Who Handles Shell and Tenant Improvement Work

Shell construction is handled by the landlord or developer and covers the building's structure, exterior envelope, and base utility infrastructure. Tenant improvement work is handled by the tenant or the tenant's general contractor and covers the interior buildout that prepares the leased space for the tenant's specific business operations. These two phases are distinct but connected, and the handoff between them is defined in the lease agreement's work letter. This article explains what each phase includes, who pays for what, how the general contractor's role shifts between phases, and what tenants and landlords need to know before construction begins.

Who Handles Shell and Tenant Improvement Work in Commercial Construction

The landlord or developer handles shell construction, and the tenant or the tenant's general contractor handles tenant improvement work. Shell construction produces the base building: the structural frame, the exterior walls, the roof, the building envelope, and the core utility infrastructure that serves the entire property. Tenant improvement (TI) work produces the finished interior: the walls, flooring, ceilings, lighting, HVAC distribution, plumbing fixtures, and finishes that make a specific leased space ready for a specific business to operate.

The split between shell and TI is the central organizing principle of commercial construction for multi-tenant properties. The landlord builds the shell once and delivers it to multiple tenants over the building's lifetime. Each tenant then builds out the interior to match their own needs. A law firm needs private offices and a conference room. A medical practice needs exam rooms and specialized plumbing. A restaurant needs a commercial kitchen and exhaust system. The shell stays the same; the TI work changes with every tenant.

According to data from Mazirow Commercial, there are no laws governing the specific condition in which a landlord must deliver a commercial space. The shell condition, what is included and what is not, must be documented in writing in the lease. This is why understanding the difference between shell work and TI work is critical before signing any commercial lease. A tenant who assumes the shell includes finished restrooms, operational HVAC, and a drop ceiling may discover after signing that the space is a concrete box with nothing but a main electrical panel.

What Is Shell Construction in Commercial Real Estate

Shell construction in commercial real estate is the first phase of building a commercial property, where the developer constructs the structural and exterior elements of the building without finishing the interior tenant spaces. Shell construction produces the core structural skeleton, the exterior envelope that protects the building from weather, and the base mechanical, electrical, and plumbing (MEP) infrastructure that serves the entire property.

The core elements of shell construction include the foundation, structural columns and beams, load-bearing walls, floor slabs, stairwells, elevator shafts, the roof system, and exterior walls. The shell elements include the building envelope (exterior cladding, windows, waterproofing), the main electrical service and switchgear, primary plumbing risers, fire suppression systems, and base HVAC equipment in the mechanical room. Common areas like lobbies, corridors, restrooms in shared spaces, and parking structures are also part of the shell scope.

The landlord's general contractor builds all of these elements and brings the building to a point where it receives a base building certificate of occupancy (CO) from the local building department. After the shell is complete, individual tenant spaces are delivered in one of three conditions depending on the lease terms and the property type.

What Is the Difference Between Cold Shell, Vanilla Shell, and Warm Shell

The difference between cold shell, vanilla shell, and warm shell is how much of the interior infrastructure the landlord installs before delivering the space to the tenant. Each shell type determines the tenant's starting point and directly affects how much the TI buildout will cost.

Shell TypeWhat the Landlord DeliversTenant Build-Out Cost ($/SF)Tenant Control LevelCold Dark ShellConcrete slab, exterior walls, roof, main electrical panel. No HVAC, no interior plumbing, no ceilings, no interior walls, no lighting.$100 - $200+MaximumVanilla Shell (White Box)Demised space with perimeter drywall, concrete floor, HVAC stub-outs, electrical panel, basic plumbing stubs, storefront glass and entry door, restroom rough-in.$80 - $150HighWarm Shell (Grey Shell)Finished drywall (taped and primed), operational HVAC, finished restrooms, drop ceiling grid, basic lighting, perimeter electrical outlets.$40 - $90Moderate

Sources: Pajaziti and Associates (2025 Florida market data, Palm Beach County), JRM Construction Management, Plescia Construction and Development

Cold dark shell spaces are the most bare-bones delivery condition. The tenant starts from a concrete box and builds everything from scratch. Vanilla shell is the most common delivery condition for retail and office buildouts in strip centers and office parks. Warm shell is a step above vanilla, where the landlord has invested more upfront, reducing the tenant's build-out cost and time to occupancy.

