working single restroom (in most markets, required by code for occupancy)
• Concrete slab floor — unsealed or with a basic sealer
• Storefront glass and entry door (for retail-facing spaces)
• Basic exterior lighting and addressed unit number

What vanilla shell does not include:

• Flooring finish (LVP, tile, carpet, polished concrete)
• Interior partitions or office walls
• Light fixtures beyond rough-in
• Plumbing fixtures (sinks, toilets beyond one basic restroom)
• Any trade fixtures or equipment
• Paint beyond primer on new drywall
• HVAC upgrades for specific tenant needs (restaurants, labs, breweries)

Tenant Improvement Allowance: The Basics

A tenant improvement allowance (TIA) is a dollar amount the landlord contributes toward the tenant's specific fit-out. It is one of the most negotiated items in any commercial lease.

The mechanics:

• Expressed as $/SF. Typical TIA for flex and small commercial ranges from $10–$40/SF depending on the space, the lease term, and the market. Longer leases justify more landlord contribution because the cost gets amortized over more years of income.
• Paid against receipts. In most deals, the tenant hires contractors, does the work, and submits receipts to the landlord for reimbursement up to the cap. The landlord does not pay in advance.
• Tied to the lease. If the tenant defaults before the lease term expires, the landlord generally has the right to recover some or all of the TI allowance. Get this in the lease.
• Improvements belong to the landlord. Unless the lease specifies otherwise, improvements funded by the TIA (walls, plumbing, HVAC upgrades) become part of the property at lease end.

When you model this in DealForge, the TI allowance is a capital cost that reduces your effective return — it should be included in your total project cost or as a Year 1 capital expenditure, not treated as an operating expense. A $37,500 TI on a 1,500 SF space at a 7% cap rate effectively adds $37,500 to the cost basis that needs to be covered before that unit is contributing to returns.

Structuring the TI Agreement: What to Get in Writing

A handshake agreement or a one-line reference to "$25/SF TI allowance" in the lease is not enough. The TI should be documented in a work letter — a lease exhibit that specifies:

What Happens to Improvements When the Tenant Leaves

This is where most landlords learn the rules for the first time — usually after a tenant vacates and leaves behind something unexpected.

Fixtures vs. Trade Fixtures

The legal distinction that governs most tenant improvement disputes at lease end:

The gray area is where disputes happen. A brewery that installs $200,000 in equipment and a glycol chilling system: the tanks are clearly trade fixtures and belong to the brewery. The glycol lines run through the walls and floor — are they a fixture or a trade fixture? Without lease language addressing it, you may be going to court to find out.

Restoration Clauses

Most well-written commercial leases include a restoration clause that requires the tenant to return the space in the condition it was delivered, or in a specified baseline condition, at lease end. This matters most for high-customization tenants.

The question you need to answer before you write the lease: do you want the space returned to vanilla shell, or do you want to keep the improvements?

• If a restaurant leaves behind a Type I hood, grease trap, and walk-in cooler — that may be worth keeping. Food-and-beverage tenants pay premium rents for restaurant-ready spaces. Your next tenant could be a coffee concept, a ghost kitchen, or a fast-casual operator who values the infrastructure.
• If a specialized manufacturer leaves behind custom structural reinforcement and a ventilation system specific to their process — you may want that removed so you can re-lease to a broader pool of tenants.

Write the lease to reflect what you actually want. Leaving it ambiguous invites disputes and gives you no leverage.

High-Customization Tenants: When Buildout Becomes a Commitment

Some tenants require significant physical changes to a space that go well beyond typical vanilla shell finish work. These tenants are often excellent long-term occupants — but they represent a different risk calculus for the landlord.

Does the Buildout Lock You In?

The honest answer is: sometimes yes, sometimes no — and it depends on the market.

A space with a commercial kitchen in a market with active food-and-beverage demand doesn't narrow your pool — it sharpens it toward a category of tenants who pay well and often sign longer leases. A space with brewery- grade mechanical in a secondary market with no craft beverage scene may sit for 18 months before you find a user who values it.

The risk is not the buildout itself. The risk is building to a specific use in a market without proven demand for that use — and then discovering that the buildout makes re-leasing to a different tenant type expensive or slow.

When Purpose-Building Is the Right Move

There are scenarios where building to a specific tenant's spec makes sense — but they all share one condition: the lease is signed (or as close to signed as legally possible) before you put a shovel in the ground.

• Credit tenant with a 10+ year NNN lease. A national chain, a franchise operator with proven financials, or an institutional tenant willing to sign a long lease with a personal guarantee changes the risk profile entirely. See the NNN lease analysis guide for how to underwrite these.
• Anchor tenant for a multi-tenant project. If one tenant is taking 40% of the space and their lease drives the financing, building to their spec while leasing the remaining bays at vanilla shell is a reasonable structure.
• Market with deep demand for the use type. If you're building a restaurant pad in a dense food-and-beverage corridor, the kitchen infrastructure isn't a liability — it's what every tenant expects. The market is telling you what to build.

Underwriting TI and Buildout in Your Deal

TI is a capital cost, not an operating expense. The mistake in underwriting is treating a $50/SF TI allowance the same as a monthly insurance premium. They are fundamentally different:

• Operating expenses reduce NOI and flow through the income statement year after year.
• TI is a one-time capital cost that reduces your effective yield on the investment — it either increases your total project cost (in development) or represents capital spent between lease cycles that your stabilized cap rate doesn't show.

Before committing to a TI level, get a cost estimate for the actual work. BuildGrade estimates buildout costs by space type, size, and region — so you can compare a $25/SF offer against what it actually costs tenants to finish the space in your market before you negotiate.

In DealForge, TI is entered as a capital expenditure alongside your acquisition or development cost. Modeling it correctly means your NOI projections and cap rate are based on fully-burdened economics, not just the income side.

The Decision Framework

For most small commercial, flex, and storefront product, the right answer follows a simple logic:

• Deliver vanilla shell. It is the market standard for most product types. It keeps your cost down while being leaseable to a broad tenant pool.
• Offer a TI allowance tied to lease length. Short leases get minimal TI. Longer leases justify more landlord contribution. A 3-year lease should look meaningfully different from a 7-year lease in your TI offer.
• Use a work letter. Every time. Even on smaller deals. The cost of the attorney's time to draft it is trivial compared to a dispute about scope at lease end.
• Specify ownership and restoration explicitly. Don't rely on the default fixture rules. Decide what you want to keep and what you want removed, and write it into the lease.
• Be cautious with high-customization tenants unless the lease is signed. LOIs are not leases. Build vanilla shell and negotiate the tenant-specific scope into the lease terms.