According to Pajaziti and Associates, a licensed Florida general contractor, the term "vanilla shell" is loosely defined and varies significantly between properties even in the same county. Two vanilla shells in the same market can be delivered very differently. One may include finished restrooms and operational HVAC; another may include nothing but bare studs and capped plumbing. Always get a written definition of the shell condition in the lease addendum before signing.

What Is Tenant Improvement Work and How Does It Differ from Shell Construction

Tenant improvement work is the interior construction that transforms a delivered shell space into a finished, functional environment for a specific tenant's business operations. The scope of TI work varies by space type but typically includes:

• Interior wall framing, drywall installation, and partition construction to create the floor plan layout
• Flooring installation (carpet, tile, hardwood, polished concrete, or vinyl plank) across all occupied areas
• Ceiling systems including drop ceiling grids, acoustic tiles, or decorative ceiling treatments
• HVAC distribution from base building trunk lines to individual zones with thermostats and controls
• Electrical wiring, outlets, data connections, and interior lighting fixtures throughout the space
• Plumbing fixtures for restrooms, break rooms, kitchens, and any specialized use areas
• Paint, trim, millwork, and all interior finishes that complete the space visually and functionally

The distinction between shell construction and tenant improvement work is who the construction serves. Shell construction serves the building as a whole and benefits the landlord's long-term asset. Tenant improvement work serves a specific tenant's business needs for the duration of their lease. Shell elements stay with the building permanently. Tenant improvement elements may stay or may be removed when the tenant vacates, depending on the lease terms.

For restaurant builds, the TI scope is especially large because commercial kitchens require grease traps, exhaust hoods, specialized plumbing, gas lines, and fire suppression systems that go far beyond a standard office or retail buildout. The shell delivers the base infrastructure; the TI work builds everything the kitchen and dining room need to function.

Is Tenant Improvement the Same as Renovation

Tenant improvement is not exactly the same as renovation, although the two terms overlap. A tenant improvement is a specific type of construction performed on a leased commercial space to prepare it for a tenant's use. A renovation is a broader term that applies to any property type, residential or commercial, owned or leased, and can include structural changes that a tenant improvement typically does not.

The key distinction is context. Tenant improvement work happens within the framework of a commercial lease, is governed by the work letter, and is often funded through a tenant improvement allowance (TIA) provided by the landlord. Renovation work can happen on any property, is funded by the property owner, and is not tied to a lease agreement. A homeowner renovating a kitchen is doing renovation work, not tenant improvement work. A business owner building out a leased office suite is doing tenant improvement work.

What Is the Difference Between a Category A and Category B Fit-Out

The difference between a Category A and Category B fit-out is who funds and installs the work, and what the work includes. Category A (Cat A) fit-out covers the base infrastructure a space needs to be occupiable. Category B (Cat B) fit-out covers the tenant-specific customization that makes the space functional for a particular business.

Category A work is typically funded and installed by the landlord. It includes raised access floors, grid ceilings with basic tiles, base lighting, HVAC distribution to the tenant zone, fire protection systems, plumbing connections, and finished shared restrooms. Category A creates a clean, open floor plate that functions but does not reflect any specific tenant's brand, layout, or operational needs.

Category B work is funded and managed by the tenant. It includes interior partitions, doors, custom flooring, dedicated lighting schemes, reception areas, private offices, meeting rooms, kitchens, server rooms, and all branded elements. Category B is where the space takes on its identity. According to data from EB3 Construction, the general funding pattern has landlords covering base structure and exterior elements, with tenants responsible for interior tenant improvements. However, some landlords provide a TIA or rent concession to offset Category B costs.

Who Pays for Shell Construction and Who Pays for Tenant Improvements

The landlord or developer pays for shell construction as part of their capital investment in the property. The tenant pays for tenant improvement work, often with partial or full offset from a tenant improvement allowance (TIA) provided by the landlord as a lease concession.

The landlord's shell construction cost is built into the property's development budget and is recovered through rental income over the building's lifetime. The tenant's TI cost is a one-time expense incurred at the start of the lease to customize the space. According to Guidance Corporate Realty Advisors, it is not enough to see that HVAC trunk lines, sprinkler pipes, or electrical conduits are visible in the ceiling and assume the landlord provided them at their own cost. In many cases, landlords pre-install these components but then charge the cost back to the tenant out of the TIA. The tenant should request the landlord's "base building specifications" to understand exactly what the landlord provides at their cost versus what gets charged against the tenant improvement allowance.

How Much Is a Typical Tenant Improvement Allowance

A typical tenant improvement allowance ranges from $20 to $60 per rentable square foot for most commercial property types, according to data from Regent Commercial Real Estate. The actual amount varies based on the shell condition, the property type, the lease term, the tenant's creditworthiness, and the local market vacancy rate. For shell condition spaces specifically, Guidance Corporate Realty Advisors reports TIA amounts typically range from $10 to $40 per rentable square foot.

With U.S. office vacancy near record levels, according to Yardi Matrix data showing national vacancy at approximately 18.4% at year-end 2025, tenants in many markets have stronger leverage to negotiate higher TIA amounts. Longer lease terms justify larger allowances because the landlord has more years of rental income over which to amortize the cost. According to data from Bhumi Calculator, 60% of commercial leases signed in 2026 include a TI escalator clause for cost overruns.

Who Owns Tenant Improvements

The landlord owns the tenant improvements in nearly all commercial lease agreements. Even if the tenant funded the work entirely and managed the construction process, ownership of permanent improvements transfers to the landlord upon completion. Walls, flooring, plumbing, electrical systems, and HVAC distribution become part of the building and remain when the tenant vacates.

The lease should specify which improvements stay and which the tenant must remove at the end of the term. Some landlords include restoration clauses requiring the tenant to return the space to its original shell condition, which can cost tens of thousands of dollars. Tenants should negotiate these clauses carefully and factor potential restoration costs into the total occupancy cost calculation before signing.

What Does the General Contractor Do During Each Phase

The general contractor's role shifts between the shell phase and the tenant improvement phase, but the core function stays the same: managing subcontractors, coordinating schedules, controlling quality, pulling permits, passing inspections, and delivering a finished product that meets the approved plans and specifications.

During shell construction, the GC works for the landlord or developer. The GC manages the structural trades (concrete, steel, framing), the building envelope trades (roofing, glazing, waterproofing), the base MEP trades (electrical, plumbing, HVAC), and the common area finishes (lobbies, corridors, parking). The GC coordinates all municipal inspections and delivers the building to a base certificate of occupancy.

During tenant improvement work, the GC works for the tenant (or for the landlord in a turn-key arrangement). The GC manages the interior trades: drywall, flooring, ceiling, electrical distribution, HVAC distribution, plumbing fixtures, paint, and millwork. The GC pulls separate TI permits, coordinates inspections specific to the tenant space, and delivers the space to a tenant certificate of occupancy. For retail spaces, the TI scope often includes storefront modifications, display lighting, and ADA-compliant entry configurations that require close coordination with the landlord's base building systems.

Who Hires the Contractor for Tenant Improvement Work

Who hires the contractor for tenant improvement work depends on the arrangement defined in the lease's work letter. In the most common arrangement, the tenant hires the GC directly, manages the construction process, and submits invoices to the landlord for reimbursement from the TIA. This gives the tenant maximum control over design, materials, vendor selection, and project management.

In a turn-key arrangement, the landlord hires and manages the GC, oversees the buildout, and delivers the finished space to the tenant. This reduces the tenant's project management burden but limits control over design details and vendor quality. In some commercial projects, the landlord requires the tenant to select from an approved list of contractors who are familiar with the building's systems and construction standards.

Can the Same Contractor Handle Both Shell Construction and Tenant Improvement Work

Yes, the same general contractor can handle both shell construction and tenant improvement work, and there are significant advantages when they do. A contractor who built the shell already understands the building's structural layout, MEP routing, fire suppression system, and base building specifications. That institutional knowledge eliminates the learning curve a new TI contractor would face and reduces the risk of coordination conflicts between the shell systems and the tenant buildout.

The handoff between shell and TI is one of the most common points where construction problems occur. If the TI contractor does not understand how the base HVAC was sized, where the electrical risers terminate, or how the fire suppression zones are configured, the TI work can conflict with the shell systems in ways that require expensive rework. A single contractor managing both phases eliminates that handoff risk entirely. This is one of the reasons we handle both shell and tenant improvement work under one roof, so the knowledge from the first phase carries directly into the second.

What Is a Work Letter and What Are Base Building Specifications

A work letter is the exhibit attached to a commercial lease that defines everything related to the tenant improvement process: the TIA amount, who hires the architect and contractor, who manages the construction, the approval process for plans and budgets, the timeline for completion, the consequences of delays, and how reimbursements are disbursed.

The work letter is the single most important document for any tenant planning a buildout because it governs every financial and procedural aspect of the TI process. According to Guidance Corporate Realty Advisors, the work letter should clearly address the amount of the TIA, the process for mutual approval of plans, who manages the construction, and the consequence of delays from either party. Tenants should have a real estate attorney review the work letter before signing the lease.

Base building specifications are a separate document (or lease exhibit) that lists exactly what the landlord delivers as part of the shell. This document should detail the HVAC capacity, electrical service, plumbing stubs, fire suppression coverage, ceiling height, floor load capacity, and every other base building element that the TI work will connect to. Without this document, the tenant has no way to confirm what the landlord is providing at the landlord's cost versus what gets charged against the TIA.

How Long Does a Tenant Improvement Buildout Take After the Shell Is Delivered

A tenant improvement buildout takes anywhere from six weeks to six months after the shell is delivered, depending on the space type, the scope of work, the shell condition, and the complexity of the tenant's requirements. The timeline follows a predictable sequence from design through occupancy.

1. Space planning and design (2-4 weeks): The tenant's architect creates the floor plan, selects materials, and produces construction documents. If the architect is already engaged before the shell is delivered, this phase can overlap with the end of shell construction.
2. Permitting (2-6 weeks): The GC submits construction documents to the local building department for plan review and permit approval. Permitting timelines vary significantly by municipality. In Miami, commercial TI permits typically take 3-6 weeks depending on complexity and review cycles.
3. Construction (4-16 weeks): Physical buildout proceeds through demolition (if second-generation space), framing, MEP rough-in, drywall, ceiling, flooring, paint, fixtures, and punch list. Standard office TI takes 8-12 weeks. Restaurant and medical buildouts take 12-16 weeks due to specialized systems.
4. Final inspections and CO (1-2 weeks): The building department conducts final inspections. After approval, the tenant receives a certificate of occupancy or a tenant CO and can begin moving in.

Understanding construction costs and timelines at this level of detail helps tenants plan their move-in date, coordinate lease commencement, and avoid paying rent on a space that is not yet ready for occupancy. According to data from NAHB and the Bureau of Labor Statistics, residential building material prices remained above 3% growth through the second half of 2025, and commercial material lead times continue to affect TI schedules.

How Do Landlords Typically Handle Tenant Improvements

Landlords typically handle tenant improvements through one of three arrangements: a TI allowance model, a turn-key model, or a hybrid model. The arrangement is defined in the work letter and affects who controls the construction, who manages the contractor, and how funds are disbursed.

In the TI allowance model, the landlord provides a dollar-per-square-foot allowance and the tenant manages the entire buildout. The tenant hires the architect, selects the contractor, approves the design, manages the schedule, and submits invoices for reimbursement. This model gives the tenant maximum control and is the most common arrangement for creditworthy tenants with specific design requirements.

In the turn-key model, the landlord manages the entire buildout and delivers the finished space. The landlord hires the contractor, manages the project, and absorbs the risk of cost overruns through built-in contingency. The tenant receives a finished space without managing construction. The trade-off is less control over design details and the risk that the landlord completes the project under budget and keeps the savings.

In the hybrid model, the landlord handles certain portions of the work (typically base MEP distribution and code-required elements) while the tenant handles the finish work (partitions, flooring, fixtures, paint). This model works well for hotel renovations and multi-tenant properties where the landlord wants to maintain control over base building systems while giving tenants flexibility on interior finishes.

The current commercial real estate environment, with national office vacancy near 18.4% according to Yardi Matrix data, gives tenants stronger leverage to negotiate favorable TI arrangements. Cushman and Wakefield's Q1 2026 data shows the national office construction pipeline has fallen 86% from its 2020 peak, and sublease inventory declined 13.6% year-over-year. These conditions mean landlords in many markets are willing to offer more generous TIA packages and more flexible work letter terms to attract and retain tenant improvement commitments from creditworthy businesses.

Frequently Asked Questions

Do You Have to Pay Back a Tenant Improvement Allowance

No, you do not have to pay back a standard tenant improvement allowance. The TIA is a lease concession, not a loan. The landlord provides the funds as an incentive to attract or retain the tenant and recoups the cost indirectly through the base rent over the lease term. The one exception is an amortized TIA, where the landlord loans additional funds beyond the base allowance, and the tenant repays the amortized amount through higher monthly rent with interest.

What Happens If the Shell Condition Does Not Match What the Lease Describes

If the shell condition does not match what the lease describes, the tenant has grounds to require the landlord to bring the space into compliance with the documented specifications before TI work begins. This is why written base building specifications in the lease are critical. If the lease states that the shell includes operational HVAC stub-outs and the tenant finds no HVAC infrastructure in the space, the landlord is obligated to provide what was promised. Without written specifications, the tenant has limited recourse because no laws govern the default shell condition.

Who Pulls Permits for Tenant Improvement Work

The general contractor typically pulls all permits for tenant improvement work. As the licensed contractor of record, the GC submits construction documents to the local building department, manages the plan review process, responds to reviewer comments, schedules all required inspections during construction, and obtains the final certificate of occupancy or tenant CO. The tenant does not need to interact with the building department directly when a licensed GC manages the permitting process.

What Is Included in Base Building Specifications

Base building specifications list exactly what the landlord delivers as part of the shell before the tenant begins TI work. Typical items include the HVAC system type and tonnage capacity, electrical service amperage and panel location, plumbing stub-out locations and sizes, fire suppression zone coverage and sprinkler head spacing, ceiling height from slab to structure, floor load capacity, storefront glass and entry door specifications, and restroom locations (roughed-in or finished). The base building specs document should be attached to the lease as an exhibit and reviewed carefully before signing.

How Does a Second-Generation Space Differ from a Shell Space

A second-generation space is a previously occupied commercial space that already has finished walls, flooring, ceilings, operational HVAC, plumbing fixtures, and lighting from the previous tenant. A shell space has none of those finished elements. Second-generation spaces cost significantly less to build out because the major infrastructure is already in place, typically $20 to $40 per square foot for cosmetic updates versus $80 to $200+ per square foot for a full shell buildout. However, second-generation spaces may require demolition and reconfiguration if the previous layout does not match the new tenant's needs.

Putting It All Together

Shell construction and tenant improvement work are two distinct phases of the same process. The landlord builds the shell. The tenant builds out the interior. The lease, the work letter, and the base building specifications define who handles what, who pays for what, and how the two phases connect. Understanding this split before you sign a lease protects your budget, your timeline, and your ability to negotiate terms that work for your business.

We handle both shell construction and tenant improvement buildouts at MT Construction Group. With over 560 projects completed across South Florida, our team manages the full scope of commercial construction from structure to finishes under one roof. If you are planning a commercial buildout and want a contractor who understands both sides of the process, give us a call at 786-882-3877 or request a free quote.